We Need New Trade Policies, But Not Trump's
After a campaign full of tough talk on trade, the specifics of President-elect Donald Trump’s international economic agenda are finally getting the scrutiny they deserve. For example, Trump’s stated intention to increase tariffs immediately on products imported from China has been criticized for its potential impacts on U.S. manufacturers. Economists agree that this policy would be disruptive, causing U.S. manufacturers who currently use goods imported from China to pay tariffs on them, or else scramble to find another source for those goods, raising costs.
Similarly, economists have criticized the president-elect’s controversial deal with Carrier Corporation to save half the jobs it planned to move to Mexico in exchange for $7 million in tax credits. Such a move might encourage firms to threaten to move jobs offshore in the hopes of receiving lucrative deals from the government. In this case as well, the manufacturing sector may be hurt by policies that are billed as helping it.
But while Trump’s proposals are misguided, he is nevertheless right to focus on trade. Our current approach to trade has serious problems, having inflicted lasting damage on communities whose manufacturers compete with imports. In fact, increased competition from China has caused the average community to lose over $1000 per working-age adult per year between 2000 and 2007. Moreover, these losses were not limited to manufacturing workers: When factories close their doors, nearby restaurants and stores also suffer economically.
So what is the solution, if not higher tariffs or more tax breaks?
First, we must get the trade rules right. Appropriately designed, trade deals can set rules so that workers share in the resulting gains. For instance, we should negotiate trade deals to ensure competition is based on technology and innovation — rather than other nations’ willingness to exploit workers or the environment.
Poorly designed rules can aggravate inequities. Under NAFTA, for example, the worst penalty that can be imposed for sweatshop conditions is that countries can call for “consultations” with the offending country’s labor ministers — consultations with no enforcement mechanisms. The remedies in the proposed Trans-Pacific Partnership (TPP) are slightly stronger, but still far weaker than those provided for investors.
Firms’ decisions to leave the U.S. are eased by provisions in trade agreements such as NAFTA, which set up special courts in which firms can challenge government policies that affect their investments. These mechanisms undermine the U.S. advantage in having a reliable legal system by helping ensure companies against potential expropriation by countries with weaker institutions.
Countries have lost lawsuits over policies ranging from financial stabilization to environmental clean-up and even criminal prosecutions. One of the president-elect’s advisors has promised that the Trump administration will oppose trade deal provisions that raise sovereignty concerns, specifically citing these “investor-state dispute settlements” (ISDS) as an example.
The new administration should promote ISDS reform in existing trade deals — a move that would have bipartisan support. More generally, institutions of global governance should focus less on facilitating multinationals’ ability to pit countries against each other to win investment and more on genuinely global issues. For example, international trade agreements should tackle issues of international tax evasion and “carbon leakage” (where countries that fight climate change are undercut by firms moving to countries that don’t).
Second, we must get our domestic policies right. There is ample room for progress on this front, as U.S. supply chains still remain largely domestic. Eighty-five percent of U.S. exports are composed of U.S.-made parts; domestic content of overall U.S. production is similarly high. The threat to manufacturing jobs comes less from the globalization of supply chains than from the movement of large chunks of whole industries abroad.
In many cases, this process begins when manufacturers move labor-intensive components or assembly overseas. Before too long, they do the same for higher-tech operations as well. For example, U.S. personal computer manufacturers started by offshoring the assembly of printed circuit boards, then moved complete product assembly overseas, then supply-chain management, and, finally, design and innovation. To prevent this atrophy of capabilities, it is important to identify clusters of industries that are at tipping points, and bolster these eco-systems. The Trump administration should build on President Obama’s investments in skills and technologies that shore up vulnerable clusters and build new ones.
It is possible to improvement the lives of ordinary workers, and trade is a good place to start. But tough talk must be followed by tough policies that put the interests of American workers and communities ahead of the desires and profits of multinational corporations.
Susan Helper is a professor of economics at Case Western Reserve University in Cleveland, Ohio. She was formerly the Chief Economist of the US Department of Commerce and a Senior Economist on the President’s Council of Economic Advisors.
Todd Tucker is a fellow at the Roosevelt Institute, where he leads work on international economic law and politics.