Since 2016, we’ve seen a wave of populist declarations of dissatisfaction with the global trading system. Britons chose to exit from the EU in June of 2016. A few months later, Americans elected President Trump in the hopes that his expertise in the “art of the deal” would enable him to re-negotiate free trade agreements in American’s favor. Many hope that steady manufacturing jobs will come back home to the Rust Belt, defying a decades-long trend in globalizing supply chains and pursuing low wages abroad. President Trump’s campaign largely centered around the idea that the United States was “getting a bad deal” with its trading partners, especially China, and needed to play tough to make it all right. Who has this confrontational attitude benefitted in real terms?
With this goal purportedly in mind, President Trump pulled out of the TPP, has continuously disparaged traditional American allies for not “paying their bills” in NATO, ranted and raved about building a border wall with Mexico, levied tariffs on $250 billion worth of Chinese goods, and most recently forced an agreement to replace NAFTA with the new United States-Mexico-Canada Agreement (USMCA). In short, he’s alienated the United States’ largest trading partners: China, Canada, and Mexico.
Under basic trade theory, countries will specialize in products and services for which they have a comparative advantage. Today, the United States simply doesn’t have a comparative advantage for many manufactured products. Services make up 80% of the modern United States economy and it’s perfectly acceptable to import goods from abroad. With unemployment rates dropping to 3.7% in September, it seems that Americans are going back to work, but not in manufacturing as one would expect given the rhetoric. The largest gains in September were in professional and business services, healthcare, transportation, and warehousing, all of which are essentially non-offshorable.
Perhaps there is a long-term argument to be made for those specific groups that should benefit from USMCA, mostly dairy farmers and those that work in auto manufacturing, but the trade war with China and others has broader negative impact on everyone. The IMF recently revised their global economic growth forecast down by 0.2%, in large part due to the escalating trade war. More concretely, the recent tariffs, particularly on aluminum and steel, are disrupting the international supply chains that provide all Americans with the goods they consume daily. Aluminum and steel are widely used, especially in the auto industry that President Trump is trying to protect. In effect, President Trump is giving the appearance of job security to certain small groups with one hand, but forcing the rest of the country to tighten their purse strings with the other.
President Trump is using tariffs and free trade negotiations as a theatrical opportunity to play the tough guy before the upcoming mid-term elections, not to actually help working-class Americans. The American economy thrives on innovation and creative destruction. Invoking national security to force companies to create jobs in the United States they would prefer to offshore is like trying to push the sand upward in an hourglass. Most importantly, it delays and impedes the structural transitions towards non-offshorable industries necessary to ensure the long-term success of the American economy.