Trade Restrictions To Redistribute Income Are Recessionary

This anti-trade rhetoric is alarming in the 21st century.

Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs.” ― Allen Greenspan

 

In the presidential primaries both Mr. Donald Trump and Senator Bernie Sanders constantly railed against the trade pacts of NAFTA and TPP (TTrans-PacificPartnership), the pact negotiated by President Obama with Pacific Rim countries (excluding China). TPP would lower tariffs on a large number of goods and reduce other barriers to trade. The Office of US Trade Representative reports that TPP is a more comprehensive pact than NAFTA, because it includes protections for the environment, intellectual property and workers.

Mr. Trump proclaimed in his presidential campaign that once elected as President, he would nullify TPP and renegotiate and/or nullify NAFTA. Mr. Trump had also threatened heavy tariffs on imports from China and Mexico. Most of our trade deficit is with Asian countries, and close to 60% of the trade deficit was with China in 2015. Such rhetoric implies that we are heading in the direction of redistributing income using trade protection.

This anti-trade rhetoric is alarming in the 21st century. It is contrary to the history of efforts made by economic thinkers and countries to argue against protectionism since the mercantilists’ era from 16th century to the end of 18th century. This movement against trade speeded up, especially after the 1930’s depression, precipitated by 53% tariffs under President Hoover. Post-WWII period, under the leadership of US, has seen a gradual decline in trade barriers, especially tariffs, and the creation of institutions to guard against unilateral protectionist policies.

The frustration of laid-off Americans with their economic status is partly due to the rise of income inequality.

No doubt that cheaper imports from China and other low-wage countries have led to job losses in the manufacturing sector, mainly concentrated in rust belt states. In addition, The Wall Street Journal, August 12, 2016, reported that most affected areas in the US were White, less educated and poor. These workers supported Mr. Trump’s stand against trade pacts and trade with China. However, a call for protectionism is not the solution.

The frustration of laid-off Americans with their economic status is partly due to the rise of income inequality. Though income inequality had been increasing even before 1987 during years of trade surpluses, it has increased markedly since 1987. It is due partly to the decline in high paid jobs of less educated blue-collar workers, mainly in the manufacturing sector, and also to the gains of jobs and incomes of more educated and skilled workers.

International trade and trade pacts like NAFTA have led to redistribution of income and jobs from less educated blue-collar workers to skilled and more educated workers. However, Mr. Trump and Senator Sanders must realize that 70% of the world’s purchasing power resides outside the US. In addition, James Pethokoukis of the American Enterprise Institute, October 3, 2016, reports that blocking of trade in an average country results in loss of 28% purchasing power to high-income people and 63% loss to the poorest 10% of the consumers.

Mr. Trump, Senator Sanders and the AFL-CIO fear that the effect of TPP would also be the same as NAFTA. However, they may not be aware of the fact that just five states had $162 billon worth of exports to Mexico in 2015, according to The Wall Street Journal, November 29, 2016. Trade with Mexico alone has led to 382,000 jobs in Texas. Jobs in Texas support millions more jobs elsewhere in the country. Moreover, it is not easy to distinguish totally US-made products from other countries’ products due to interconnected supply chains around the globe.

High tariffs, if levied by Mr. Trump on Chinese and Mexican imports, though violating WTO rules, will end up starting trade wars.

Evidence shows that there is an increasing demand for high skilled workers and an increase in their wages and incomes. The Wall Street Journal, September 27, 2015, reported that, in July 2016 there were 379,000 openings and only 274,000 hires. Reviving traditional manufacturing by enacting trade barriers to compete against Chinese imports works against structural change in industries that promote advanced manufacturing with sophisticated technologies, innovation and technical change in other sectors, skill development and exports.

A recent paper by Justin Pierce and Peter Schott, American Economic Review, July 2016, finds that after China’s WTO (World Trade Organization) membership, approved by US Congress in 2000, there were manufacturing job losses but also an increase in real value added after 2000. Industries responded by increasing skill and capital intensity of production, thus increasing productivity and US comparative advantage in trade.

High tariffs, if levied by Mr. Trump on Chinese and Mexican imports, though violating WTO rules, will end up starting trade wars, increasing prices for consumers, thus decreasing their real income. This is a recipe for shrinking US trade, close to 28% of GDP in 2015, and precipitating severe recession in the US and around the world. I hope Mr. Trump does not repeat the mistake of President Hoover.

A more productive trade policy would be for US to negotiate with China on stable exchange rate regime, opening up China’s economy to more trade, and dismantling regulatory and quantitative trade barriers on US business and financial flows. The laid off blue-collar workers would have better employment prospects if Mr. Trump initiates major skill upgrading training programs around the country on a sustainable basis. The advance of technology and its effect on labor markets cannot be reversed. Protectionism may provide temporary relief to some laid off workers, but at a huge cost to the nation. Mr. Trump may wish to learn from the protectionist experience of Argentina, where the cost to taxpayers for protecting one factory worker’s job is $72,000, according to The Price of Protectionism, by Taos Turner and Paul Kiernan, The Wall Street Journal, November 26-27, 2016.

Hopefully Mr. Trump will realize the folly of protectionism, because there are more least-cost ways to redistribute income.

 

Mathur is former chair and professor of economics and professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, Utah.

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