A Long Time Coming

Trade, Trump and What to Do Now

The most surprising Presidential campaign of our lifetimes shouldn’t have been surprising at all. The political upheaval of the past year is rooted in long-simmering economic problems that have been apparent for the better part of the last decade, yet stubbornly ignored by Washington policymakers.

For many working-class Americans, the problem was blindingly obvious, the rest of the world was eating our lunch. They could see it in the closing of factories and scores of unemployed manufacturing workers.

While globalization has resulted in large aggregate benefits that cannot be ignored, foreign competition has left a large swath of the American workforce behind. Real incomes have stagnated.

Meanwhile, as the nation’s capital was experiencing an unprecedented boom Washington policymakers seemed completely blind to the economic pain many ordinary Americans were feeling. Innovation hubs like Austin, San Fransisco, and North Carolina’s Research Triangle had Washington buzzing about “green jobs” and the “innovation economy.” But, to an unemployed furniture worker in Hickory, NC, they might as well had been speaking Japanese. China had stolen their job, all they wanted to hear from a politician is how they were going to steal it back. Donald Trump was so successful because that’s exactly what he did. It’s part of the reason Bernie Sanders caught fire too.

When the history of the 2016 Presidential election is written, the disconnect between the deepening economic woes of workers and the political establishment’s failure to respond will be at the core of the story.

Ten years ago, my colleagues Rob Nichols, John Dearie, Courtney Geduldig and I at the Financial Services Forum began to recognize that the legitimate concerns about globalization among ordinary Americans must be addressed. If Washington policymakers continued to ignore this problem, it would eventually boil over. Politicians would likely overreact with dangerously protectionist responses that could have lasting and deeply harmful consequences for the American economy.

It would be incredibly foolish to just simply shut ourselves off from the world. The aggregate benefits of free trade is one of the very few things about which economists universally agree. However, the consensus of economists is of little consolation to a worker put out of a job by foreign competition.

Succeeding in the Global Economy

In 2007, we commissioned three leading economists to study this problem and propose policies to address it. Matthew Slaughter of Dartmouth, Robert Lawrence of Harvard and Grant Aldonas, former Undersecretary of Trade at the U.S. Department of Commerce co-authored Succeeding in the Global: A New Policy Agenda for the American Worker. The report confirmed that the problems resulting from rapid globalization were more extensive than Washington policymakers had recognized:

The aggregate gains from global engagement, large though they are, are not evenly shared and do not directly benefit every worker, firm, and community. The many constituent forces of global engagement have also fostered economic changes that have pressured the well-being of many workers. These pressures are both short-term and long-term, and they often are concentrated in particular groups of workers, firms, and communities…
Growth in real income has been extremely skewed to very high earners, with little or no growth for most workers…. [P]olicymakers face an increasingly skeptical public about whether globalization benefits them — a skepticism not without cause given the lack of recent real income growth for most Americans.

The report also provided a prescient warning of the political backlash against globalization that has fueled the political upheaval of this election year:

Public support for engagement in the global economy has been eroding rapidly in recent years. Left unaddressed, this erosion will gather momentum and will shape the economic-policy debate into the 2008 presidential elections and beyond.
This protectionist drift reflects a public increasingly skeptical about whether globalization benefits them. There is a substantial risk that, absent an effort to clarify and address the real economic challenges at hand, policies will be implemented that isolate the United States from world markets…

What to Do Now

This Presidential campaign has has not lacked for fiery outrage. China, the Trans-Pacific Partnership, and NAFTA have been subjected to an unrelenting rhetorical assault from both ends of the political spectrum. It is a deep irony, and a demonstration of the extent to which Washington was oblivious to the angst about globalization lurking under the surface, that as the current Congress began, promoting trade was one of the few priorities about which there was thought to be enough consensus between Republicans and President Obama to pass legislation.

Either Hillary Clinton or Donald Trump will enter office in January. When they do, they will need to deliver on the promises they have made on the campaign trail. That will prove more difficult than they think. There is a better way. The policy options outlined in Succeeding in the Global Economy are as relevant today as ever.

Trade is Not a Zero Sum Game

While Donald Trump and Bernie Sanders have the problem right, they have the answer wrong. Retreating from the global economy remains a bad idea, and as past Presidents have discovered, it is nearly impossible besides.

If elected, Trump will find that his vow to renegotiate NAFTA will not be simple, nor much of a solution. It’s worth noting that President Obama also promised to renegotiate NAFTA during his own run for the Presidency. But, after taking office, when it became clear how unfeasible this actually was, he scrapped the idea. While Trump would argue that he is a better negotiator, he will operate within the same reality.

Mexico would only agree to renegotiate NAFTA voluntarily if it benefits Mexico. Recognizing this, Trump proposes to compel Mexico to the negotiating table with a 35% tariff on imported goods and the threat of the U.S. pulling out of NAFTA altogether. But, none of this would come without collateral damage to the U.S. economy as well.

The nature of the modern global supply chain risks damaging some U.S. businesses as Trump seeks to help others. For example, U.S. textile manufacturers that export fabrics to Mexico for assembly into finished garments for the U.S. market would feel the pinch of Trump’s stiff import tariffs too.

If Trump had his way, it would not at all be certain that many jobs would return home. Advances in technology and the need to manage costs mean that much of the manufacturing that does return will be highly automated, employing few workers.

Further, a substantial reason for shifting manufacturing to Mexico is less a result NAFTA that the need to compete with low cost goods coming from China. Global firms manufacturing goods in Mexico for the U.S. market might simply look to other low-priced labor markets. Perhaps Trump could follow them around the world inflicting tariffs on companies that attempted to do so. But, he would be playing a losing game of whack-a-mole. Even if he managed it, other suppliers from offshore low-cost jurisdictions would likely just step in to take their place.

Many U.S. companies have invested substantially in operations in Mexico. A trade war with Mexico would destroy those investments with major impacts on shareholder value, draining wealth from the pension funds and retirement accounts of ordinary Americans.

Trump’s promises to extract trade concessions from China and other countries would have similar problems. The cost of import tariffs would be passed along to consumers in the form of higher prices. Trump’s efforts to strong-arm trading partners to the negotiating table would be met with retaliatory tariffs that would devastate U.S. exporters. Finally, the uncertainty of Trump’s trade policy would be a drag on business investment.

If elected, the next President will realize that a dramatic swing towards protectionism would leave America isolated and, very likely, drag an already limping economy into recession. Hillary Clinton already knows this. The skepticism of Sanders supporter that she won’t follow through on her tough talk about trade is well placed. I suspect that Trump’s economics advisors have warned him by now that counterproductive trade wars are not realistic nor are they wise.

The important thing is to address the problem. Succeeding in the Global Economy introduced new policy ideas that balance harnessing the opportunities of trade with the need to make sure that it is fair to American workers.

Economic policy should aim to produce a growing American economy in which every American can find the opportunity to use their skills to craft their own economic future. That is the only way to meet the current challenge of guaranteeing that America overall continues to benefit from global engagement while also delivering on the idea of an equal-opportunity society and thereby addressing the legitimate distributional concerns about the pressures of economic openness.

The report suggests reforming the outdated Trade Adjustment Assistance program to better help workers adapt; identifying communities disproportionately impacted by trade for greater assistance; and a number of other ideas that would help American workers succeed. Finding the right way to respond to the challenges of globalization won’t be easy. But, both campaigns would be wise to look to Succeeding in the Global Economy as a good place to start.

Succeeding in the Global Economy is available for download here.