US President Donald Trump’s views on trade can’t be reconciled with the way economists treat trade. The two sides are so divided that it is hard to even have a discussion: Trump talks constantly about bilateral trade deficits, which economists dismiss as meaningless.
My theory is that underneath the confused early-morning tweets, Trump is trying to express a view that treats people as workers and wants trade rules to give them better and more fulfilling jobs. Economists instead focus on consumption, with people regarded as better off if they have, loosely speaking, more stuff.
The two views bring different trade recommendations. A focus on production leads to mercantilist policies, aiming to boost exports and limit imports to attract jobs from other countries, at the cost of consumption. Americans may find themselves with more appealing jobs — assuming they want to work in manufacturing — but will be able to buy less stuff.
Economists generally take the exact opposite approach, focusing on consumption as the measure of success. If the population can afford more stuff, they are better off, so a trade deficit isn’t a problem. Economists typically argue that free trade leads to a bigger economy and it is up to government to decide how the cake is shared.
Readers are similarly divided, to judge from the response. Many readers wanted to talk about the effects on workers and how the manufacturing sector might benefit from higher tariffs.
It is easy to pick holes in the approach of both sides. In any supposed golden age of American manufacturing, plenty of workers had unpleasant, dangerous, dirty and repetitive jobs. The shift from manufacturing to services hasn’t only been about moving into “McJobs”, but also about high-value services, too. As reader Massimo Mazzone pointed out, heart surgeons in Houston and software engineers in San Francisco are hardly the “lumpen proletariat”.
There is no doubt that for many people, self-respect depends on their work, and even the lowest-paid jobs in mining or heavy industries often brought a degree of camaraderie lacking among those fielding complaints in call-centre cubicles. This sense of community is what many hark back to in wanting to boost blue-collar jobs.
Economists who support free trade accept that there are losers from trade and many agree that government should help them. Direct compensation and retraining is provided under a federal program begun by John F. Kennedy, but it has had mixed results, at best.
This gets to the heart of the political problem: the gains from trade are spread widely across consumers, while the losses are concentrated in small groups who no longer have jobs. Not surprisingly, they shout louder than the winners.
If the political system could properly compensate the losers from trade, there would not be a problem. A foreign country choosing to subsidise US consumers and at the same time carry out unpleasant, polluting and dangerous jobs might even be welcomed.
But the US political system hasn’t been able to compensate or find equivalent-quality jobs for enough of the losers from trade to keep them happy. New tariffs can be thought of as an attempt to redistribute from consumers back to manufacturing workers and communities and in this sense they might even work.
The problem is that trade barriers damage the entire economy, hurting consumers by more in total than the gains for the small group of new jobs created. The result is that overall more jobs are likely to be lost than created, just as was the case with the steel tariffs under George W. Bush. In a reverse of the benefits of trade, jobs created come with high-profile investment and plant openings, while those lost are likely to be spread widely across industries and much less obvious. Politically, that helps protectionists.
Wall Street Journal reader Matthew Taylor argued that this method of protecting a tiny segment of American workers was just too costly: “This is like burning down your whole garage to cook a steak; yeah, you have a steak, but now you have no car and can’t get to work.”
Is a trade war with China really the equivalent of burning down your garage, though? The International Monetary Fund estimated two years ago that a trade war leading to 10 per cent across-the-board tariffs by both sides — roughly what Trump is threatening — would result in an economy about 0.25 per cent smaller after two years than it would have been. BNP Paribas chief economist William De Vijlder points out that such a small effect is close to the margin of error.
Perhaps America is just burning the junk in the back of the garage to get the steak to sizzle, a loss it can put up with. But if the garage does burn down, no politician will accept the blame.
The Wall Street Journal