Donald Trump has frightened much of the world with his aggressive trade policies. His proposed tariffs and the renegotiation of the North American Free Trade Agreement (NAFTA) have been flatly condemned by orthodox elite thinkers and leaders, who argue that free trade is essential to a healthy growing economy.
These critics, however, fail to understand that the status quo is now politically unsustainable within the United States; it has created too many losers whose lives and communities have been upended.
Millions of Americans have lost their jobs solely because of China. David Autor, David Dorn, and Gordon Hanson found that US labour markets exposed to Chinese manufacturing competition between 1990 and 2007 experienced higher unemployment, lower labor force participation rates, and reduced wages compared with markets not similarly exposed. Those estimated million lost jobs were heavily concentrated in exactly the Rust Belt communities whose votes elected Trump president.
Other economists have calculated the job loss to be even higher, closer to two and a half million. Efforts intended to ameliorate the effect of job loss, such as increased minimum wages and liberal disability insurance policies, have reduced the labour force by an additional one million people. Three and a half million lost jobs are huge even for an economy as large as America’s – and this research does not account for increased competition from Mexico and other nations.
Trump owes his election to these developments. The regions where he gained most over President Obama are exactly those areas that have experienced the outflow of high-paying manufacturing jobs over the past 20 years. Moreover, Trump’s popularity has risen over the last six months as he has moved his economic policy away from Republican, tax-cutting orthodoxy and towards aggressive protectionist measures.1 Pro-status-quo opinion within the United States, meanwhile, is increasingly isolated within Democratic and Democratic-leaning voters – those who would never consider voting for Trump or any other Republican.
A trade war with China isn't the West's only option
So what’s the way forward? In the UK, the sharp division on Brexit has rationally given rise to calls for compromise – Brexit with some continued ties to the European Union. A similar approach ought to prevail in America’s trade and tariffs debate. Neither the status quo nor a trade war is what America needs. And that means supporting alternatives to tariffs.
Quotas are one such alternative. The advantage quotas on imported goods have over tariffs is that they encourage foreign producers to establish factories within the United States to get around them. Ronald Reagan’s quotas on Japanese auto imports in 1981 – sold as a “voluntary export restraint“2 – resulted in Japanese companies establishing “transplant” factories in the United States so their cars did not count as “exports”. That created over 100,000 automobile factory jobs with non-American companies in 2013 and 130,000 currently. In effect, quotas encourage overseas companies to share the gains of trade with American blue-collar workers at the expense of the owners of their American competitors – exactly the “Labor over Capital” trade-off America’s distressed workers support.
South Korean exporters might already be looking at doing this in response to Trump’s proposals. The Wall Street Journal reports that at least one South Korean steel manufacturer, Nexteel, is considering building American factories as a way to continue to sell steel to US customers despite an export quota agreed to in March. The example of the automobile industry is likely to encourage more countries to accept quotas over tariffs, and then encourage their companies to build transplant factories in the US over the coming years.
There are other ways to reduce the pain global trade is inflicting on local communities. US policy makers might consider adopting the practices that already commonplace in some of their competitors to close the skills gap that is causing economic underperformance and social unrest. American public education, for example, has largely abandoned large-scale vocational education in recent decades. Manufacturers already complain they cannot find workers who can do the jobs they do have available because of a lack of skills. Germany and Switzerland, in contrast, have extensive job skills training that prepares teenagers for real jobs in the modern economy. Seriously adopting this type of approach could give many younger workers who will never go to college access to the sort of well-paying jobs their parents and grandparents once had.
America also suffers from a social welfare system that subtly encourages people down on their luck to stay put in declining areas rather than move or better paying jobs. Unemployment insurance, government-subsidised health care, and a host of other commonly accessed income support programs are delivered by states, not the national government. This means that displaced workers who come to rely on these programs would lose their benefits if they tried to leave the state in search of better work. Given the wide regional disparities in economic opportunity within the United States, this approach unnecessarily encourages short-term gain at the expense of long-term pain.
Wage subsidies might also be an attractive alternative. If the only jobs that a region can support are low-wage, service industry work, it might be conducive to social peace to make tax-financed wage top-offs a 21st-century addition to the social welfare system. This approach clearly states that it is a social obligation to ensure that all citizens share in economic growth; it is clearly more conducive to innovation and change than trying to use tariffs to enshrine the past into law.
Taking on China: how the West can save free trade
Global trade is lifting hundreds of millions of people throughout the world from poverty, and as such should be endorsed, even if it were not also lifting living standards for many in the developed world. But such gains cannot come at the expense of millions of our fellow citizens. The oft-heard refrain among the Davos set and their devotees “those jobs aren’t coming back” – can’t be code for “we don’t care about you”.
A sensible approach to the modern economy involves exactly the sort of prudent compromises that capitalists and their allies made to industrial workers over a century ago when the modern mixed economy was created. Tariffs are not the answer, but neither is doing nothing. These alternatives are a good place to start.
Three pro-poor alternatives to Trump's dangerous tariffs