The Port of Baltimore is a major transit point for U.S. exports. Trump’s war against U.S. trade agreements could hurt U.S. manufacturers in world markets. (Photo by Mark Wilson/Getty Images)
Trump has promoted his “America First” policy by attacking U.S. trade agreements. But that strategy is based on a false premise that goes back decades.
Trade agreements have been a conservative whipping boy, since NAFTA’s passage in 1993. They’re an easy scapegoating target that uneducated voters can understand.
He claimed in his inaugural address the agreements had drained the middle-class of wealth and jobs.
There’s no question American manufacturing job have been declining for decades. The income-gap between non-college-educated and college-educated workers has grown as well. But it’s not hard to see where the money went.
Massive tax cuts favoring the wealthy during the administrations of the Ronald Reagan, George W. Bush and yes, Barack Obama have weighed most heavily on the middle class.
Over the past 24 years, half of all households saw their share of wealth fall from 3 percent to just 1 percent. In contrast, America’s richest 10 percent saw their share grow by 12 percent, according to a new study by the Congressional Budget Office
The wealthiest 10 percent now controls 76 percent of the nation’s wealth; the lion’s share is concentrated in the top 1 percent.
Now Trump is going to double down with a major tax cut for the rich and corporations.
Theoretically, corporations are supposed to take that money, invest it in new plant and equipment and hire workers. But it just hasn’t happened. The reason is simple. Tax cuts for the rich do not spur new demand for goods and services.
No chief executive worthy of their executive suite will expand plants and hire workers without an increase in demand for their goods or services.
Instead, corporations have been hoarding cash, making acquisitions–usually leading to job losses–and buying back stock to boost share price.
Goldman Sachs, one of Wall Street’s leading investment banks, predicts in a new study that corporations will spend $780 million on stock buybacks in 2017, a 30 percent increase over this year.
In contrast, spending on new plants and equipment is expected to rise just 6 percent and spending on research and development is expected to rise by 7 percent. Spending on acquisitions and dividends is expected to rise by 5 percent and 6 percent respectively.
The one place where U.S. companies have found new customers is overseas.
The fact is trade agreements like the much-maligned NAFTA have been good for the United States. Even the Trans-Pacific Partnership (TPP) had a number of positive benefits that will now be lost.
The European Union’s trade chief yesterday (Jan. 25) criticized Trump’s protectionist strategy and said the EU will press ahead opening markets through trade agreements, according to Bloomberg.
“Those who, in the 21st century, think that we can become great again by rebuilding borders, re-imposing trade barriers, restricting people’s freedom to move — they are doomed to fail,” EU Trade Commissioner Cecilia Malmstrom said at a Bruegel conference in Brussels.
“Building a wall is not the answer,” she added.
The United States currently has trade agreements with 20 markets worldwide, representing 10 percent of global Gross Domestic Product (GDP), according to the Department of Commerce’s International Trade Administration.
In 2015, 47 percent of U.S. exports went to trade agreement partners, totaling $711.4 billion. The U.S. currently has a trade surplus in manufactured goods with its trade partners, totaling $13 billion in 2015.
The surplus is led by exports of petroleum and coal products ($29.9 billion), machinery ($29.0 billion), and chemicals ($24.8 billion).
Exports to trade agreement partners grew by 53 percent between 2009 and 2015, driven by increased exports to 19 of 20 trading partners.
From 2009 to 2015, U.S. exports to FTA partners grew by 53 percent, topping the 34 percent growth in goods exports to the rest of the world.
As for the negative effects of trade agreements, economists estimate that they are responsible for one percent to five percent of domestic job losses.
Trump’s economic policies are strikingly like East Germany’s before the end of the Cold War. The Communist nation protected jobs with high tariffs on foreign goods which led to inefficiencies and products and services that were noncompetitive on world markets.
Trump’s latest corporate meddling occurred Tuesday (Jan. 24). He met with the chief executives of Ford, General Motors and Fiat Chrysler.
He called them together to explain his so-called “America First” economic policy and coerce them into bringing manufacturing jobs back the United States.
Companies, however, rely on free and open markets to determine the most efficient way to allocate capital and other resources.
If Trump keeps interfering, his meddling will cause distortions that will make American products less competitive on world markets as well.
Trump’s counter is to spur the economy by repealing regulations. But wages are the biggest determining factor on job migration, and the one thing he can’t change without selling out his supporters.
Right now, the wage differential between Third World countries, including Mexico, is so great it will be impossible to increase U.S. manufacturing jobs without significant cuts in wages and benefits.
Trump could trigger the downward wage spiral himself if he goes through with a promise to abolish the federal minimum wage.
But it won’t do a thing to spur growth.
Of course, the best way to do that is to raise wages, encourage family formation and allowing more immigration.
But Trump is gutting programs that encourage people to go to school so they can afford to create families, and he’s cutting the social safety net.
He’s threatening to impose tariffs on imports which will produce a retaliatory response overseas, cutting demand for U.S. products even more.
Stagnant population growth is the handmaiden to stagnant economic growth, especially the mythical 4 percent average annual GDP growth Trump has promised.
The administration should take steps to increase wages, make college affordable, provide decent health care and retrain workers from displace industries.
But that’s not on his agenda. He’d rather chase demons.