Keating: Trump Trade Policy

February 14, 2017

by Maryann O. Keating, Ph.D.

There was much soul searching at the annual meetings of the American Economic Association held in Chicago last month. Four ex-chairs of the President’s Council of Economic Advisors, two Democrats and two Republicans, commented in a panel discussion on economic issues facing President Donald Trump. His proposed trade policies concerned the several hundred economics professors in the audience, all generally committed to teaching their students the economic benefits of unrestricted movement in goods across national borders.

The logic underlying the economic principles of international trade is tight. All residents, particularly those from lower income households, benefit from being able to buy the best and cheapest products regardless of country of origin. Protecting local producers from international competition harms consumers. Nevertheless, there are inevitable winners and losers as a country moves towards freer trade. It may be the case that the economics profession in the past has minimized the cost to certain individuals and certain sectors of the U.S. economy. Presently, the focus of the American public may have shifted from cheaper consumer goods to the availability of productive employment.

Firms and workers associated with industries having an international comparative advantage reap the gains of freer trade. However, all those associated with industries, unable to sell their products at rock-bottom global prices, lose.
Economists, since World War II, have supported the U.S. government’s strategy of encouraging international and regional trade initiatives, including the General Agreement on Tariffs and Trade (GATT), the European Union (EU), and the North American Free Trade Agreement (NAFTA). In practice, free-trade policies have indeed fostered co-operation between nations and raised the living standards of the bottom billion of the world’s population. But what about those in the U.S. harmed by these policies? It is optimistically assumed that firms and workers associated with losing industries would be directed through market forces towards sectors of the economy in which the U.S. continues to maintain a particular trade advantage.

What happened? As well-educated technologically sophisticated or well-connected Americans thrived in globally competitive markets, others, particularly those associated with the U.S. manufacturing sector, saw their jobs disappear and inflation adjusted income decline. Tariff barriers declined but they were effectively replaced by other countries’ reliance on value-added sale taxes. In addition, U.S. exporters may be hampered by more onerous environmental and employment regulations.

The degree to which existing trade agreements contribute to stagnating U.S. median household income and rising income inequality is an open question. Whatever the cause, the fact is that discouraged younger workers, in the early part of this century, were unable to find or reduced their efforts in seeking employment. Labor force participation declined, putting pressure on the tax supported social safety net. The overall rate of gross domestic product growth never reached levels prior to the Great Recession, limiting displaced workers’ absorption into employment.

Economic trade theory in goods and services, alone, cannot address labor problems associated with the mobility of persons and firms across national frontiers. Furthermore, the competitive advantages of developing countries with increasingly well-educated workers and efficient industries cannot be reversed. Economics, however, does have something to offer concerning U.S. competitive disadvantages due to the dollar acting as the world’s reserve country and tax boarder adjustments. Economic analysis is also useful for discerning if international agreements are efficient or merely trade diverting.

Maybe it is time to reconsider existing international trade agreements to determine if the scale is balanced in favor of truly low-cost quality goods and services, such as air conditioners produced in Indianapolis. It remains to be seen, however, if the suspension of existing multilateral agreements and renegotiation of bilateral ones will create new losers, such as Indiana farmers exporting corn and soybeans.

Americans, in the past, have been willing to trade-off international economic advantage for national strategic objectives, up to a point. For example, they are not willing to provide unlimited subsidies to maintain workers in declining industries. But, most of all, they have traditionally objected to trading off economic advantage resulting from special treatment given to politically favored individuals and industries at home and abroad.

The four ex-chairs of the President’s Council of Economic Advisors were each questioned as to whether or not free-market economists would be willing to work with the present administration. There was general agreement among the panelists that the supply of economists is ever-ready, but it appears that demand is weak.

Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell.



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