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Date: 2016-11-27

The Thorny World of Trade Policy

 Trump’s trade policy, although a work in progress, is predicated on the belief that America has gotten a raw deal in its trade relations based on these pillars: 1) current trade agreements are not good for Americans and must be renegotiated or scrapped; 2) there must be no new agreements until we figure out why the old ones are so inefficient and 3) we must then figure out how to get other countries to agree to new agreements that are horrible for them but great for us.

Furthermore, tariffs may be slapped on products from countries that the administration deems to be breaking trade rules or manipulating their currency to make their products cheaper.  This, it is believed, will punish the wrong-doers and bring manufacturing jobs back to the U.S.

 

However, after threatening to impose big tariffs on Chinese goods, Trump has dropped that rhetoric and is saying he expects to have a great relationship with China.  For now, let's assume his previous pronouncements on trade should be taken literally, more or less.

 

Foreign manufacturers are creating jobs in the U.S.

 

Re-imposing duties on products covered by existing trade agreements won't create new jobs.  In the case of NAFTA, the goods are either entirely made in the U.S. or the finished goods contain a large volume of U.S. components. A tax on these goods as they cross borders will add to the price the final consumer pays.  This might reduce demand, forcing producers to look for other markets or cutting production and dismissing workers.  This is the opposite of what those who claim trade deals are horrible said would happen if they were elected.

 

Punitive tariffs will increase the import costs of foreign made goods, lowering demand for them and perhaps encouraging domestic substitutes, or encouraging the foreign producers to move their factories to the U.S.  A Chinese maker of automobile glass recently moved to the states on his own volition, taking over an abandoned auto factory in Michigan and creating several hundred new jobs.  The investor didn't do this for fear of punishing tariffs, but because it made business sense.  Many foreign car companies manufacture here, as will soon the European-owned passenger aircraft maker Airbus.

 

Import substitution mostly doesn’t work. The free movement of capital in search of the most attractive investment opportunity has been the cornerstone of the free enterprise system, but will now be tested again, ironically through involvement by national governments in regulating the domestic and international marketplaces. Government regulatory tentacles are unlikely to bring back many manufacturing jobs.  If the wage differential is the reason for going offshore, then efforts will be made to reduce U.S. labor costs by introducing more automation and hiring part-timers to avoid paying benefits.  Workers will have to be trained to staff the re-shored enterprises, and thus won't be cheap or more productive.  Also, forcing U.S. companies to move from foreign markets that are close to foreign buyers will disrupt supply chains and add substantially to the cost of goods.

 

De-incentivizing companies from offshoring production is something you'll hear a lot more about.  Getting this right is desirable because considerable harm is caused when companies employing substantial numbers of workers decide to pack up and move to Mexico.  Whole communities can be devastated with families immediately pushed into poverty while tax revenue evaporates, harming everyone else.  A combination of carrots and sticks may help companies with itchy feet stay put.  But success is not guaranteed.  Too many sticks and the affected companies will leave by other means.

 

Most new jobs will come for SME’s

 

The U.S. can become more protectionist in other ways.  It can impose curbs on investing in certain countries and transferring technology.  For years, the Chinese have pursued mercantilist policies that have been harmful to U.S. job creation by creating a competitive edge in certain sectors.  The U.S. has filed numerous complaints against Chinese trade practices.  We've won some and we've lost some.  A more aggressive posture might be worth trying, but expectations should be more tempered and additional costs will be involved.  The bureaucracy that regulates trade and enforces agreements has been compared to a sack of crabs, a situation not easily resolved by declarations from the White House.

 

The truth is that most new jobs will come from SME’s.  Automated manufacturing processes and 3D printing seem to be the wave of the future.  For the U.S. to compete, companies will need more support in the realm of financing, training and market entry than is now available—all things that went undiscussed during the recent presidential campaign.

 

The truism that everything and everyone is interconnected has never been more true.  Attacking only one part of the trade issue without carefully considering the affect on all is likely to make those who are angry even more so.  We're also learning that what is said or threatened one day, can be quite different the next.


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