Trump is just wrong on trade

Donald Trump has found a sure-fire way to rile up his angry supporters. Not only is NAFTA a “disaster;” not only will new trade agreements “cost millions of jobs.” No, China is actually “raping” us, Mexico is “killing” us with trade. Here’s the easy way to campaign for President: blame job losses on foreigners: foreign trade, foreign investment, and foreign immigrants. Emphasize that they are “criminals, drug dealers, and currency manipulators,” and don’t bother to consider the consequences. 

Trump says he will make America great again with tariff walls, border walls, and investment walls that will keep U.S. companies from going abroad. America will be great again because foreigners will no longer be allowed to compete in America, and American companies will no longer build factories abroad. Trump is the tough guy who will snatch those good factory jobs from foreigners and give them back to the Americans they belong to.

{mosads}But what good will tariffs do? Those jobs aren’t coming back with tariffs or other market restrictions because the job losses are due mainly to technology. The US now makes much more manufacturing output with fewer workers, with productivity improvements accounting for 90% of the loss in manufacturing jobs in the last 25 years.

Tariffs themselves will hurt the economy. Prices will be higher, and other countries will retaliate with their own tariffs. Financial markets won’t take the news well. Investment will fall as the U.S. retreats from global markets. Tariffs act like a white flag that says, “we can’t compete, so we’re closing the borders to trade.” The last big tariff hike was in 1930, followed by the Great Depression.

Don’t count on reclaiming the jobs. The U.S. steel industry had tariff and quota protection for years, while the industry shed jobs. Steel technology advanced, steel users switched to lighter and cheaper materials, and specialization led the steel mills themselves to import steel slabs. Demand for basic production workers fell.

Don’t expect a big improvement in wages, either. Tariffs are often more the friends of capital, not labor. As prices rise for the protected products in industries with large workforces, the extra profits are often captured by oligopolistic firm owners and their stockholders. This effect was documented in the U.S. textile industry as it received protection from imports. Income re-distribution from tariffs therefore often goes the wrong way. Meanwhile prices rise disproportionately for goods such as basic clothing and smaller cars. Most trade protection is a regressive tax on lower income groups.

Trump’s NAFTA bashing ignores the facts. Net job displacement in the U.S. has been minimal, as adjustment to more industrial specialization has created new jobs to offset job losses elsewhere. Investment patterns in the NAFTA countries have reflected the trend in international supply chains. This probably allowed more auto industry jobs to remain in the US than would have been the case in the absence of NAFTA.

And Trump seems to believe that the “rapist” China is behind the Trans-Pacific Partnership (TPP), when in fact it counterbalances Chinese influence in the region. The trade aspects of it would avoid large U.S. job displacements in general, since it has significant provisions for labor and environmental standards. At the same time it would open markets abroad in autos, services and agriculture. Its positive impact on the U.S. economy will increase if other countries join it, creating an even larger trade area that abides by 21st century trade rules.

It is true that trade can be disruptive, and we need to address this problem as a national priority. Worker adjustment is the biggest problem, especially when it takes so long for them to find new jobs. They often need re-training, more education, and re-location to regions of job growth. Our trade adjustment assistance program has not met this challenge, partly because it has been stingy in teasing apart trade-induced job losses from job losses for any other reason, including technology. Such assistance needs to be broader and more comprehensive in order to get workers re-hired.

Market mechanisms and new job creation also need to be more flexible. Entrepreneurs need to have a better business and regulatory environment so that they can start new businesses and hire new workers. The last thing they need is a tariff-ridden economy, where workers and other resources are locked into businesses that have proven to be incapable of competing in a global 21st century market.

Trump knows how to exploit public anger and frustration, but he would take the country down a very dangerous path. America’s future greatness and standard of living will lie in its leadership role in the world economy, not in hiding from it behind tariff walls.

Jones is a Professor of Economics at Babson College. He is the author of Reconstructing the WTO for the 21st Century.

The views expressed by Contributors are their own and are not the views of The Hill.