The Billionaire and the Socialist are out to implode the global trade order. While presidential candidates Donald Trump (Republican) and Bernie Sanders (Democrat) do not describe their intentions as such, their toxic policy prescriptions would nevertheless have that unintended effect.
The global trade regime, cobbled together by the United States after WWII, has been sustained over time by both Democratic and Republican administrations. It is a regime focused upon maintaining an open, liberal trade order, one of maximizing trade flows, reducing trade barriers, and promoting foreign investment. Yet, with hammer and blowtorch in hand, the two unlikely political bedfellows are out to dismantle this order and, in so doing, usher in a new era of economic nationalism and protectionism.
Trump’s primary targets are Mexico, China, and Japan and their “unfair” trade practices. Apparently any country that runs a trade surplus with the U.S. – which would include the great majority of countries – is fair game for Trump. With respect to Mexico, he has also criticized Ford’s planned $2.5 billion investment south of the border. Addressing an audience in Michigan, Trump boasted that “the deal is not going to be approved – I won’t allow it. I want that plant in the United States, preferably here.”
What Trump did not tell the audience was that not only is Mexico the second most important export market for the U.S., but that it is also the second most important foreign destination for Michigan products, with $11 billion worth of their merchandise exports heading south of the border in 2014, thirty nine percent of which involved transportation equipment.
Automobiles and auto parts go back and forth seamlessly between General Motors, Ford, and Chrysler plants in the U.S. and their Mexican subsidiaries. The end result is the creation of an integrated North American manufacturing auto platform that has driven down costs to become a major competitive force in global automotive trade.
Consequently, Trump’s suggestion that he would tax auto parts coming from Mexico into the U.S. is misguided, as it would damage American-Mexican auto trade and jeopardize American jobs in the process. In addition, many of these imported parts are then incorporated into an American-made Chevy, Nissan, BMW, or other brand that is then exported to a third country. Taxing the part raises the cost of the car, thereby making American-based auto exports less competitive in the global market.
The U.S. economy is now embedded in a North American economy in which supply chains span the three NAFTA economies (the U.S., Mexico, and Canada) and promote efficiency through specialization. The integration of the U.S. economy with Mexico is reflected in the fact that forty percent of the content of U.S. imports from Mexico is produced on American soil. Yet Trump, as well as Sanders, threatens to jeopardize the benefits that accrue from this mutual and profitable partnership.
China, however, constitutes the primary nemesis for both Trump and Sanders. Following the recent meltdown of Chinese and American stock values, both candidates went on the attack. Trump claimed that “they are taking our jobs” and called for a “big uncoupling” of the two economies, while Sanders tweeted that “unfettered free trade has been a disaster for working Americans. It is high time we ended our disastrous trade policies.”
But the jobs that China has “taken” over the past decade are low-skilled manufacturing jobs at the bottom of the global production chain. Moreover, these low-value-added jobs, which are performed by a large force of young, poorly educated, migrant Chinese workers, are hardly appropriate for an American high school graduate for whom taxpayers have expended over $100,000 to educate. Nor would these jobs, such as assembling iPhones and laptops, making toys and towels, provide the remuneration necessary to climb into the American middle class.
The United States has indeed lost many manufacturing jobs over the past twenty years, as have all developed economies, as the comparative advantage in performing some of them has shifted to China (which has also lost millions of manufacturing jobs despite this) and other developing countries. While some of these jobs are now migrating from China to Mexico because of rising labor costs in the former, there is little chance that many of them will return to U.S. shores, despite Trump’s claims to the contrary. Also, this migration represents a positive development for the U.S. economy given the fact that firms operating in Mexico use a high percentage of American-made components.
Mexico is hardly the trade villain depicted in – and central to – Trump’s platform (he places them in the same penalty box as Communist China). As for China’s trade-related practices, including its controversial policies involving currency devaluation, there are no easy solutions. But what is apparent is that China’s role as the world’s largest economy is consequential; they hold considerable American debt, produce huge quantities of goods for high-tech American firms such as Apple, and are an increasingly important market for Boeing, General Motors, and other American multinationals. Punitive measures against China would inevitably have considerable blowback for the U.S. economy. To suggest, as Trump does, that the U.S. economy can simply “uncouple” from China is wishful thinking.
While Trump contends that he "favors trade" but also that existing American trade agreements such as NAFTA and the Trans Pacific Partnership are “terrible,” Sanders opposes all trade agreements as well as free trade in general. As a member of the House, he once supported a resolution that called for the U.S. to withdraw from the World Trade Organization.
Sanders assails the impact of trade on American workers and the jobs lost because of it, as the former are forced to compete in a “race to the bottom” against poorly paid employees abroad. For Sanders and other critics on the Left, trade accords are responsible for the demise of American manufacturing and the destruction of the middle class.
Yet his prescribed remedy – protectionism, “Buy American” laws, a renegotiation of existing trade agreements, and essentially bordering up the American economy to protect non-competitive industries – would be more destructive than the ailment he is attempting to address. For the costs, in terms of declines in efficiency, disruption of global supply chains, lower productivity, and lost American jobs and market opportunities for American firms, would make the U.S. a poorer country. As the Organization for Economic Cooperation and Development (OECD) has concluded, protectionism reduces transparency, creates risk, and weakens growth, while free trade and market openness contribute over the longer term to prosperity and the creation of new jobs.
In their narrative of American trade victimization, Sanders and Trump also fail to take into account that offshoring of jobs goes both ways and that the U.S. remains the most important destination for foreign direct investment (FDI). In 2013 alone, $236 billion was invested by firms from Japan, the UK, Canada, and other countries in the U.S. Trump never references the fact that Japan, one of his favorite targets, was the largest foreign equity investor in the U.S. in that year (providing $45 billion in FDI), creating jobs, spending on research and development, and paying taxes in the process.
Also, almost forty percent of FDI in the U.S. is in the manufacturing sector and approximately 5.6 million Americans are employed by foreign subsidiaries overall. Any misguided efforts at protectionism, or imposing tariffs, would block these critical flows by creating an inhospitable investment climate for foreign companies.
The economic nationalism promoted by Trump and Sanders may garner support along the campaign trail, but nevertheless makes little sense at the policy level. If implemented, these retaliatory trade policies would hurt the U.S. economy, while at the same time invite damaging countermeasures by America’s trading partners. The longstanding liberal trade order, which has performed well for over a half-century, would be weakened accordingly.
Erik Lindell has a Ph.D. in Political Science (International Relations) from the State University of New York at Albany and has taught at several colleges and universities in New York State. He has published articles, reviews, and op-eds in a number of journals and newspapers. His areas of expertise include International political economy and American foreign policy.