An absolute torrent of pro 'free-trade' commentary has been unleashed since Donald Trump emerged as the Republican frontrunner. Economists, reporters, and pundits have argued vigorously in favor of the free-trade status quo, opposing Trump's plans to renegotiate trade deals and perhaps impose tariffs. Although their approaches vary, all argue trade deficits don't matter and trade is working as advertised to benefit Americans. Thus Trump is largely wrong highlighting trade deficits and unfair foreign practices, and we shouldn't tamper with current trade arrangements.
But what about free trade's inadequacies in addressing the 'angry' workers displaced by free-trade agreements who are backing Trump? The consensus solution is retraining and wage insurance supplementing the new, lower incomes of former factory workers -- preserving free trade as-is by compensating with social welfare those negatively impacted. The big flaw is that such subsidies do nothing to improve America's competitive position internationally, potentially crating more displaced workers.
In fact, the best training/income-enhancing program is a manufacturing job. U.S. manufacturing, targeted by foreign rivals and neglected by our policy makers, is an important component of GDP, is responsible for the lion's share of productivity increases and private sector R&D, has a high jobs-multiplier effect, and often creates new spin-off industries. Manufacturing jobs allow workers to increase skill levels over time, and earn higher pay.
Trump's trade policy is ultimately a call for a national pro-manufacturing agenda. As a businessman who buys large amounts of construction materials, sophisticated electronic systems, and finished goods for his hotels, Trump knows that entire U.S. industries have vanished or are so diminished that he has to go offshore to meet his needs. Just as the displaced workers who support him, he sees that our manufacturing economy has been badly damaged by a flood of goods on world markets artificially priced through rigged currencies, subsidies, lax regulation, worker suppression, and tax holidays, inter alia.
He also understands that America's manufacturers face a much tougher time accessing foreign markets than vice versa, in part because trade agreement tariffs cuts are countered with hikes in border-imposed VAT and consumption taxes. Japan, for example, in preparing for the Trans-Pacific Partnership has raised its consumption tax to eight percent from five, and will soon move to ten percent.
Trump has gotten the diagnosis correct -- that is trade deficits at current levels subtract substantially from economic growth. Years of paltry two percent grow needn't be the 'new normal.' Eliminating our current $500+ billion trade deficits would put growth back in the 4-5 percent range. If we ran surpluses, our growth rates would climb even higher.
Re-booting the globally-imbalanced 'free-trade' system, thus precluding a potential catastrophic crash, is Trump's goal. The IMF reported recently that the risks from global financial instability have risen, especially in regard to emerging markets. China is boosting its slowing economy by adding to its massive debt and avoiding elimination of its excess, inefficient industrial capacity now swamping the globe with dumped goods.
However, Trump's belief that better trade agreements alone will do the trick and can be negotiated in six months' time is wildly optimistic. In fact, negotiations with nations that have run export machines and used unfair trade practices for decades are not likely to be quick or to yield good results. And a more comprehensive goal than just halting currency cheating is necessary.
The next president must start with a strategic blueprint for our economy for the next 25 years. Trump wouldn't build a hotel without a blueprint; one is needed here. Almost every other major trading nation has an industrial strategy. The U.S. does not, fearing the government might 'pick winners and losers.' But deciding, for instance, that the beleaguered US steel or aluminum industries are vital components of our economy and must not be eliminated by Chinese dumping is hardly picking winners.
The fact that we have suffered 40 straight years of trade deficits, with no end in sight, argues conclusively for a more strategic approach to trade policy -- rather than continuing to enshrine free-trade rules in still more agreements. New, quick response U.S. enforcement mechanisms are also a must-have. In negotiations, the Chinese might move toward balanced trade by buying more scrap metal, waste paper, soybeans, and oil, but could still leave us more dependent on them for advanced technology goods. The U.S. must know which industries and technologies are crucial to our national security and economic future.
However objectionable one might find Trump on other grounds, it is folly to dismiss out of hand his critique of global trade imbalances with their growth-subtracting U.S. trade deficits. Throwing wage-insurance crumbs to disaffected non-college workers will not increase economic growth, foster competitive industrial/technological capabilities, and pay down the national debt. A new approach to our leave-industries-and-workers-behind trade policy is needed, with or without Donald Trump.