Nowhere is today’s highly polarized political climate more visible than in the debate on trade, which has been dominated by two polar opposite viewpoints. The first sees trade as a white knight capable of fixing all our woes, no matter the circumstances, and the second sees it as an evil tyrant that strips people of their wealth. Championed by supply-side economists and fearmongering protectionists, respectively, these rigid articles of faith have crowded out more rational and nuanced analyses. This is unfortunate, because both extremes are wrong, albeit in different ways, and the focus on absolutes makes it almost impossible to seriously discuss or address loss of American manufacturing strength.
Consider, for example, the claims of commentators such as Scott Lincicome and Michael Hicks, who echo the unabashedly pro-free-trade logic of conservative economists like Milton Friedman when they argue that all of our job losses have been lost because of productivity. Hicks writes, “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”
This assertion relies on a rigid, supply-side economic model that starts with the assumption that trade cannot possibly make anyone worse off. The model also stipulates that losing production to other countries as a result of eliminating all protections cannot hurt the United States, because in the long run all equilibriums balance out. However, this model is short-sighted and fails to account for dynamic effects outside of currency valuation that will determine competitive advantage in future periods.
On the opposite pole of the trade discussion, Donald Trump has rallied conservative voters with his assertion that “American doesn’t win anymore,” and he promotes slapping high tariffs on Chinese goods. Trump attributes just about all job losses to trade, stating that “tens of millions of jobs” have been lost because of China’s inclusion in the WTO. Mr. Trump is joined by Sen. Bernie Sanders (I-VT), who does not want the American worker to have to compete with international workers willing to work for lower wages, and has stumped for higher tariffs, tighter controls on immigrations, and has vilified deals such as NAFTA.
Sanders and Trump’s trade doctrines are fiercely retaliatory. With proposed tariff hikes the likes of which haven’t been seen since Smoot-Hawley in the 1930s, their policies would likely trigger an outright trade war between the United States and China. While currently a popular line of rhetoric that resonates with angry and economically disaffected voters, isolationism serves no one’s best interests. Shutting America off from the world will not help it “win again” in either old industries or new ones, but instead will result in higher prices for American consumers and less productive, lower-paying jobs for American workers.
The deleterious dualism between panglossian conservative economists on the one hand and the protectionism of Trump and Sanders on the other prevents the United States from taking appropriate steps to regain competitiveness in manufacturing. Unfortunately, American manufacturing is in a precarious position, with production stagnant and over 5 million jobs lost since 2000. Unless the United States makes a concerted effort to keep up with other nations by increasing productivity and competitiveness at home while enforcing and expanding multilateral trade agreements abroad, we will indeed see a deepening of the trade deficit across manufacturing sector, including in advanced technology industries. Unfortunately, Lincicome and other economists from the Chicago school claim that “the trade deficit with China doesn’t matter,” and maintain that all jobs lost in manufacturing come solely from productivity increases.
Nothing could be farther from the truth, and the idea that voluntarily surrendering competitive American industries to foreign producers who are willing to bend the rules on trade is beneficial to the United States is absurd. The United States needs to discuss ways to become more competitive while simultaneously fighting against mercantilist policies from trade partners. However, the engine that is capable of making America “win again” must come from American innovation, not from higher trade barriers.
Trade, in the long run, has the power to increase prosperity for all involved. It also can maximize global innovation by allowing production to be located where it is most productive. This is the goal, the potential, and the promise, of global free trade. Walling ourselves off from global markets and shielding our industries from any and all competition would doom the United States to slow stagnation. At the same time, the Chicago-school assertion that the United States should unilaterally dismantle any and all restrictions or barriers to trade is equally damaging. Forfeiting industries for which the United States does have a comparative advantage when the playing field is level eliminates the United States’ ability to innovate in these industries, lowering global economic benefits and keeping the United States from competing in these industries down the road.
The United States cannot lie down and allow China and others to continue to manipulate trade to give themselves a leg up. It must instead craft a strategy that makes the country more competitive with the rest of the world, all while looking to enforce existing trade agreements and force countries with mercantilist trade schemas to play by the rules. While doing so, the United States should continue to engage in bilateral tariff reductions with its international trading partners. Above all, the United States must be able to view trade realistically, and dismiss extreme viewpoints in favor of debate focused on how to maximize U.S. innovation and competitiveness internationally.
Photo credit: Gage Skidmore, Flickr