Trump's Economic Policies Won't Protect American Jobs

Promises to protect U.S. jobs feature prominently in Trump’s speeches about the economy. He famously questioned the Federal Reserve’s unemployment statistics and recently stated that Americans should “pay more” to protect domestic jobs. This is no coincidence. He appeals directly to a portion of the electorate with increasingly stagnant incomes and a growing sense of economic disenfranchisement.

And free trade is the main culprit, according to Trump. He has stated that “the American worker is being crushed” as a result of trade liberalization. He has also repeatedly called the Trans-Pacific Partnership (TPP) — an agreement between the U.S. and 11 of its Pacific Rim trade partners — a “disaster” that would destroy US manufacturing.

His solution? A full-scale retreat from global markets. He promises to raise tariffs by as much as 45 percent, renegotiate NAFTA, and abandon TPP. Trump insists that this is a viable way to protect American jobs, summarizing his position by stating that he “doesn't fear a trade war.”

He should.

With these kinds of positions, Trump continues to prioritize populism over simple economic pragmatism. Unsurprisingly, most economists remain unconvinced by his platform. Instead, Trump’s policies will fundamentally damage American firms — and their employees — both at home and abroad.

Trump gets at least two important things wrong about the costs and benefits of global trade.

First, protecting the U.S. market only endangers American export interests. When a country raises its tariffs, it leaves its exporters vulnerable to trade retaliation. Key U.S. industries rely on access to foreign markets to sell their goods abroad (or to secure access to the inputs required for production). Starting a trade war will only reduce the share of global markets open to American firms as our partners respond with entry barriers of their own.

History shows that protecting one U.S. industry jeopardizes other firms’ access to key markets abroad. Recent disputes with China illustrate how these tit-for-tat trade policies can backfire. A direct result of Trump’s policies, therefore, is that American firms will find it harder to do business abroad.

Second, raising tariffs makes consumers worse off. Protectionist lobbies often cite foreign competition as the reason some American firms suffer from free trade. However, protecting the market with high tariffs merely robs Peter to pay Paul. Tariffs increase the prices that individuals pay for everyday goods and services. This pushes back against any wage gains workers reap from protection.

The net costs could be severe. Estimates suggest that the resulting loss in consumer welfare could cost Americans as much as $6,000 per household. These costs are particularly severe for the poor. Removing more affordable goods from the domestic marketplace is, effectively, a “tax” on the working class. Conversely, allowing cheaply priced foreign goods into the market puts downward pressure on prices, increasing consumer welfare.

All of this has important implications for American jobs. Reduced access to foreign markets will only cause contraction in America’s export industries. At the same time, consumption of American-made goods will decline due to higher prices at home.

Taken together, Trump’s plan will drive down wages — and reduce employment — as firms across the economy face new pressures to manage costs. The total effect is likely to be another recession.

A recent study estimated that Trump’s policies would cost the U.S. economy three to four million jobs as markets for U.S. goods dry up around the world. If true, the unemployment resulting from Trump’s protectionism will quickly outpace even the most negative assessments of NAFTA’s 20-year impact on U.S. manufacturing. As a result, there is little reason to believe that Trump’s economic platform will contribute positively to US economic prosperity. 

No one denies that trade has downsides. While the gains from market openness are spread across the economy, the costs are highly concentrated. Some industries contract, jobs are outsourced, or firms may close down entirely. These well-known arguments are commonly heard among opponents of free trade, including an increasingly splintered Republican Party. Citing a declining manufacturing base, key Republicans said that TPP negotiations fell “woefully short.” They even promised to delay Congressional approval until it was clear that American workers stand to benefit from additional trade agreements.

The question is not whether trade has negative consequences. The question is whether retreating from the global economy is a viable alternative that would be in the best interests of American workers. Trump ignores America’s crucial dependence on free trade as well as the benefits associated with remaining a central figure in the global economy. The best solution is the opposite of what Trump proposes: to remain competitive and secure a share of world markets.

Turning inward will only amplify the economic problems that Trump rightly laments.