Running for president on a protectionist platform, Donald Trump confronts tough challenges.
College educated voters – a demographic he must better attract to beat Hillary Clinton – generally believe that free trade promotes prosperity. He must explain to them how getting tough on trade will boost economic growth and raise wages – enough to justify accepting higher prices for many imported consumer goods.
Free trade permits nations to specialize in what they do better or more cheaply than others. Americans make jet engines and write software, and the Chinese sew dresses and assemble the cell phones. US workers in many manufacturing industries may lose jobs, but an economy made larger through increased exports and high-productivity specialization should create new opportunities for them in other activities.
Sadly, trade agreements that lower tariffs have not worked out quite so well, because governments around the world have thrown up new trade barriers, kept their currencies artificially cheap against the dollar and blocked U.S. investment necessary to sell goods and services in their markets. Consequently, American exports have grown not nearly as much as imports, and the United States must borrow abroad to finance a $490 billion annual trade deficit.
The drag of the trade deficit on the demand for U.S. goods and services slows GDP growth and were Americans to make an additional $490 billion in goods and services to eliminate the trade gap, the economy would directly gain nearly 4 million jobs.
Mr. Trump’s detractors say productivity growth is responsible for the job losses in manufacturing and elsewhere. What that argument ignores is that productivity improving technologies have been destroying jobs since the spear and wheel.
Thanks to the drag imposed by the trade deficit, annual GDP growth in this century has been a paltry1.8 percent, as opposed to 3.4 percent during the Reagan-Bush-Clinton years. That’s why jobs growth is anemic, and wages and family incomes adjusted for inflation have been falling since Bill Clinton left office.
Donald Trump wants to rip up NAFTA but the deficit with Mexico is only $62 billion, whereas the gap with China is $360 billion.
We may have issues with our southern neighbor, but harsh bullying would destabilize its economy, create a humanitarian crisis and require measures far more draconian than Mr. Trump’s big wall to keep the masses of unemployed and desperate Mexicans from crossing our southern border – measures most Americans simply could not stomach and would not tolerate.
Regarding China, he laid out a revised approach in a recent trade policy speech – strict application of U.S. trade laws against subsidized imports and products made with pirated U.S. intellectual property. That’s the approach already taken by the Obama administration and has provided only very limited relief from Chinese mercantilism.
Mr. Trump does advocate finally naming China a currency manipulator in the Treasury’s semi-annual assessment of our trading partners’ exchange rate policies but short of new substantive measures, that doesn’t really mean very much. It would trigger consultations in the IMF, an organization hardly friendly to America’s trade complaints.
Gone from his proposals is the 45 percent tariff that would force negotiations with China to fundamentally change its industrial and trade policies. Mitt Romney running in 2012, liberal economist Paul Krugman and this author have supported variations on this more muscular approach but Mr. Trump seems to be willing to get tough on weaker Mexico – where he will do more harm than good – but shirks from the more powerful Middle Kingdom.
Were a President Trump to well up the courage to truly challenge Beijing, those actions would raise the price of imported consumer goods – initially reducing inflation adjusted incomes for many families. However, as Americans made more of what they now import, increased GDP growth would put unemployed Americans back to work – especially among the millions discouraged and currently not even looking for jobs.
For highly educated people with good jobs, the trade deficit has created an illusionary benefit – cheap furniture and electronic devices at Target and Best Buy – but those come at the expense of fewer opportunities for recent college graduates, unemployment for many Americans with only a high school education and lower wages and incomes for most families. It’s worth paying a few dollars more for stuff we can already easily afford to put Americans back to work. Though after his recent speech, I am beginning to doubt Mr. Trump is up to the task.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist