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Globalism and its Discontents
Donald Trump yesterday made one aspect of his platform entirely unambiguous: He is against free trade. The full transcript of his speech is here. He draws a dichotomy between “globalism” and “Americanism,” and in his view, globalism — or free trade — is unAmerican.
This is how he understands recent American economic history:
America has lost nearly one-third of its manufacturing jobs since 1997 – even as the country has increased its population by 50 million people.
At the center of this catastrophe are two trade deals pushed by Bill and Hillary Clinton.
First, the North American Free Trade Agreement, or NAFTA. Second, China’s entry into the World Trade Organization.
NAFTA was the worst trade deal in history, and China’s entrance into the World Trade Organization has enabled the greatest jobs theft in history.
In his view, “massive trade deficits subtract directly from our Gross Domestic Product,” and the TPP would not only “undermine our economy, but it will undermine our independence,” because it “creates a new international commission that makes decisions the American people can’t veto.”
And here are his proposals to fix this:
One: I am going to withdraw the United States from the Trans-Pacific Partnership, which has not yet been ratified.
Two: I’m going to appoint the toughest and smartest trade negotiators to fight on behalf of American workers.
Three: I’m going to direct the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm our workers. I will then direct all appropriate agencies to use every tool under American and international law to end these abuses.
Four: I’m going tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don’t mean just a little bit better, I mean a lot better. If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal.
Five: I am going to instruct my Treasury Secretary to label China a currency manipulator. Any country that devalues their currency in order to take advantage of the United States will be met with sharply
Six: I am going to instruct the U.S. Trade Representative to bring trade cases against China, both in this country and at the WTO. China’s unfair subsidy behavior is prohibited by the terms of its entrance to the WTO, and I intend to enforce those rules.
Seven: If China does not stop its illegal activities, including its theft of American trade secrets, I will use every lawful presidential power to remedy trade disputes, including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.
He calls for what sounds like central planning to boost and support the steel and energy industries, although it’s not clear that what mechanism he proposes to ensure we only use American steel; perhaps he thinks it will happen on its own:
A Trump Administration will also ensure that we start using American steel for American infrastructure.
Just like the American steel from Pennsylvania that built the Empire State building.
It will be American steel that will fortify America’s crumbling bridges.
It will be American steel that sends our skyscrapers soaring into the sky.
It will be American steel that rebuilds our inner cities.
It will be American hands that remake this country, and it will be American energy – mined from American resources – that powers this country.
Trump clearly doesn’t adhere to the neoliberal consensus.
The word “neoliberal” is almost always used disparagingly, but I use it here to refer to the policies introduced by Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States. In Neoliberalism: The Genesis of a Political Swearword, Oliver Marc Hartwich describes the critics of neoliberalism thus:
In any case, it is a curious alliance that has committed to fighting neoliberalism: Religious leaders and artists, environmental activists and globalisation critics, politicians of the left and the right as well as trade unionists, commentators and academics. They all share a passion to unmask neoliberalism as an inhuman, antisocial, and potentially misanthropic ideology or as a cynical exercise by strangely anonymous forces that wish to exploit the world to their own advantage.
It’s unusual, to say the least, for a GOP presidential candidate to embrace these views.
At this point, experts will interrupt to say, “But these proposals are insane. They will cause a recession.” You can read what the experts have to say, for example, in the Washington Post:
An economic model of Trump’s proposals, prepared by Moody’s Analytics at the request of The Washington Post, suggests Trump is half-right about his plans. They would, in fact, sock it to China and Mexico. Both would fall into recession, the model suggests, if Trump levied his proposed tariffs and those countries retaliated with tariffs of their own.
Unfortunately, the United States would fall into recession, too. Up to 4 million American workers would lose their jobs. Another 3 million jobs would not be created that otherwise would have been, had the country not fallen into a trade-induced downturn.
It’s safe to say that Trump’s response would be much like Michael Gove’s: “People in this country have had enough of experts.” After all, what else could he say?
We actually know what happens when we try to protect the steel industry. Bush tried it in 2002. His administration levied tariffs on imported steel. It saved 1,700 steelworkers’ jobs. But as Walter E. Williams puts it in Investor’s Business Daily, it would have been cheaper to tax ourselves and give each of those 1,700 steelworkers a $100,000 annual check:
[S]teel-users — such as the U.S. auto industry, its suppliers, heavy construction equipment manufacturers and others — were harmed by higher steel prices.
It is estimated that the steel tariffs caused at least 4,500 job losses in no fewer than 16 states, with more than 19,000 jobs lost in California, 16,000 in Texas and about 10,000 each in Ohio, Michigan and Illinois.
In other words, industries that use steel were forced to pay higher prices, causing them to have to raise prices on what they produced. As a result, they became less competitive in both domestic and international markets and thus had to lay off workers.
Within three years, Trump’s proposals would — in both the expert and my inexpert view — cause the US economy to shrink by 4.6 percent and the unemployment rate to double. Insofar as they’d also cause a recession in our trading partners, they’d further destabilize whatever fragile world order is left.
Was NAFTA “the worst trade deal in history?” Hardly. It’s true that unskilled American workers have received an increasingly raw deal since the 1970s. But NAFTA’s not to blame. After NAFTA entered into force, trade with Canada and Mexico nearly quadrupled. Canada and Mexico buy more than a third of US merchandise exports. It’s actually been the most beneficial trade agreement in US history, apart from the Uruguay Round agreement that created the World Trade Organization. According to the Peterson Institute for International Economics, NAFTA’s been worth a gain in annual income of about $10,000 per household.
But they’re experts, and we’re sick of experts.
Waving the trade deficit around as if it means something is absurd. The United States has registered trade surpluses with its NAFTA partners in manufactured goods and services. The deficit is owed to our petroleum imports from Canada and Mexico, which stem from geology, not NAFTA.
The gold-standard model used by economists to measure the employment effects of trade agreements is a computable general equilibrium model called Global Trade Analysis Project. Developed in the early 1990s, it’s maintained by a consortium of more than 30 American and international organizations, including the US International Trade Commission, the World Trade Organization, the World Bank, and half a dozen US government agencies. Joseph Francois and Laura M. Baughman used the model to assess the impact of our Free Trade Agreements in a paper called Opening Markets, Creating Jobs: Estimated U.S. Employment Effects of Trade with FTA Partners. Among their findings:
- We find that in recent years the services provisions of the NAFTA have translated into a 13.3 percent reduction in cost savings for U.S. services exporters. This means that, where it would have cost $100 to sell a service to NAFTA partners before the agreement went in effect, it now costs $86.70 to sell the same service at the same price. For other FTA partners, we estimate an average cost saving of 8.5 percent.
- We find that because of this trade, U.S. GDP was 7.2 percent higher than it would have been otherwise — $1.0 trillion. In other words, goods and services trade with the 14 FTA countries generated net U.S. output gains worth $1 trillion in 2008. Furthermore, total U.S. exports of goods and services to the world are $462.7 billion higher than they otherwise would be because we trade with these countries. Finally, out of the total number of jobs in the U.S. economy in 2008 and the wages they paid to workers, trade with the FTA partners supported 17.7 million of those U.S. jobs. These jobs are spread across the range of U.S. industries. These higher levels of output, trade, and employment were made possible by the benefits of trading with the 14 FTA partner countries.
- We find that the FTAs in 2008 generated $304.5 billion in U.S. output, or 2.1 percent of U.S. GDP. They expanded total U.S. exports of goods and services to the world by $462.7 billion. Finally, they supported 5.4 million U.S. jobs. This is output, exports and employment that would not exist in the absence of the 2008 FTAs (fully implemented in some cases, partially implemented in others).
- FTA-induced trade with Canada, an important U.S. trading partner and an integral part of the North American manufacturing based, is estimated to have brought roughly 60 percent of overall FTA labor market and output gains from trade … Mexican trade brings with it an additional one-third of the overall gains. The fact that much of the NAFTA trade involves trade at intermediate stages of processing also means that the gains from NAFTA trade are larger, relative to the impact on trade itself, than is the case with other FTA partners.
But they’re experts and we’re sick of experts.
I’m open to the argument that our social stability has been jeopardized by the loss of unskilled jobs, and the federal government must therefore step in to create them artificially. Something is obviously very wrong, after all: If it weren’t, Trump would not be the presumptive GOP nominee. But if we want the government to do create unskilled jobs, this is not the way to do it. The US is in need of upgraded infrastructure. The jobs required to rebuild our infrastructure can’t be exported. A massive state-run program to rebuild that infrastructure would be less damaging than a trade war. Or just redistribute income, full stop: Buy off the underclass in exchange for social harmony. It would cost less than a trade war.
Anything but this — this plan is advanced insanity.
Published in General
As you have pointed out, there are plenty of costs to US JVs in China that are not labor costs. As I’ve pointed out, there are other reasons that US companies may be able to charge more in China.
Sure.
I don’t think that this is the case, unless you think that the SUV, minivan, etc. markets are all luxury. Even then, it wouldn’t be entirely true, but it’d be more true.
Do you mean the tariff, or are you alleging other barriers? When I ask about non-tariff barriers you tend to talk about barriers to FDI, not barriers to trade. This would be a question about what other barriers to trade exist.
Where does the US export primarily low end cars to? If you look at our FTA partners, you will see that US exports to them generally look pretty like the US exports to China; mostly SUVs, upscale cars, and minivans. That’s the sort of factory that foreign brands generally set up in the US, and it’s the sort of thing that domestic brands are generally best at selling abroad.
Could you reword this? I’m not sure what you mean.
My understanding is that there are plenty of car parts that are not enormously complex, but that they still fall into the type of heavy industry that the EPA is unkind to. There are other reasons for being in China, of course. If Chinese labor for this stuff really was more expensive than US, then China would struggle to compete with, say, Russia, or Brazil, India, or Spain. China isn’t just competing with the US in the global car part market; they compete successfully with the entire world, because that sort of product appears to be something they’re genuinely good at producing.
There are plenty of companies with factories in both the US and China. You keep suggesting that these decisions are more black and white than they are.
The Auto industry had a much stronger union system a decade ago, and stronger still before that. Honda and Toyota seem to be doing just fine.
This is a list of auto parts manufacturers, with market shares and such. I don’t think you’ll find it dominated by Chinese companies, although there are certainly a fair number of Chinese companies out there. China isn’t giving itself monopoly power, it’s just competing in a globally competitive market at the sort of thing that it’s good at.
Trade disputes often see multiple rounds of WTO dispute resolution (the US is just as guilty of being repeatedly hauled back as China is), but China appears to be respectful of the decisions. That doesn’t mean that it won’t be charged with more stuff, just as the US is regularly charged with violations; that happens because the interaction of global markets with national regulation is an intrinsically complex thing.
The effective ban is how China got to that 75%+ share you assert. Te fact that it leaves niches is irrelevant.
Without any support and by strange guesses at b]vague analogy that I’ll swat down like this. Stella is a brand of InBev. InBev differentiates its brands in markets that it fills all segments of. That’s the point of brands.
In some (many, most?) situations the difference between a company’s different brands is more marketing than actual production costs.
This is not such a case of a company having full freedom to sell all its brands into every submarket tweaking the levels a given brand sells at country-by-country
Caveat on cost vs. price. I am complaining both that CN artificially raises costs (fia tarrifs, etc) and then restricts price to make even the vestigial market less (or un) profitable.
All cars.
What other sources of Jeeps? Perhaps one of the issues they had was the exclusivity factor (caused by the effective ban on mass imports by Chrysler itself) left open a black/grey market.
Cars, do not have the exact same issues as scarves. You can tell the fakes and the grey/black market imports fairly easily. Nevertheless, as was the topic on prior threads knockoffs are a problem (but they are easily identified as knockoffs.
My understanding is that the FDI regulations are highly segment-specific
What reasons?
The key point is that even is a few vehicles that are upper mid market in the West get imported to CN, the exclusivity makes them effectively luxury vehicles.
The tariff, plus whatever other trade barriers are involved (be them the Trump-alleged “currency manipulation” or regulatory barriers more like Japan’s)
As previously discussed it is misleading to look at existing US exports for a variety of reasons:including: that other countries have built up car industry by trade barriers does not justify China doing so; other markets have tended to want a bit more different product whereas China has an affinity for US-spec products; other countries let us do local manufacture.
We could export from various other of our sources, including Mexico and Korea.
Tier 1 suppliers sell directly to the OEM, usually assemblies such as seats, transmissions, etc. Tier 2 sells to Tier 1.
Of course, low end part manufacture seems like something China may be good at. The problem is they are using trade barriers to target the high value parts of the business.
So what? It’s not relevant that some of the foreign OEMs use non-union labor in the US. The UAW still has all, if not more influence over GM/Ford. The German unions have all their influence over VW, etc.
Again, the fact that Japan built a world-dominant auto industry using trade barriers that still protect its domestic market does not help your position.
What list?
Right. I wasn’t sure what you felt I’d conceded.
What trade barriers are you alleging? The tariff, or something more?