Tag Archives: international trade

The Trump Trade Agenda

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Trumponomics is taking shape: tax reform, regulatory reform and infrastructure spending.  The likelihood of President-elect Donald Trump and Congress working together on these major initiatives is so great that the dollar and the U.S. stock market are surging. This complicates the Trump trade agenda:

  • The yuan is now being driven down against the dollar.  China will face even more pressure to devalue in the year ahead as the U.S. Federal Reserve raises interest rates and the dollar continues to strengthen. Stronger U.S. growth will also increase the demand for Chinese goods, making our trade deficit with China even greater.

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  • One way to increase U.S. manufacturing employment is to figure out how to train workers for the 334,000 manufacturing jobs which are now vacant.  Wages are stagnant is America today not because we have too few taxes and restrictions on international trade but because we have too many taxes and restrictions on domestic trade here at home.
  • When the U.S. entered the North American Free Trade Agreement, Mexican taxes on U.S. imports fell from 12.5% to zero, Canadian taxes fell from 4.2% to zero and U.S. taxes on Mexican and Canadian imports fell from 2.7% to zero.  In other words, NAFTA improved America’s competitive position.
  • Pro-growth economic policies are the key to higher wages.  From 1900 to 2000 employment in agriculture declined from 41% of the workforce to 1.9%. But the number of jobs in the country rose fivefold and average real income rose eightfold. All because of pro-growth economic policy. The same thing can happen again with respect to manufacturing employment in the 21st century.
  • Eliminating direct currency manipulation and special interest provisions in existing trade agreements will benefit American workers, raise world living standards and reinforce the impact of Mr. Trump’s primary recovery program.

Conclusion. Restricting international trade won’t bring back high-paying manufacturing jobs. But faster overall economic growth will create more jobs and better paying jobs as businesses have to compete more vigorously for qualified employees.

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What Trumponomics Will Look Like (Hopefully!)

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Donald Trump won the presidential election because of his strong support from blue-collar workers who feel aggrieved by the U.S. economic system. Many have lost their jobs in recent years due to technology and globalization.  Many others have suffered wage stagnation.  Helping this large group of voters is surely Mr. Trump’s primary mandate from the election.

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The best way to do this is to make the economy grow faster by implementing smart policies such as:

  • Corporate tax reform. Reducing the top rate from 35% to about 20% will make the U.S. competitive with other developed countries and induce American multinational companies to bring their overseas profits back home for reinvestment. This will create more jobs and better paying jobs. This can be paid for by eliminating various deductions.
  • Business tax reform. Allow full expensing of capital investments, paid for by eliminating the deductibility of interest payments. This will strongly encourage more business investment and therefore increase worker productivity.
  • Individual tax reform. Lower marginal tax rates across the board by 10%, paid for by eliminating most deductions. This would give an automatic increase in pay to the two-thirds of taxpayers who do not itemize deductions and, since most of the pay increase would be spent, grow the economy by stimulating demand.
  • Regulatory reform. Much can be done to alleviate the regulatory burden on business, see here and here.
  • International trade rules. “Tearing up NAFTA” would be a huge mistake because the U.S. exports $600 billion annually to Canada and Mexico with a trade deficit of only $40 billion. But NAFTA can be updated with side agreements to address concerns of fairness. Expand retraining programs for workers who lose their jobs to foreign competition.
  • Immigration reform. Secure our southern border and deport the illegal immigrants who are lawbreakers as Mr. Trump wants to do. Then give guest worker visas to law-abiding employees of legitimate businesses and use eVerify to enforce them.

Conclusion. Changes such as these will give a big boost to the economy and therefore create many new jobs and better paying jobs.

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Why Free Trade Is So Important

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My blog “It Does Not Add Up” addresses our country’s two major problems:

  • Slow Economic Growth, only 2.1% annually for the past seven years and
  • Massive Debt, now 74% of GDP, the highest it has been since the end of WWII.

These two problems are, of course, closely related.  Faster growth would bring in more tax revenue and reduce our annual deficits.  Shrinking the debt, as a percentage of GDP, will demonstrate that the world’s strongest economy will not falter when interest rates inevitably return to more normal (and higher) levels.
Capture5There is a strong correlation between trade and world-wide economic growth as shown in the above chart.  A recent Gallop poll found that 58% of Americans consider foreign trade an opportunity for economic growth and only 34% view it as a threat.  Not surprisingly, the opponents are lower-income, blue-collar workers who are the most vulnerable to economic change.  Consider:

  • It is technology, not trade, which is behind the loss of manufacturing jobs. Between 2000 and 2010, employment in manufacturing fell by 5.6 million. But productivity growth accounted for 85% of the job loss. Only 13% resulted from trade.
  • Since trade is not the underlying cause of job loss, protectionism is not the solution. If, for example, the U.S. imposes 45% tariffs on imports from China, production would merely shift to other low-wage developing countries in Asia. Pretty soon we’d have a massive trade war.
  • Trade Adjustment Assistance consists of extended unemployment compensation as well as retraining programs. This program misses the millions more who are unemployed due to technological change. Furthermore, extended unemployment compensation leads to deterioration of work skills. A better way to help displaced workers is to expand the Earned Income Tax Credit which supplements all low-income work.
  • NAFTA is a huge economic and foreign policy success. Trade between the U.S. and Mexico has greatly increased sine 1994 and 40% of the value of imports from Mexico consists of content originally made in the U.S. Furthermore NAFTA has promoted the growth of a large middle class in Mexico.
  • Starting in 2001 when China became a WTO member, U.S. companies became more interested in foreign investment in China and other countries and offshoring has proliferated since then. Substantially reducing the corporate tax rate would bring many of these foreign operations back to the U.S.

Trade is win-win for everyone except the production workers who lose their jobs to foreign competition. We can clearly do much more to help them maintain their standard of living.

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Trade Makes America Great

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Two leading presidential candidates, Bernie Sanders and Donald Trump are running against trade expansion because they say it costs American jobs. I pointed out in my last post, that there is a strong correlation between international trade and global GDP growth.
Capture2Today I will focus on the direct benefits to the American economy of expanded international trade.  First of all, I refer to a recent article in the Wall Street Journal by Frederick Smith, the CEO of FedEx Corp.  Says Mr. Smith:

  • From less than $50 billion in total trade in 1966, the U.S. now imports and exports over $4 trillion annually in goods and services, out of a global trade market which exceeds $15 trillion annually.
  • NAFTA has clearly been an economic success. U.S. trade with Mexico and Canada has risen to $1.2 trillion in 2014 from $737 billion twenty years ago.
  • History shows that trade made easy, affordable and fast always begets more trade, more jobs and more prosperity.

The U.S. typically runs a trade deficit of about $500 billion per year. The New York Times journalist, Neil Irwin, explains what this means. Says Mr. Irwin:

  • The dollar is a global reserve currency, meaning that it is used around the world in transactions which have nothing to do with the U.S.
  • This creates upward pressure on the dollar for reasons unrelated to trade flows between the U.S. and its partners. That, in turn, makes the dollar stronger and American exporters less competitive.
  • In other words, trade deficits with other countries serve as their reserve dollars.
  • Maintaining this global reserve currency creates lots of advantages for the U.S., including lower interest rates and higher stock prices.
  • The centrality of the dollar to global finance gives the U.S. power on the global stage which no other country can match.

There certainly are workers who lose their jobs because of trade competition. We can and should do more to help these workers get back on their feet.  This will increase popular support for free trade and allow its growth to continue unimpeded.

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More Trade, Faster Economic Growth

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My last post discusses the fact that both worldwide, and in the U.S., employment is growing robustly, while productivity is declining.  In the U.S., for example, the economy is producing lots of new (low-productivity) service jobs and fewer (high-productivity) manufacturing jobs.
CaptureAs I have pointed out previously, there is a high degree of correlation between the growth of world trade and the growth of world GDP.  Unfortunately, many Americans, especially blue collar workers, blame their own economic stagnation on the competition from foreign trade.  This has caused several presidential candidates to declare opposition to the recently negotiated Trans Pacific Trade Pact.
A very informative article by Scott Lincicome in the current issue of the National Review, “The Truth about Trade” points out the fallacy in this way of thinking.
According to Mr. Lincicome:

  • The U.S. is the world’s second largest manufacturer (17.2% of global output) and third largest exporter. America remains the world’s top destination for foreign direct investment ($384 billion in 2015). Much of this investment goes to U.S. manufacturing assets.
  • The U.S. manufacturing “decline” has been limited to employment losses primarily caused by productivity gains, not trade. Import competition explains only ¼ of the contemporaneous aggregate decline in U.S. manufacturing employment.
  • Past global trade liberalization has generated between $2800 and $5000 in additional income for the average American. Almost 90% of these gains accrue to America’s poor and middle class, because of more heavily traded sectors such as food and clothing.
  • More than half of all imports are inputs and capital goods consumed by other American manufacturers to make globally competitive products.
  • Protective tariffs force American families and businesses to subsidize the small share of U.S. manufacturers and workers who compete directly with the imports at issue.
  • We do not have a good set of policies for helping workers adjust to trade or any kind of technological change. For example:
  • The federal tax code’s business deduction for work-related education only applies to one’s current job and not a possible new job.
  • Trade Adjustment Assistance and federal job training programs are notoriously inefficient and ineffective.

Conclusion: It would be a shame if presidential politics leads to a retrenchment of our involvement and leadership in foreign trade which has so many positive benefits for the American economy.

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Economics Is a National Security Issue

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“Speak softly and carry a big stick”                          President Theodore Roosevelt, 1900

There are many foreign policy issues facing the U.S. at the present time:

  • Russia is stirring up unrest in Eastern Europe by threatening the independence of Moldova and the Ukraine as well as several NATO countries.
  • The Middle East is in turmoil stirred up by ISIS and the effort to prevent Iran from acquiring nuclear weapons.
  • China is working hard to assert dominance in East Asia.

The world is more stable when there is a single dominant power such as the U.S..  If the U.S. retreats from this role, it is inevitable that regional powers such as Russia, China and Iran will assert themselves to take up the slack.  We don’t need to act as the world’s policeman every time a problem flares up around the world.  But democracies are  better actors on the world stage than are autocracies.  Therefore the whole world benefits when the U.S. projects power and interest.
CaptureA column in today’s Wall Street Journal by Michele Flournoy and Richard Fontaine makes a very important point, namely that “Economic Growth Is a National Security Issue.” In other words, the stronger is our economy, the more influence and respect we will enjoy in our relations with other countries.  Especially they recommend emphasizing:

  • Trade and Investment. It looks like Congress will give the President trade-promotion authority for negotiating a Trans-Pacific Partnership free-trade agreement. Indian, African and European trade agreements could then follow.
  • Energy. The ban on the export of crude oil and natural gas should be lifted.
  • International Institutions. A Chinese-led Asian Infrastructure Investment Bank will be much less of a threat to the U.S. one a TPP trade agreement goes into effect.

Ms. Flournoy and Mr. Fontaine are focused here on international economic growth.  But all economic growth, domestic as well as international, will make the U.S. stronger and therefore better able to project power.
Conclusion: we need to focus more strongly on economic growth in all of its guises!