On the eve of the US presidential elections there appears to be only one policy area where the two candidates agree. Unfortunately, it is one where both are demonstrably wrong. It is their leaning toward trade protectionism. The argument in both the Clinton and Trump camps is that lowered tariffs and open trade have harmed the US economy, in particular that they have caused US jobs to flee the country to destinations such as China and Mexico. That this line of argumentation is in sync with a global trend has just been underscored by the difficulty the long-delayed Canadian-European trade deal known as CETA has had to get signed (provisionally!!), an accord that was considered a done deal two years ago. The protests against the pact were led by Wallonia, at one time Belgium’s economic heartland but now hard-hit by years of industrial shut-downs. Similar feelings are easily drummed up in what in the US is often called the “rust belt,” in the Great Lakes region and covering much of the Midwest.
One consequence of this line of thinking is that enormous question marks are now hanging over the officially much-vaunted Transatlantic Trade and Investment Partnership (TTIP) as well as over the 12-nation Pacific Rim Pact called Trans-Pacific Partnership or TPP, which now Hillary and Trump both say they oppose and which has yet to be ratified by Congress. So far since the 2008 crisis, leaders around the world have been fairly successful in avoiding a serious new cycle of protectionism (although “below-the-board” defenses against imports such as buy-local provisions and special rules for labelling have mushroomed). But now this appears to be changing as the populists on both sides of the political spectrum are gaining ground and middle-of-the-road politicians have to talk their language in order to get elected.
There is, of course, no denying that America has been running foreign trade deficits every year since 1976 and that a part of the heavy job losses in manufacturing states such as Michigan, Ohio and Pennsylvania must be attributed to industrial capacity having been shifted to other countries. But to say that this has been due to free-trade arrangements like NAFTA and that renegotiating such accords will solve the problem is far too simplistic an argument to be taken seriously. In fact, even a brief look at history shows that only countries that are open to trade do well, while closed economies struggle and wither.
There are many reasons why manufacturing and jobs are being moved offshore. Taxes can be an important incentive as well as the behavior of labor unions. So can ridiculously complex and politicized regulation. The cost of health insurance can be a key consideration and so is a location’s access to key markets, not to mention the international strength or weakness of the US dollar. What the US government should be doing is not make it more difficult for companies to leave (the larger ones cannot be fenced in, anyway) but to make it more attractive for them to stay. At least nine major automotive assembly plants have migrated from the US to Mexico in the last few years. Certainly, lower wages were one consideration. But another one was that Mexico has free-trade agreements with more than 40 other countries, which is more than double the number the US has deals with. It does cost, on the average, USD 1,200 less to build a car in Mexico rather than the US, but Mexico also has tariff-free access to nearly 50% of the global new-vehicle market, which is a not inconsiderable plus.
Even so, the automotive industry in the US still easily outweighs that in Mexico. The auto parts supply chain is stronger here than South of the Border and vehicles produced in Mexico have a US content of upwards of 35%. Volvo and Daimler Vans just established two new plants in South Carolina which are designed to export at least half their output. As for China, while that country has been the recipient of much US manufacturing capacity, the movement seems to be coming to an end. There are signs that more jobs are now returning to the US from China than are going the other way. Meanwhile, an increasingly affluent middle class has sprung up in the PRC -- larger than the entire US population – that demands foreign-made goods, especially goods made in America. And Chinese are investing in the United States in record numbers. Back in 2010, such investments came to just USD 4.6 billion. In 2015, the total was up to USD 15.3 billion, in 171 projects, and in the first two quarters of this year alone the aggregate was valued at USD 18 billion. If one adds up all the acquisitions, expansions of existing industries and new greenfield operations, foreign investment from all sources amounted to a whopping USD 420.7 billion in calendar 2015, for a 68% increase from 2014. More than half of this was manufacturing-related. Foreign companies established in the US employ close to 5 million American workers.
Our trade deficit notwithstanding, the US last year was the second-ranked exporter, world-wide, behind only China. And nearly 50% of all our shipments abroad went to countries with which we have free trade agreements, to wit, Australia, South Korea, Israel, Singapore, countries in Central and South America, and, of course, Mexico and Canada. With these markets, the US racked up a trade surplus in industrial goods of about USD 12 billion last year. With the others, which include Europe, China and Japan, we incurred a deficit of some USD 500 billion. The shortfall with China was USD 334.1 billion, that with Germany USD 77.3 billion, and that with Japan USD 55.4 billion. As Mr. Reynolds of the Cato Institute put it succinctly, you can’t renegotiate trade deals that were never negotiated.
None of this is to suggest that the US manufacturing sector is not hurting. While the American economy, overall, gained at an annual pace of 2.9% in the third quarter, with one of the chief drivers having been stronger exports, manufacturing remains in an extended period of stagnation. But trade agreements have not been the culprits. And one should also point out that openings for manufacturing jobs this year have averaged 353,000 a month, up from 311,000 in 2015. The trouble for many of those having a rough time trying to find well-paying jobs is that companies have heavily invested in advanced machinery requiring an altogether new set of skills, which the unemployed frequently do not have.
The conclusion from all this should be that protectionism is not the answer. When President Obama in 2009 slapped punitive tariffs on tires imported from China, the annual cost to American consumers was USD 1.1 billion. According to the Peterson Institute for International Economics this works out to over USD 900,000 for each of the 1,200 jobs that were “saved.” What the government should do is to put considerable more money into helping working Americans cope with the job churn that inevitably results from shifts in trade and technology. Much more could and should be done with education and retraining, especially as colleges and high schools have drastically reduced their focus on technical education. Too many people have lost manufacturing jobs paying a solid wage plus health and retirement benefits and have been able to replace them only with jobs in the service sector, without benefits and paying not even half as much. Finding ways to cushion such downsides is where government efforts should be concentrated. Closing borders will cause great harm and do hardly anything to address economic inequities.