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TRUMPED UP TRADE POLICY

Trump’s plan to bring back jobs by isolating the US won’t work—but it will start a trade war

Donald Trump Carrier plant jobs
Reuters/Chris Bergin
Good for publicity, bad for business.
  • Gian Luca Clementi
By Gian Luca Clementi

Associate professor of economics, Stern School of Business, New York University

Published This article is more than 2 years old.

Throughout his long electoral campaign, US president-elect Donald Trump promised that he would bring back millions of American manufacturing jobs ostensibly lost to the forces of globalization. Trump told his supporters he would do so by curtailing trade and offshoring the old fashioned way, i.e. by reneging on international treaties and coercing US-based companies into shutting down foreign operations to the benefit of domestics plants. During campaign stops, the Trans-Pacific Partnership (TPP) free-trade deal was a constant. But will his plan actually work?

Regardless of its actual effectiveness in bringing back manufacturing jobs to the US, any decision by Trump to raise tariffs or introduce new quotas will hurt the interests of other stakeholders, both at home and abroad. And you don’t need a background in economics to understand why. Instead, one must only look back in time, to 2002, when president George W. Bush attempted to shield the US steel industry from foreign competition by imposing tariffs up to 30% on steel imports.

The measure was strongly opposed by domestic industries that make use of steel, many of which were concerned that higher input prices would make a dent in their profits. Unsurprisingly, the most vocal dissent came from a sector dear to the current president-elect—the construction industry. The tariff also enraged countless foreign governments, including members of the European Union and Japan, who sought and easily won support from the World Trade Organization. The WTO’s dispute resolution process led to a ruling that unequivocally demanded that the United States cease and desist. President Bush had no choice but to comply, and by 2003 the steel tariff was history.

It is hard to believe that a similar move by Trump would be met by a different reaction. On the one hand, lobbyists working on behalf of adversely affected sectors will lean on members of Congress to oppose the new measure. While Trump’s incendiary campaign rhetoric may have led voters to think the president has primary control over trade deals, the US Constitution grants Congress key oversight regarding these types of agreements. Meanwhile, trade partners will once again turn to the WTO if they feel threatened.

Given the extreme level of partisanship in Congress currently, overcoming domestic opposition may require Trump to cajole the entire Republican caucus to side with him. This will not be an easy task, but perhaps not impossible either, given the rampant anti-trade sentiment that drove Trump into the White House.

But even if he does get Congressional backing, how will Trump deal with a WTO injunction? When an offending country is found in contempt of one of its rulings, the WTO can authorize the offended parties to retaliate. In the case at hand, retaliation could take the shape of tariffs or quotas on professional and financial services as well as medical equipment made in the US. The international backlash could also affect less mundane US products such as soybeans, cotton, and corn—which are among the top US exports to China—as well as civilian aircraft and passenger vehicles. BMWs made in South Carolina and Mercedes-Benz’s made in Alabama, which are currently shipped worldwide, may suddenly become too expensive for many foreign consumers. In other words, Trump risks a global trade war.

For an idea of what the US economy might look like after such a trade war, we can turn to the early 1980s, when exports (as well as imports) accounted for about 5% of GDP, as opposed to the current 13% (16% for imports). The textile industry might rebound, yes, regaining its captive domestic market by decree. But the pharmaceutical and aircraft industries would lose their foreign markets and, with those, the economies of scale that are crucial to both.

Simply put, restricting trade will not affect the overall number of US jobs. We will reclaim positions in sectors where we are at a competitive disadvantage with the rest of the world while losing the same number in areas where we enjoy a competitive advantage. Consumers will also lose, as prices on goods rise across the board.

It should be noted that the US of today differs from the US of the 1980s in our greater and ever-increasing ability to use machines to perform repetitive tasks. This, rather than trade, is the key driver of both the decline in manufacturing employment and the rise in earnings inequality. Only a few disingenuous souls would disagree that technological change is the reason why agriculture produces a vastly larger value added today than it did in 1930, say, despite shedding about 7 million jobs. The same force is mostly responsible for the sizeable increase in manufacturing value added that we have experienced since 1979, when that sector employed about 7 more million people than today.

This means that isolating the United States will not stop the decline of employment in manufacturing, unless Trump also imposes a tax on technological innovation. And rejecting globalization certainly won’t bring back the millions of good jobs Trump has been promising. We can argue the merits of various trade agreements, but history—and economics—shows us that putting up trade walls may sound good on the campaign trail, but in reality it will not make America great. It will make America worse.

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