President Trump keeps on mentioning the surpluses or deficits that we have with specific trading partners. Recently he mentioned Norway’s prime minister that the US has a surplus with that country. He is disturbed with the deficit the US has with Mexico. NAFTA negotiations are in danger as the US proposes unilateral terms that won’t be accepted by either Canada or Mexico.
Trump has threatened outright protectionism – tariffs or taxes reducing the flow of trade in order to erase deficits or increase surpluses.
Here is the problem with US protectionism:
- Other countries will institute retaliation or barriers to US goods as a result. As we see with NAFTA negotiations, neither Mexico or Canada will agree to rules that hurt their own economies and interest groups. The US simply does not have the leverage to unilaterally insist on its trading rules. Retaliation will simply result in reduced trade – not a better trade balance.
- International trade institutions and trade rules will be weakened. If the US disrespects the rules now followed by 150+ countries, the system will either unravel, or as current experience in Asia suggests, other countries will promote a new set of free trade rules, excluding the US from the resulting agreement.
- Protectionist countries such as Venezuela recently and Argentina under Peron illustrate that trade barriers slowly weaken a country’s ability to complete, weakening its competitiveness and reducing standards of living relative to competitors over time. This is what economics predicts; this is what history illustrates.
- Consumers, especially middle-class consumers, will be hurt by higher prices for imports. The resulting burden would be deeply regressive.
Protectionism is not likely to reverse the loss of jobs in manufacturing, as increased productivity and automation are responsible for much of the loss that has occurred since the 1970’s. Manufacturing has become much more sophisticated, requiring trained workers with the ability to run programmable machines; the age of mass employment to produce products is over, and the clock cannot be turned back.
Protectionism also will not correct for the chronic overvaluation of the dollar which is due to the US’s position as the reserve currency of the world. Per experts, the reserve currency role accounts for 2 – 3% of our deficit, while enabling the US to spend beyond its means to maintain our military operations abroad.
Companies are now part of highly sophisticated supply chains relying on imports as inputs to the final product. Changing or disrupting this supply chain, may actually hurt US company’s competitiveness overall, dampening global sales, and damaging the overall trade balance Trump is seeking to improve.
Protecting low-end jobs, which are the ones most threatened by free trade, is a tradeoff which risks higher-end jobs. Retaliation will hurt export industries, which tend to pay above-average wages.
Ironically, the latest tax bill, by providing rewards to consumers and business in a full-employment economy, is likely to make the deficit worse, as it lowers domestic savings (as tax cuts do) both for businesses and consumers and does little to encourage investment. (Economists and CEOs project the bulk of business tax reductions from the bill to go to shareholders, not towards new investments. US businesses are already sitting on a trillion dollars of cash.)
Rather than protectionism, steps to prevent unfair practices, such as preventing the theft of US intellectual property from our Companies, is critical.
To summarize, it is unlikely that protectionism will increase employment in a full-employment economy or reduce US trade deficits. Protectionism risks moving employment towards lower paying jobs rather than higher paying ones, while increasing prices for consumers. Finally, US protectionism will undermine international support for free trade and multilateral rules, or result in the exclusion of the US from new multilateral trade agreements.
If free-trade rules and institutions lose legitimacy as a result of Trump’s moves, the chaos that will result will not benefit a high-cost economy like the US. It will only hasten the loss of influence of the US, and US living standards over the long term.