On Trump and trade

If 2016 was any indication, governments around the world are going to spend an awful lot of time rethinking trade, investment and industrial development policy. The declines in manufacturing jobs, offshoring in various segments of production, and rapid mechanization of jobs in outbound sectors have combined to unleash fervor against globalization. Trump, Brexit and the campaign of France’s Marine Le Pen have channeled such anger with globalization into an assault on the neoliberal consensus that supports free trade and immigration as benefits across nations. It would be unwise to dismiss the concerns of their voters, as it was to reject any statistician or political scientist who predicted a Trump victory. If anything, the wave of populism has alerted us of the urgent need to address globalization’s shortcomings. We can do this without completely abandoning the systemic integration of the global economy and the international world order—major contributors to an overall decline in global income inequality since 2000.

Apparently President Trump didn’t get the memo. After walking back his whimsical idea of a 35 percent tariff on American companies with foreign operations, on March 1 he unveiled a trade strategy that indicated a swift enforcement of Section 302 the Trade Act of 1974, which allows the administration to slap tariffs in defense of American producers from imports. Doing so would violate World Trade Organization (WTO) rules and potentially bring substantial legal blowback from other countries. It would punish consumers simply because American industry isn’t competitive with foreign counterparts in terms of cost and quality. It would also hurt domestic workers who will no longer be able to contribute to export-intensive industries that will be priced out of foreign markets.

President Trump’s misguided solutions are rooted in a misdiagnosis of issues within U.S. trade and industrial policy. According to Harvard’s Ricardo Hausmann, value added in the U.S. manufacturing sector since NAFTA has increased roughly 19 times as much as Mexico’s. While that may not resonate with the displaced factory workers in the rust belt, Hausmann also shows that industrial shares of economic expansion also declined at similar rates in other developing nations from 1994 through 2014, as Mexico’s proportion stayed flat. This is besides the fact that the loss in manufacturing jobs didn’t exactly go to Mexico as Trump likes to claim, but were replaced by mechanization and increases in productivity. The problem is not a lack of stringent enforcement of trade laws, but how our trade and industrial policy as a whole doesn’t help American workers adjust to the shortcomings of globalization. The Trump administration should instead shape trade policy reform around workforce development, industrial competitiveness, and technological innovation, rather than unilaterally making deals and slapping tariffs on foreign imports to feed his nationalistic base.

As opposed to continuing against the winds of globalization, President Trump should use them to pursue a levelheaded trade and investment policy agenda. He should apply those frequently touted deal-making abilities to take on more leadership in global trade negotiations. For example, he could offer to lift certain tariffs in a revitalized auto industry in exchange for countries removing market access regulations, which force companies to re-locate the bulk of their supply chains in emerging markets and offshore more segments of production than initially planned. This could keep certain elements of production abroad while ensuring companies aren’t hit with hidden costs of re-locating and workers aren’t victims of rapid supply chain re-location. He also could revamp federal agencies to better assist those unemployed because of offshoring. 

The Department of Labor’s Trade Adjustment Assistance program is tasked with supporting workers affected by global competition, but it is grossly ineffective and lacks the resources to meet the scale of displaced workers; perhaps this could stem workers’ reliance on disability and Social Security benefits, or slow the tide of a low labor force participation rate, all while bolstering consumption. Instead of trying to lure manufacturing jobs back with corporate subsides, President Trump should change his military-heavy budget to one that prioritizes critical investments in manufacturing sciences and technologies; current funding has stagnated, and as Professors Gary Pisano and Willy Shih of Harvard Business School demonstrate, the diffusiveness and long-term aspects of R&D payoffs make them unattractive and unviable for the private sector. The federal government must also divert more resources towards worker training initiatives that recruit more millennials into the manufacturing sector, encouraging a new generation of talent to pursue educations in vocational training and technical programs. In making these investments, the administration could help bring more supply bases and technological foundations back from overseas.

President Trump must also refurbish the business environment in America to one that recognizes the role of long-term, holistic business infrastructure development. He can start by changing his regulatory strategy from one that prioritizes quantity—for every regulation added, two are to be axed–to one that focuses on trimming administrative costs. President Trump should also reform the onerous corporate tax code to simultaneously close loopholes while gently lowering our high corporate tax rates. Failing to address these issues gives executives more reasons to divert their production facilities away from America. This is critical because as Robert Reich points out in his famous 1990 article “Who is Us?” where a corporation’s HQ lies is virtually irrelevant; on the other hand, where a company integrates its supply chain and equips workers with skills and training is extremely important. 

The President should help develop policies that mesh business ventures with community talent pools, such as ones that match corporate funds for workforce development and streamline regulations in regional economic clusters. Doing so can capitalize on America’s strengths in areas like national universities and capital for entrepreneurship, providing more opportunities for manufacturers to disseminate their production networks in American communities and metropolitan areas. This is because, according to Pisano and Shih, when a company’s manufacturing and product-development process become more integrated, location and proximity become more important in shaping business decisions.

If he is to revamp the American economy and appease his constituents, President Trump must abandon his pugnaciousness in trade diplomacy, recognize both the contributions and drawbacks of trade agreements, change his trade and investment policy to better equip the American workforce, and improve America’s business environment. The Trump administration, like its foreign counterparts, has a tall order in addressing the limitations of globalization. This is what he asked for when he submit to the protectionist political currents of 2016.