Why Trump’s Economic Nationalism is the Wrong Prescription
The President-elect thinks Making America Great Again = Made in America. This is a mistake.
Donald Trump’s economic policy is coming into focus.
In a radical break from his predecessors (both Republican and Democratic), the President-elect is embracing economic nationalism. This is a policy that involves government management of America’s international trade and the use of explicit federal policies to promote specific industries.
Trump’s policy is a response to anger over the loss of good-paying manufacturing jobs, a decline that has deep historical roots.
In particular, rapid productivity growth in manufacturing industries combined with slow growth in the demand for manufactured products means that these companies need fewer workers. Contrary to popular wisdom, American companies moving abroad for cheaper foreign workers contributed only slightly to this problem.
Trump and his supporters diagnose the illness differently. They believe that free trade led to the decline of American manufacturing and the disappearance of thousands of jobs in the industrial Midwest.
In particular, they assert China, among other countries, has taken advantage of our free trade policies and lack of protection for domestic businesses to steal jobs and industries that should be ours.
Trump’s response to this diagnosis is to prescribe a strong dose of economic nationalism.
Economic Nationalism and Trade
Presidents since World War II have promoted free and open international trade as a key American policy. They took two approaches:
- Creating institutions such as the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) so that countries could work together to lower tariffs and reduce trade barriers.
- Negotiating directly with other countries to reach trade agreements such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP).
Economic research confirms that these efforts promoted economic growth generally across countries, but specific sectors and groups of workers bore a disproportionate share of the costs of these agreements.
Trump loathes both of these channels. He proposes unilaterally imposing 35–45 percent tariffs and renegotiating trade agreements such as NAFTA, though he has not provided specifics of either scheme. Both actions would violate WTO treaties.
Imposing high tariffs would probably start a trade war, with other countries raising their tariffs in retaliation. Estimates of the effects of various trade war scenarios clearly demonstrate that American output and employment will fall, leading to decreased family incomes and higher rates of unemployment.
Furthermore, other countries might be willing to renegotiate trade agreements, but doing this opens up many issues that they might have with the U.S. Again, like raising tariffs, it seems likely that such renegotiations would harm the U.S. economy more than help it.
Economic Nationalism and Industrial Policy
The second facet of economic nationalism is industrial policy, which consists of explicit federal efforts to promote particular industries.
Republicans traditionally recoiled from any role for government in directing resources toward certain industries, at least philosophically (except in defense industries). They generally believed that financial markets did a good job allocating investment capital to where it was most productive, and that the idea of markets “underinvesting” in particular industries was nonsense. If an industry experienced declining investment spending, it was because that sector had worse economic prospects than did sectors receiving increased investment.
By contrast, Trump embraces industrial policy. He clearly has no problem using the bully pulpit to push companies to change their ways, as when he stated:
We’re gonna get Apple to start building their damn computers and things in this country, instead of in other countries.
In addition to browbeating companies, Trump intends to use tax policy to support particular companies (e.g. tax incentives to Carrier to keep jobs in Indiana) and regulatory policy to assist entire industries (e.g. repealing Clean Air Act regulations to help the coal industry).
There are two problems with following this prescription.
First, the strategy works for low-income countries that are catching up with high income countries but not for already-rich nations. Economists debate why this is the case, but hypotheses center around the difficulty of moving from a country that imports new technologies and grows quickly (like China) to an economy that must develop its own new technologies and grows more slowly (like the United States).
The government structure that resulted from these policies is called a Development State, one in which tight links among government officials and business management leads to rapid industrial growth combined with deep corruption among those same managers and bureaucrats. This is what we usually think of as crony capitalism, something candidate Trump decried during the campaign, but which is likely to grow under the types of industrial policies he is expected to implement.
Wrong Diagnosis, Wrong Prescription
Trump and his supporters believe that Republican economic orthodoxy, aided by Democratic trade deals, led to the decline of American manufacturing and the disappearance of thousands of jobs in the industrial Midwest. The prescription for this ailment is economic nationalism.
This is the wrong diagnosis of what ails our economy.
The resources and income in an economy are not created by business alone, and promoting and protecting American businesses will do little to bring back middle-class jobs.
To promote economic development and growth, government policy should target people and the markets in which they interact with one another, not companies. Economic policy should aim to ensure that Americans are well-educated and healthy and that all businesses — large, small, global, and local — have access to the private capital and public infrastructure they need to grow and thrive. And those particular locales and workers harmed by free trade should receive government aid to recover from such economic shocks.
Unfortunately, American voters chose economic quackery and the prospect of miracle cures on November 8, and we will all live with the consequences of that choice for years to come.
Susan Riley contributed to this story.
