Is the US Really Getting “Trumped” on Trade? A Q&A with Claude Barfield

 

china_hong_kongTrade and trade partnerships hit the American public in a big way this past summer in the form of the Trans-Pacific Trade Partnership, with voices on right and left chiming in on a deal positioned as President Obama’s NAFTA. Signed this past February, it included 12 nations representing 40 percent of the world economy.

But China – one half of the world’s two economic superpowers — wasn’t part of the TPP, and Donald Trump’s campaign trail emphasis on failed American deal-making seems to stoke popular fears that trade with that country hurts the American worker. So did “trade [make] America great,” as one CEO opined in the WSJ? “Are Trade Agreements Good for Americans?” Is America losing a trade war that will see China crowned the world’s strongest economy?

On my Ricochet podcast, I chatted about all this with Claude Barfield. Before coming to AEI, he was on the faculties of Yale and the University of Munich, and worked at the National Journal; in the Department of Housing and Urban Development; the Senate Governmental Affairs Committee, and as a consultant to the office of the US Trade Representative. he is the author of multiple publications and has a Ph.D. from Northwestern University.

Check out some edited excerpts of our conversation, and take a listen to the podcast.

Pethokoukis: So, Claude, let me start off by asking a broader macro-question. Why are US trade deficits so darn big, hundreds of billions of dollars a year, every year? Are they a sign of economic weakness? 

Barfield: Well, I think you have to start out with trade deficit or current account deficit with the rest of the world and not with one country. We’ve had trade deficits for the last four decades because of a simple macroeconomic fact.

If you don’t save enough – and that’s both government saving and government having a surplus and the private sector or individuals saving more than they consume — then you total that up, if you don’t have enough, somebody will do it for you and the people to do it for you are those who sell us goods. We have not for 40 years been able to put our own macroeconomic house in order.

And so before you get to China or Japan or Europe’s individual trade deficits, you’d make the point that overall, in a given year, if that’s the case, we will be running a trade deficit with someone. If it’s not with China, or if the China deficit were to go down, it would go up somewhere else because that’s really the background fact.

And it doesn’t really betoken either weakness or strength. I think in the United States’ case,  the times we’ve had that’s the biggest trade deficits are times when we actually have been growing at a faster rate and consuming more than the rest of the world.

For instance, you take the 1990s, which is a golden – looked back on as a golden period – one can disagree or agree with that – under Bill Clinton, where we had growing trade deficits but we also had huge increase in employment and great growth. The same thing happened after 2001 to 2007, before the big recession, when again, our trade deficit was growing but so was our economy growing. And we were running trade deficits because others were not growing as fast.

There are other countries, advanced economies, who have been running trade deficits with China but they’re much, much smaller. Germany certainly exports a lot from China. The trade deficit as a share of the economy is typically maybe a half, a quarter, a fifth, as a share of GDP of what our trade deficit is. So they run a much smaller trade deficit. Why is that? 

Well, I think I’d go back to have the same explanation there. The explanation I gave for the United States covers other nations, too, and the Germans in general have had their economic house in order in the sense that they have not run big budget deficits internally. They’ve had a high savings rate relative to the United States. It’s also true that in some areas, it’s the so-called Mittelstande, the sort of middle-size manufacturing segments in specifically south and southwest Germany, you have a residual strength. So it kind of adds up.

But, again, there’s little or nothing to do with their trade policy or, in fact, the Germans no longer actually negotiate trade agreements. It’s done by the Europeans – nor do any other European Union countries. It’s done by the European Union.

So, again, it has to do with the basic sort of economic facts of the economy and not with any particular trade agreement or any particular trade policy.

What would the US economic situation, budget deficit, saving, look like or how would it be different than what it is now to result in much smaller trade deficits or even trade surpluses?

The federal government is the biggest actor here so [it would have to] get its economic house in order in terms of not running such large individual budget deficits. You could have incentives for saving in the United States that people have talked about for years.

Those kinds of things would turn the overall current account or budget surplus or deficit around, and that’s the only way to do that in terms of our total – the total trade deficit or surplus we’d have with the world. I think –whether we have trade agreements or don’t have trade agreements — that is an underlying fact that it’s not affected by whether you have a trade agreement.

Is the size of those deficits, is that at all influenced by the kind of trade agreements?

Yes.

So could we negotiate a better deal with China that would result in a much smaller trade deficit?

No, as a general rule. The only negotiation we’ve been in with the Chinese is not a bilateral one, but with the World Trade Organization. Which, actually, despite the fact that people tout this as somehow the beginning of the end, it didn’t go all the way but the Chinese made a lot of trade liberalization and investment liberalization concessions to get into the WTO, so we benefited. And our exports to China have grown tremendously since 2001, when they got in.

Now, because of our own situation here, rather than any trade deal, we didn’t have a treaty except for the WTO. We’ve also run a bigger trade deficit with them but that’s because of the background macroeconomic facts. And if it had not been with China, it would have been with somebody else.

Now, the Trump theory is: listen, it’s basically all about the Chinese currency, that it’s really, really undervalued and if they weren’t manipulating their currency, US trade deficits would be a lot less, so it is almost a form of economic warfare by the Chinese government against the United States. So what is the role of their currency in those big trade deficits?

Well, I think it is true that you might at times over the last two decades, the ’90s and after 2000, on the margin, even given the macroeconomic points that I made, the trade currency manipulation, so-called, can have a marginal effect.

But if you look back at the history of – let’s just take the bilateral relations, so you’d have to sort of look at the impact on the rest of the world not just for us. The Chinese actually through much of the ’90s followed the dollar. So they actually didn’t devalue or cut their currency during the 1990s when the dollar was going up in value.

The crucial time was that they did begin to manipulate a bit in 2002, 2007, that period. But it didn’t really have a huge effect and it wasn’t the largest thing that had to do with the increasing trade deficit between the bilateral trade deficit, and, as I said, that had to do with the fact that we didn’t have our economic house in order.

Recently, it’s not so much they took positive steps, so they took steps not to intervene. And so the currency has come what the World Bank and the IMF count as close to, you know, the market value – what the market value would be.

So you really can’t blame recent years’ trade deficit with China on any currency manipulation. The same thing is true by and large with the Japanese, which have been tagged at times with manipulating the currency.

So those are really kind of old stories.

Yes.

Because oftentimes, I’ll hear Donald Trump talk about these issues – they have video of him in the ’80s talking about those issues. It seems like the situation he’s describing may have been true in the 1980s and with China may have been true years ago, but it’s not really sort of where we are in the –

At the moment. This could change. I mean, the Chinese could intervene. Given the troubles they’re having internally in terms of the domestic economy and the attempted transition from an export-led investment-led economy, they could intervene again. I mean, this is not, to say this is in perpetuity.

But certainly over the last few years, this is a two-way street. As some people may know and probably most of the listeners don’t know, it’s also argued that the United States Federal Reserve has acted to the so-called quantitative easing. While it may not have been aimed at cutting the value of the dollar, it certainly had that effect. And so when we accuse other nations of this [manipulation], they come back and say well, your Federal Reserve, which has a lot more power in the world than other institutions, they’re doing very much the same thing for your economy, or has done so.

Two particular issues that often get brought up here in this trade debate. One, that there are these barriers or subsidies that China engages in, legal export subsidies and other unfair advantages which give them an edge. To what extent is that a big factor in US trade relations with China?

Well, I think it is a factor, but I don’t think it’s among the largest factors. In the United States, over the past decade and certainly under the Obama administration — it began under Bush — we have really taken China to task and taking them to the WTO, and we have won a number of cases.

So there is the question of export subsidies I think is a problem as well as in certain sectors, in agriculture and a lot of number of services, while the Chinese did open up as a part of their WTO obligations, there are still areas where there is protection.

One thing to keep in mind that’s interesting about China is that it [follows] a very different political and development pattern than earlier patterns of Japan, or let’s say, Korea, which were more, not totally but a kind of mercantilism of the 20th century and early 21st century.

You can’t really say that China did that because China did something that Japan and Korea did not do, and that is, by and large, they threw their economy open to foreign direct investment, which was a very smart thing to do, but that means that you didn’t have the kind of closed, totally closed economy, certainly in terms of investment.

This is not to say that the United States and other countries, Asian countries, European countries, have not had problems with investment. And certainly the Chinese have national champions and certainly in some of the high tech, electronic sectors, they have not been open.

But it was a very different model. And it became more important in the ’90s as a part of their joining the WTO.

What gets mentioned a lot is China is stealing US intellectual property, whether it’s copying things or whether it’s hacking and stealing property. How large of a problem is that, and does it make a significant difference in the economic relationship between the United States and China?

Well, I think it is a large problem and the United States is only gradually coming to grips with that. It’s a very tough, tough thing to do particularly in the era of the Internet. A lot of this has to do with the hacking you’re talking about.

The Obama administration is finally about to take them to task unilaterally on our own part. And while I am skeptical of interventions that are unilateral, I think we have reached a time when, as we saw with the Chinese officers two years ago, the United States ought to bring the Chinese to a trial even if it’s only in our own economy.

I don’t think we can do more – it’s very tough in terms of the WTO or any international obligation that we have because that really isn’t covered. So we have to end up doing this I think unilaterally as we should do more and more.

How big of a problem is it in billions?

We don’t know. It makes it difficult – and you’ve had estimates by various think tanks and universities. It’s in the hundreds of billions of dollars.

But it is tough to trace and that’s why it’s tough to go at them in terms of, let’s say, hacking because you have to not only know that it was stolen and be able to track that. Let’s say some patent that you’ve just gotten on a new widget in telecommunications. Then you have to actually show that that actually appeared or is used by a Chinese company.

Now, what we think is that often the Chinese government intervenes for the company and passes things on to the Chinese company, but that’s not an easy thing to prove. You have to show what was stolen and how it was used in some later device or product.

So then to what extent are these issues that can be negotiated? To what extent should we be employing things like, as Trump suggests, a tariff? Not permanently but a very large tariff to get their attention and give us leverage over them? Is that how you would conduct negotiation? What would negotiations be about exactly?

Well, we are negotiating and I’m in favor of it. I’m not very sanguine about it, but we are negotiating a bilateral investment treaty with the Chinese. I think, ultimately, here’s where the model of the TPP becomes quite important — the Trans-Pacific Pact. And the Chinese expressed some interest in joining.

On that side, you can negotiate. The idea of unilaterally putting on tariffs of 35%, 40%, 45%, as Trump and others have talked about, is really self-defeating on our part.

Now, let me – before I get to the economics, we have pushed since the Second World War for a rules-based trading system. And one of the first things that people did was to bind themselves to particular tariffs. And we are bound to tariff rates and the Chinese are bound now in the WTO. So we would be breaking the rules-based system that we set in place unilaterally.

Secondly, as all economists who have reacted to this have said, this is self-defeating. They would certainly retaliate. The other thing is that even more direct in terms of trade flows, at least 40% of what we’re importing from the Chinese are parts and components. So they’re going to US firms and so if we are raising tariffs on these parts or components, we’re not just raising tariffs on things that would hurt the Chinese, but will be hurting our own companies.

And the other thing is that the Chinese, where they really have a strong trade surplus with this are lower manufacturing things such as textiles and shoes and toys. And particularly with clothing and with textiles and other things, that’s where the US and any other countries, the people who have less money spend more of their money on these basic goods. And so it would really be hurting – it’s an anti-social thing in terms of our own population.

Right. So people go to Wal-Mart, all the sudden, everything is 45% more expensive.

I mean, it wouldn’t trace to exactly to 45 or 35, but it would certainly be a good portion of that.

I think the Trump plan would be: this is a lever over China, that it would hurt them more than it would hurt us, so eventually they would give in to some degree… we’d cut a deal with them. Of course, it would be in our favor, because we’d always be winning so it would be a deal greatly benefiting us and that if we chose to use these tools to our advantage, we could cut a better deal, jobs would come home, trade deficit would shrink and more jobs, more economic growth. I think that’s the strategy.

The Chinese economy now is as large as ours, so they have economic power too. But the trade deficit would not shrink. Some jobs might come home, but most jobs would not come home. The trade deficit, as I’ve said, is government macroeconomics, so if we’d cut with China, we’d have it with somebody else as long as we have the same situation at home.

And the second thing is, in terms of jobs coming back, some jobs are coming back but those have to do with issues that are not related to the trade and the trade agreements. It’s an experiment that I think it would be highly dangerous for the United States I think to undertake. We don’t know how it would come out, as a matter of fact.

Paint for me, not a worst-case scenario, but what a US-China trade war or trade conflict looks like in the context of the US economy and the global economy.

We don’t know exactly where this would end up. It could be just tit for tat. It is true, though Trump doesn’t raise this, that we are less dependent on trade than a lot of other nations, including the Chinese.

But the consequences would go beyond the United States and China, and particularly when you think about the fact that we are both involved in worldwide and certainly region-wide supply chains and so if the two elephants get in a fight, it’s the smaller animals that really get hurt. And so you wouldn’t know how this would ripple out I think. It would certainly create a lot more turmoil.

Let’s narrow it down. How will that affect me getting an iPhone 7?

Well, the supply chain would certainly be cut. This is where our trade statistics have not caught up with supply chains. It’s true that you take the iPhone, and it’s produced in a dozen or 15, 20 countries, and each adds up and it goes back and forth. And that’s what would be disrupted with the trade battle between us. But then it ends up in being assembled in China.

And so not only would the Chinese part will be disrupted, but also the supply chain in between. And so, who knows? Apple would scramble to get other sources, but that would take months if not years to put that all back together.

The point is you’re getting a disruptive effect beyond what you just think about when you say “we’ll just slap a 45% tariff and then, you know, we’ll just work it out in a bilateral way.” It would be much bigger than that.

It sounds like is that there’s a lot of economic nostalgia about trade that hearkens back to what the US looked like 50, even 60 years ago, and misses what’s been happening with globalization, where you have these global supply chains putting products together. We may be doing a lot of the high-value design work, but they’re being assembled elsewhere.

So we’re tightly knit in these global supply chains with other countries, and what some people are suggesting is a severing of that and going to go back to where we were in the 1950s with everything made inside the United States. To me, it looks like North Korean economic policy. We’re going to be completely self-sufficient, not need the world, we’re going to keep all our stuff here, and we’re going to keep all the jobs here. I don’t think that’s a better world, is it?

No, it’s not. And particularly where the United States is now. I mean, if you look back, the nostalgia certainly doesn’t go to the 1930s. It goes to the ’50s and ’60s, when the rest of the world was either physically shattered, the economies weren’t really functioning. And so, of course, we looked dominant and we were dominant.

I think because of our free market system, we’ve remained an engine for growth. And then Trump says, “we don’t produce anything anymore and all the jobs are going to China.” It’s just not true.

I mean, the key factor here, as economists, again, have said again and again is that there may be some questions about productivity at this moment. This rising productivity, which has produced enormous output in the United States, we are still and we’re about to be again the number one producer of manufactured products. We’re number two with China now.

But I think the World Bank projects that in the early ’20s, we will come back. In other words, while we have lost jobs within the manufacturing sector — not lost but we have downsized in terms of the use of labor — it’s because productivity has grown, not because of anything that happened with trade agreements or opening up to trade. It’s just that we are now, really, again a major producer of goods and now increasingly with services where we actually run to a surplus all the time.

So if you’re concerned about manufacturing jobs, then you really need a two-part policy. You need to build and smash. You need to build those trade barriers and then you need to smash the machines because it’s really been productivity and automation that’s cost the bulk of those manufacturing jobs. Even though output’s gone up, total manufacturing employment has gone down.

But since we really don’t think about that, we just think about trade — and China’s so obvious as a scapegoat. But  if you’re talking about creating good jobs, trade certainly over the longer term is going to mean a more productive and innovative economy that should produce better jobs, I would hope.

That’s exactly right. Everyone has focused on what is a very good paper by David Autor and some of his co-authors about the shock and the impact of China in terms of the US labor force and in terms of manufacturing jobs.

Where in some regions [of America] which are really exposed to trade for China, they never came back. They didn’t act like the economic model. People didn’t move. They didn’t find jobs in other sectors. They remained depressed.

Right. But in some circles, it is said, okay. We have a new trade paradigm now as opposed to an old trade paradigm. People can quibble about Autor’s exact numbers, but his paper is part of a moving target also. I remember in the 1990s writing correctly that you couldn’t say that trade with developing countries or even with NAFTA had an impact on the US economy because whether it was Mexico or sub-Sahara Africa where the wages were lowest or whatever, we just didn’t trade with those countries. China did change things in the fact that this is a huge economy where you had a very quick movement to compete.

But the Autor paper is in a sense maybe not obsolete or out of kilter but a lot of that transition. I’m talking about in terms of competition. Chinese wages have grown tremendously. China is moving to other sectors so that the Autor paper is a snapshot in time. It is not that there is suddenly a new set of economic principles that relate to trade. It’s just a moving target that we’ve had.

And by 2025 or 2030, that, too, will have moved on. It’s also true that the problem that you face is that we had the worst recession since the 1930s. And so adjustment was bound to be slower because of the depth of the crisis, I think. And this is not to say that this is not a problem, but it’s not a problem is baked into somehow economic theory about trade.

As the wages have gone up and China does more high value added stuff, they’re automating. There’s a huge automation push in China. So when we talking about bringing jobs back, I think what you’re saying in essence is you want American robots to do the job of Chinese robots.

The idea that we’re going to be shuttering factories in China and there’s going to be Americans — human Americans, not robot Americans — doing the job that human Chinese are doing, again, that’s a very nostalgic, backward-looking view that doesn’t reflect where trends are going.

If you were a trade czar, appointed US trade czar, what changes would you make in US trade policy with China or more generally?

I’m hoping that the next administration, Republican or Democratic, will come back to … I think the Trans-Pacific Pact is a very good model. It is an advance on liberalization.

And I think, assuming that you have more than a single term for the next president, I think there would be time to get the Trans-Pacific in order and then turn to Europe and then go back to the World Trade Organization because, from the economist’s point of view, it’s the world economy that you’re looking at. And even as large as the Trans-Pacific is going to be, and the TPP would be, I think that’s where you really ought to go in terms of our trade negotiating priorities.

And China would be a part of that. I think politically, I think it would be easier also to advance liberalization, including China, within the WTO than trying to have, in the next eight years, a bilateral trade agreement with China and the United States. I think it’s not politically possible.

Beyond that, I mean, I think the other thing I would keep in mind is the Trans-Pacific Partnership got much more than I thought. The rules that we got for the Internet in terms of trade rules are still astonishing to me, how much those other 11 nations agree to. You know, that’s the wave of the future for the United States and where our comparative advantage is.