Trump’s global trade policies are good for middle-class America

As President Trump talks more openly about aggressive action on the trade front to support the U.S. economy, traditional economists and commentators, especially many on Wall Street, are raising the volume on a scare campaign, aimed at suggesting all sorts of imaginary negative consequences. They fail to recognize that persistent global trade imbalances, whereby trade surplus countries overproduce and excessively rely upon consumers in deficit countries for growth, pose the most serious risk to global growth and economic stability.

In recent days, President Trump has spoken openly about terminating North American Free Trade Agreement, the free trade agreement with Canada and Mexico. Reports have emerged in Axios and the Financial Times that he wants to impose tariffs on Chinese imports to the United States. Both policies can make good sense if applied carefully and in a well-targeted fashion. (We know from private discussions that many Democrats would support these policies, privately, if not publicly.)

{mosads}NAFTA has cost the U.S. about a million jobs in the 23 years since it came into force, mainly in manufacturing jobs that have moved to Mexico. It’s also helped to drive down real wages, especially in the automotive industry. If the United States withdrew from NAFTA, it would make sense to levy tariffs in the range of 10 percent to 25 percent on Mexican-manufactured imports. It’s likely that businesses would react by immediately halting investment in Mexican production facilities and looking into bringing production back to the United States.

For example, BMW is spending $1 billion on a Mexican plant likely to employ 1,500 workers when it opens next year. That plant’s production is primarily for the U.S. market. In the first half of this year, BMW sold more than 171,000 cars in America, 16 times as many as the roughly 10,700 it sold in Mexico. Tariffs applied to the sectors where we have lost the most jobs to Mexico, such as motor vehicles, electronics, machinery and furniture, could lead to a significant boost to investment, production and jobs in domestic U.S. manufacturing industry.

With China, the numbers are even larger. China accounted for nearly half of the U.S. trade deficit last year, $347 billion out of a total of $750 billion. According to an estimate by Rob Scott of the Economic Policy Institute, Chinese imports cost the United States 3.4 million jobs between 2001 and 2015. If the Trump administration levied a tariff of say 25 percent on foreign steel due to subsidized overcapacity, this would lead immediately to a rise in U.S. steel prices.

If the administration made it clear it was committed to the new policy, it would give steelmakers the confidence to invest for the future, and we would see increased production and hiring in steel. Any steel tariff would be better if it included downstream products with substantial steel content to prevent subsidized foreign steel from avoiding the tariff simply by exporting valued-added products.

The expansion in the domestic economy would outweigh the effects of the price increases in the steel supply chain, leading to faster growth in real gross domestic product, exactly the goal Trump and the Republicans are seeking. This policy would also put pressure on the Chinese government, making it clear that for the first time the U.S. was determined to act instead of just talk about the problem of China’s strategy of dominating the world steel market through billions of dollars of government subsidies.

Traditionalists have raised the specter of a “global recession” and “trade war” they claim could follow remedial trade action by the U.S. government. They are wrong for three reasons. First, World Trade Organization rules prevent other countries from raising tariffs unless they file and win a WTO case that declares the U.S. action unlawful. That process takes years. If the U.S. were to lose, no retaliatory tariffs would be imposed if the U.S. simply dropped the tariffs. Second, other countries are far more dependent upon exports to the U.S. than we are dependent upon exports to them. We need to realize that we have the market power. Other countries have far more to lose should they choose to escalate any trade dispute.

Third, most of these “global recession” forecasts are based on economic models that specifically exclude the expansionary effects of a tariff on a domestic U.S. industry. In some cases, that’s because the free trade biases of the economists who built the models are built into the underlying assumptions of the model. In other cases, it’s simply because the models are old, and they don’t have enough depth to handle trade effects. In effect, they are obsolete for today’s world.

In fact, the worldview of many of these pundits is obsolete. They worry irrationally about the end of what they call the “liberal global economic world order that has supported prosperity since 1948.” Noted Dutch economist Willem Buiter and his colleagues fail to recognize is that this world order was ended by a series of events, including the end of communism, which brought millions more low-wage workers into the global workforce, the aggressive implementation by China of growth led by state-supported exports, and globalization itself, which intensified competition and depressed living standards for all the relatively high-wage workers in developed nations like the United States.

We are in a new world. The United States is still the world’s largest economy, although China is not far behind. It’s up to us to take a long-term, truly global view, and develop a strategy by which deficit nations can address their fiscal problems, attack inequality by boosting the incomes of the working and middle classes, and establish a world order where surplus nations can no longer use “beggar my neighbor” policies to export unemployment to deficit nations.

Jeff Ferry is research director at the Coalition for a Prosperous America, a bipartisan coalition working for a national strategy on trade and the economy.

The views expressed by contributors are their own and are not the views of The Hill.