Moneybox

Trump Isn’t Entirely Wrong on Trade

Mercantilism isn’t the answer. But smarter economic nationalism could be.

Donald Trump, Pennsylvania

Donald Trump gave a globalization and jobs speech on Tuesday in Western Pennsylvania, a region that has seen a steep decline in manufacturing employment in recent decades.

Jeff Swensen/Getty Images

There are few things more frustrating than half-agreeing with Donald Trump. Every time he says something that sounds semiplausible on the surface, he soon says something else that undermines it. Some weeks ago, Trump suggested that the United States would have little to fear from a nuclear-armed Japan or South Korea. Whether you agree with this claim or not, you can make a coherent case for it. But what did Trump do when Hillary Clinton brought up his controversial views on nuclear proliferation? Did he offer an intelligent defense of what he’d said just weeks before? No, he did not. Instead, Trump denied that he had ever expressed such views.

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There are many thoughtful people on the right who’ve felt that while Trump is a buffoon, he has made defensible points on, say, the foolishness of calling for deep cuts in Social Security and Medicare at a time when older Americans are anxious about the future, the importance of controlling immigration levels, or the failure of policymakers to adequately defend middle-class economic interests in trade negotiations. I’m at least somewhat sympathetic in every one of these cases. What Trump’s reluctant defenders fail to appreciate is that his erratic behavior, his lack of familiarity with even the most rudimentary facts about the policy issues he chooses to address, and his impulse to insult and demean others all discredit any of the defensible points he might accidentally have stumbled upon.

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This all comes to mind in light of Donald Trump’s speech this week on globalization and jobs. Appropriately enough, Trump gave this speech in Western Pennsylvania, a region that has seen a steep decline in manufacturing employment in recent decades, which has been driven at least in part by Chinese import competition. Western Pennsylvania has in the past proven receptive to economic nationalism; though Trump has fallen well behind Hillary Clinton in almost every way that counts, from support in opinion polls to fundraising totals, it is regions like Western Pennsylvania that could, in theory, help him win the presidency. When Trump declares that “globalization has made the financial elite who donate to politicians very wealthy, but it has left millions of our workers with nothing but poverty and heartache,” I am inclined to at least half-agree with him. It really is true that the effects of globalization have been far more positive for some Americans than others, and this should worry us. But once you scratch the surface of Trump’s vague declaration, you get nothing but hot air.

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When Donald Trump talks about “globalization,” he seems to have in mind an all-out trade war, in which various mercantilist countries are scheming to steal America’s jobs and treasure. He argues that whereas America used to “win” on the economic battlefield, these days, “China’s just eating our lunch.” But this reflects a misunderstanding of how the global economic integration we’ve seen in recent decades differs from what came before it. The truly novel thing about globalization is not that different parts of the world are trading with each other or even that the volume of global trade has increased to very high levels. Rather, as the Brown University political scientist Edward Steinfeld observes in Playing Our Game, the truly new thing about globalization is that it involves production networks that can extend across dozens of different countries. Steinfeld observes that “in the networked world of global production, there inevitably arise lead firms and follower firms, rule makers and rule takers.” There is a reason why U.S.-based Apple reaps the majority of the profits from sales of the iPhone while most of the hard work of actually assembling the device is done in East Asia. By controlling the highest-value components of the global supply chain—the branding, the creation of new intellectual property—it occupies the most privileged position in this new, more dispersed hierarchy of production.

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So it is wrong to say that the U.S. has “lost” from globalization. Some Americans really have been harmed by the rise of multifirm, multicountry production networks, particularly those who do labor-intensive work that can be done at lower cost in other, mostly poorer countries. But most Americans have benefited from it, whether as consumers, as workers who occupy the more privileged rungs of these complex production hierarchies, or as shareholders, who profit when multinational business enterprises grow more valuable. For Trump, the right response to the problems caused by global economic integration is, essentially, to impose tariffs, and to force these production networks to be based in only one country. This might lead to an increase in the level of U.S. manufacturing employment, but it might also accelerate the pace of automation. Scott Lincicome, writing in National Review, observes that since 2000, 90 percent of the decline in manufacturing employment can be attributed to productivity gains. If offshoring labor-intensive production becomes impracticable, U.S. companies might decide to make their production processes even less labor-intensive. Alternatively, U.S. firms could incorporate overseas and shift their operations elsewhere, to continue taking advantage of multicountry production networks. Their competitors won’t stop doing so, so why should they? The truth is that short of a devastating world war, there is no way to put the genie of global economic integration back in the bottle.

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Does this mean that the U.S. should just throw in the towel and accept that some of our workers will be harmed by globalization and that they just need to suck it up? Not at all. We can craft an economic nationalism that works. To do that, however, we’ll have to move past Trump’s nostalgic delusions.

Since global economic integration isn’t going away, how can we help U.S. workers thrive? Trump seems to believe job losses caused by trade are totally different from those caused by rising productivity. From the perspective of displaced workers, alas, there is very little difference. Jobs are always destroyed and created in large numbers. What separates a healthy labor market and an unhealthy one is that in the former, job creation outpaces job destruction while in the latter, job destruction outpaces job creation. Lincicome notes that when workers were displaced from manufacturing firms that faced intense foreign competition in the 1980s and 1990s, they generally found employment in other sectors. Since 2001, displaced workers have had a much harder time, due in part to a long litany of counterproductive policies. For Lincicome, a libertarian, the biggest problems are job-killing regulations and poorly designed safety net programs. Jason Furman, chairman of President Obama’s Council of Economic Advisers, sees this landscape differently. Though Furman agrees with libertarians on relaxing occupational licensing restrictions and local land-use regulations, he also calls for more government support for workers that goes well beyond transitional assistance, including more generous child care subsidies. Whether your views are more in line with Lincicome’s or Furman’s, there is no reason to believe that tariffs are the answer to sluggish domestic job creation. And again, hiking tariffs is pretty much the sum total of Donald Trump’s job creation strategy.

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One of the ironies of Trump’s brand of economic nationalism is that globalization is entering a new phase. As automation accelerates, labor costs will represent a declining consideration for manufacturers when choosing to locate their facilities. The new frontier is in trade in services, not manufacturing. A smarter economic nationalism would recognize this fact and try to capitalize on it. When you consider the most important challenges facing low- and middle-income U.S. families, the high cost of medical care and education are at the top of the list. The high and rising costs of these essential services are arguably the main reason so many middle-income families are anxious about the future. Pretty soon, trade won’t just drive down the cost of manufactured goods. It will drive down the cost of these all-important services as well.

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On the one hand, the thought that doctors, nurses, and teachers might face international competition is a scary one, particularly for those who’ve built their lives on the assumption that their jobs are shielded from such competition. But on the other hand, meaningful competition in these sectors will represent a tremendous boon to consumers. Shutting ourselves off from trade in services will almost certainly cause more problems than it will solve. Those who oppose high levels of less-skilled immigration ought to be particularly attuned to the benefits of trade in services. If Americans can hire “virtual immigrants” living overseas to perform various tasks, they can get many of the benefits of immigration without the downsides.

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Now let’s look at monetary policy, another of Trump’s hobbyhorses. Trump attacks China for being a currency manipulator every chance he gets. It’s his way of sounding savvy and smart. There is no question that China manipulates its exchange rate with the U.S., but it is hardly alone in that regard. Instead of singling out China, we need a broader reassessment of the role of the U.S. dollar in the global economy. Across the political spectrum, there is agreement that the fact that the U.S. dollar is the world’s reserve currency is essential to America’s economic strength. But far from being a source of economic power, the dominance of the U.S. dollar has proven to be a millstone around America’s neck that has exacerbated our debt crisis, fueled the housing bubble, and caused our current account deficit to reach dangerously high levels. As the veteran China-watcher Michael Pettis has argued, the dominance of the U.S. dollar has created an untenable situation in which America is forced to choose between rising unemployment and rising debt.

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Over the past two decades, foreign central banks, and in particular Asian central banks, have purchased an increasingly large share of U.S. debt securities. By accumulating dollars, countries like China could keep their own currencies relatively weak, giving a boost to their exporters. Across East Asia, consumers suffered from overvalued currencies while export industries flourished. Meanwhile, heavily leveraged American consumers bought cheap imports to their hearts’ content while manufacturers struggled against cut-rate foreign competitors. As East Asian exporters gobbled up an ever-larger share of global demand, U.S. workers found themselves squeezed. According to Pettis, the only way for the U.S. to maintain a high level of employment was to increase consumption and investment by taking on more debt. In effect, Asia’s booming economies fattened up U.S. debt markets the way French farmers stuff geese to make foie gras. You don’t have to be a protectionist to believe that this arrangement can’t last forever.

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What should the U.S. do, exactly? Just as the Richard Nixon strong-armed the world’s major economies into reforming the international monetary system in 1971, Pettis calls for another dramatic break: “The U.S. should lead a reconvening of the world’s economic policymakers in a global conference to restructure the global capital and trade regime, so that countries looking to kick-start or goose domestic growth cannot do so at the cost of U.S. unemployment or rising U.S. debt levels.” Unlike Trump, Pettis is not proposing a beggar-thy-neighbor trade war. Instead, he’s calling for a fairer and more sustainable global trading system, which would work better for all countries, not just the U.S.

Donald Trump is right to say that globalization hasn’t worked for all Americans. But rather than devise sensible strategies to spread the benefits of globalization more widely, he’s calling for isolating America from all the global economy has to offer. That’s not economic nationalism—it’s economic idiocy.

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