The Millennial Economy Part II: How Trump Wants to Change the World
The president’s trip to Asia provided an opportunity to lay out a coherent explanation of his trade policy. Intrepid reporter Doug Palmer summarized that in a Politico piece on November 10:
“President Donald Trump's tough speech on trade today heralds the start of a new era in which the United States will not hesitate to use its huge ‘economic leverage’ to force other countries to change their behavior, U.S. Trade Representative Robert Lighthizer said.
‘The president spoke loud and clear: The era of trade compromised by massive state intervention, subsidies, closed markets and mercantilism is ending,’ Lighthizer said in a statement from Da Nang, Vietnam, where he and Trump are attending the annual APEC leaders’ summit.
‘Free, fair and reciprocal trade that leads to market outcomes and greater prosperity is on the horizon,’ Lighthizer added.”
If the president really succeeds in bringing an end to the practices outlined above, he will no doubt get a standing O from the assembled business community, which has been complaining about those very things for a long time. Unfortunately, I think he is not only grossly overestimating our “huge” economic leverage, but his efforts to withdraw from multilateral arrangements like TPP and potentially others will diminish it even more.
First, relatively speaking, we’re not as huge as we used to be, meaning that while trade may be growing in importance as part of our economy, our global share of it is declining. According to the New York Times, “Today the United States accounts for only about 13 percent of world trade, down from almost a quarter in the 1980s.” The truth is we are not as big a global deal economically as we used to be, and the “leverage,” if you will, is moving in the other direction. With 95% of the world’s consumers outside the U.S., we need them more than they need us if we want our economy to continue to grow. As a result, threats to deny others access to our market if they don’t shape up are increasingly hollow.
Second, the president is rapidly squandering what leverage we have. His withdrawal from TPP, lack of interest in other multilateral agreements, including the WTO, and his failure so far to initiate any of his promised bilateral negotiations tells the rest of the world that the United States is not very interested in them and plans to go it alone. The result is that other countries are saying, OK, we’ll get along just fine without you. Countries in Asia in particular, watching the NAFTA and KORUS renegotiation dramas, are asking why in the world they would want to put themselves through that. Our negotiating approach so far has been to ask for a lot, offer nothing, and periodically threaten to withdraw, which are hardly incentives for anyone else to enter into talks.
Now, if that were the whole story, we could just write the obituary by saying noble goal, flawed implementation — remember the ant and the grasshopper from several weeks ago. Unfortunately, there is more to it than that, as Ambassador Lighthizer has also begun to make clear that, at least as far as NAFTA is concerned (and probably other agreements as well), his goal is to make it as expensive and difficult as possible for American companies to move outside the U.S.
That is simply a recipe for America’s decline. While some companies have moved offshore for tax reasons — something the pending tax bills attempt to address — others have moved in order to access foreign markets or to construct global value chains that reduce their costs. Ambassador Lighthizer’s underlying assumption seems to be that these are all bad for America, but a 2014 Peterson Institute study by Ted Moran and Lindsay Oldenski concludes:
“The findings show that US multinationals that increase their investments abroad simultaneously increase the size and strength of their manufacturing activities in the United States. The creation of jobs by US multinationals abroad and the expansion of sales by US multinational affiliates abroad both lead to more production and employment at home…Indeed the preponderance of net job loss in the US manufacturing sector comes within companies that stay at home and do not invest abroad.”
Here is a more detailed presentation of their conclusions:
The lesson from this is that foreign investment can be win-win, not zero-sum. (This is not new; I recall a NAM study said pretty much the same thing more than 20 years ago). The wins may not be equal — the US might gain less than the foreigners — but it gains nonetheless.
This contrasts sharply with what Commerce Secretary Wilbur Ross said at the Wall Street Journal CEO conference: “A trade agreement is meant to help the people inside consolidate business and build a barrier against the people outside and the current NAFTA has totally failed to do that.” He is right that NAFTA has failed to do that. Its purpose was the exact opposite — to develop an integrated North American market to the benefit of all three parties — and it has worked. If the president’s policy is to reverse that, then he is flying in the face of economic theory and geopolitical reality. Sort of like King Cnut ordering the tide not to come in. One would hope we have learned something in the last thousand years.