The Trump Economic Policy Plank That Could Work

CREDIT: AP Photo/Matt York

Republican presidential candidate Donald Trump

Republican presidential candidate Donald Trump offers a lot of policy ideas that progressive economists hate. He wants to close up the country’s borders and crack down on immigration, something that could seriously hurt the economy. His tax plan would cost trillions and offer most of the relief to the wealthiest, with very little for the middle class and poor.

But when it comes to his positions on trade, the same economists say he’s identified the right problems, even if some of his solutions might get him into trouble.

“Trump has stumbled on, and I think it’s the right word, stumbled on to a very important issue,” said Robert Scott, senior economist and director of trade and manufacturing at the left-leaning Economic Policy Institute.

Trump’s stances on trade, as in many other policy areas, shift often. But the general outline is taking action to boost industries, and therefore jobs, here at home.

Action makes sense, Dean Baker, co-director of the left-leaning Center for Economic and Policy Research told ThinkProgress, because the promised benefits of past trade agreements haven’t come to pass. The country was supposed to be able to cheaply import goods from other countries and simply shift our attention — as well as American workers — at home to making higher-end goods to then sell back abroad.

“But what we actually see is very high unemployment,” he said. The workers in the industries where the country began importing goods from elsewhere weren’t able to simply jump to different, more in-demand sectors; instead they just lost their jobs. “It’s hard to say we’re benefitting.”

The damage has been severe: one study found that the United States lost about 2 million jobs between 1999 and 2011 to trade competition with China. That amounts to about 10 percent of all manufacturing job losses during that period. Meanwhile, another study found that in areas hit hard by rising competition with China, employment and wages remained depressed for at least a decade.

A ‘Reasonable’ Plan

Trump has promised big tariffs on imports, either from specific countries like China or Mexico or from individual companies that shift jobs overseas, to supposedly give our domestic industries competing with those countries and companies a boost; go after China for manipulating its currency so that it is lower than the dollar, and therefore goods made in the country are artificially cheaper than ours; and renegotiate trade agreements past and present, which he has said have been disastrous for the economy.

Key for Scott is tackling China’s currency manipulation and any other countries that may be artificially holding down the values of their currencies. If China’s policies keep the value of the yuan lower than where it would be without intervention, that makes it cheaper for the goods and services they price in that cheaper currency for other countries to buy. “It acts like a subsidy to everything that China and other countries export to the U.S.,” he said, and it “acts like a tax on all U.S. exports to China and to every country where we compete with China in the world.”

And tariffs could be the answer, if done a certain way.

“It’s reasonable to talk about imposing a tariff on these exports…in order to offset the effects of currency manipulation,” he said. He pointed to just such an experience in the past: when President Nixon imposed a tariff on imports that lasted a few months and “got countries he dealt with to agree to make changes in currency policies,” Scott said.

Baker agrees that tariffs, if done the right way, can force concessions from other countries. “If it results in changing policy, then there’d be a net gain” for the economy, he argued, when weighing the boost to jobs against extra costs that might trickle down to consumers. The problem is that it will all become a game of negotiation, and the U.S. has plenty of other priorities it’s trying to haggle with China over beyond its currency. “With China we can’t give them a laundry list and say, ‘Here’s what we want you to do,'” he said. “If we want them to raise the value of their currency, it’s pretty much got to be number one.” Trump could shift his priorities that way, but he’d have to let go of a lot of other things, like patents and human rights.

It also depends on what Trump would actually do as president, and Baker is far more wary of using blanket tariffs that go on indefinitely to achieve these results.

“Simply imposing tariffs would almost certainly have a negative effect, it would violate a wide range of trade agreements,” he said. “If [Trump] is thinking about a long-term thing, having tariffs for 20 years, he won’t get away with that.”

Timothy Wise, a director at the Global Development and Environment Institute at Tufts University, similarly warned of what might happen if Trump levied blanket tariffs. “Imposing the kind of really high tariffs that Trump is talking about to bring jobs back to America is really coming late to the game with a sledgehammer,” he said. Hitting all of China’s exports would “fly in the face of all kinds of multilateral and bilateral agreements” the U.S. has made. China might not just react by bringing a case challenging the tariffs before the World Trade Organization (WTO), but by retaliating with its own tariffs on our exports, starting a trade war. “It can be a slippery slope,” he said.

An economic model built by Moody’s for the Washington Post found that if Trump slapped all imports from Mexico and China with stiff tariffs, it would throw all three countries’ economies into recession, costing 7 million jobs, although that falls to 3.5 million if the other countries don’t retaliate. Those numbers could be far too high, however, given that the model assumes no return of the jobs lost to offshoring over recent decades, and higher costs for American consumers may not materialize.

Still, there are more limited, temporary ways that presidents can impose tariffs as a sanction that are much less risky. For example, in the early 2000s President George W. Bush imposed tariffs on imported steel to help the domestic steel industry. While the tariffs were brought before the WTO and the U.S. eventually lost, they still lasted for nearly two years and “gave the steel industry some breathing room,” as Baker put it, stemming the job losses that would have otherwise been larger. “It wasn’t done in a stupid way.” President Obama has also used this tool, imposing tariffs on Chinese solar panels because, the U.S. argued, the Chinese were getting away with selling their panels at prices below what it costs to make them thanks to government subsidies. Even Ronald Reagan used such a tool against Japan in the 1980s.

“Those aren’t crazy things to do, both President Obama and President Bush have done that,” Baker said. “That’s consistent with trade agreements, consistent with current policy. What isn’t consistent is saying we’ll just slap tariffs all over the place.”

Tariffs are not what the first method Scott would choose, however. “I think there are better ways to achieve the same end result,” he said, “and that is to go directly after the tool that China and Japan are using to manipulate their currencies.”

A president who wants to do something about currency manipulation could fight fire with fire. China has been depressing the yuan’s value by buying up dollars, thus making our currency more expensive and theirs cheaper. So our Treasury Secretary could basically do the same thing, offsetting China’s purchases by buying the same amount of Chinese assets, bring the whole game to a truce — what’s known as countervailing currency intervention.

“When Trump tells you, ‘I can stop this,’ this is one case where it’s true,” Scott said. “He can sign an order and tell the secretary to take steps to end currency manipulation.”

Bring Back The Jobs

The end goal is to help revive manufacturing in the United States. Scott argues that tackling currency manipulation could do that. “Over time, it would create millions of jobs in the United States, most of them in the manufacturing sector,” he said. “That would be a very good thing.”

These jobs come with much higher wages and benefits than the majority of those created since the recession, which have mostly been in low-wage sectors like food service and retail. This imbalance “is one reason why wages have not grown very fast and workers have been feeling squeezed,” he said.

But Baker is more skeptical these jobs are coming back in those kinds of numbers. Given that the manufacturing sector has become more efficient, using technology to reduce the number of workers needed, he argues that it will never get back to its peak, saying an optimistic estimate would have the country recouping half to a third of those jobs.

“Obviously we’re not going to bring back the same number we’ve lost,” he said. “You can reduce the number you lose.”

Not everyone is convinced Trump is on to something, particularly those with a more conservative view of trade. Imposing big tariffs on other countries would throw the world “into another great recession, if not depression,” said Gary Hufbauer, a senior fellow at the right-leaning Peterson Institute. “It would be quite a shock to the overall system.” He argues that it would cause a massive trade war that would spread beyond China and the U.S., which he says could even result in a global depression and negative economic growth. “It would be quite something to live through,” he said.

Beyond tariffs, Trump has also promised to “rip up” all existing trade agreements with other countries, such as the North American Free Trade Agreement (NAFTA). That kind of idea warrants condemnation from all sides. It would “certainly” mean a trade war, Baker said. “It’s not a story I would want to see. I thought NAFTA was a bad idea, but you’ve had 20 years of development based on it.” Pulling that rug out from under the economies of Mexico and the rest of Central America could seriously harm them. “It’s not as though we could reverse history,” he added.

HufBauer agreed. Simply publishing a notice that NAFTA or another trade agreement was going to be terminated “would be quite a shock to the global economic system of which we are a part,” he said. “Who knows what would happen next.” He predicted that the stock market would tank and currency exchange rates “would go wacko.”

Political reality also makes the likelihood of following through on such a threat low. Obama himself campaigned on renegotiating NAFTA, but changed course once in office. It’s “a huge complicated process” to redraw those agreements, Wise said. Meanwhile, big business has a strong vested interest in keeping trade rules the way they are.

What a President Trump could do, however, is redo the Trans-Pacific Partnership, the trade deal the Obama administration has been trying to push Congress to ratify, if it doesn’t get finished up before he leaves office. “If we sign that deal, as bad as [trade] is, it’s going to get a lot worse,” Scott said. The next president might get a chance to change it. Trump “could go back to the drawing table and come up with an agreement that is going to work, and what’s what we need,” he said.