The Trump administration has been capitalising on the “dark-side of globalisation”. However, Devashish Mitra advances that an anti-globalisation campaign might not be the best for the United States. The article is both a critique to current government direction and a call to salvage America.
Globalisation, in all its forms, is under siege from the Trump administration. Importantly and unfortunately, last week’s G-20 financial leaders’ meeting ended without its usual commitment to promote free trade or resist protectionism. On inauguration day itself, the new administration announced that they were pulling out of the Trans-Pacific Partnership and would be renegotiating the North American Free Trade Agreement. Setting aside for the moment that globalisation has lifted over a billion people out of poverty all over the world, making it safer and more secure, here is why anti-globalisation policies are actually bad for America.
The US-led multilateral process of getting rid of trade barriers, initiated after World War II, was motivated, to a large extent, by the terrible interwar experience with escalating worldwide protectionism. This “beggar-thy-neighbour” protectionism, used by several countries on each other, played a significant role in converting a regular recession into the Great Depression. This important lesson, that the rest of the world does not remain passive to any country’s protectionism, has been forgotten while interpreting the recent evidence showing US wage and job losses from trade with Mexico and especially China. Besides, the recent studies don’t take into account the possible increase in automation from restricting trade, as if it is good enough to bring jobs home for American robots.
The Trump administration is gearing up to slap higher tariffs on imports. Trump and his associates have mentioned the possibility of a 20 percent tariff on imports from Mexico to pay for the “wall”. During the campaign, Trump also advocated for a 45 percent tariff on imports from China. The alternative to tariffs is the Ryan-Brady border tax adjustment plan, which is potentially more protectionist, but also less transparent. Under this plan, American producers will be given tax exemptions on domestically produced inputs, but not on imported ones. The plan also provides for the deduction of wages while taxing domestic production, without such provision in case of imports. And, export revenues will be totally tax exempt. Thank goodness Trump finds it “too complicated”. He is in favour of plain old tariffs, without any apologies whatsoever.
Whichever form of protection is implemented, it is likely to be challenged at the WTO for US’s failure to honour past commitments. Besides, import protection is going to lead to large-scale destruction of global production networks. It is virtually impossible to find a manufactured product completely made in a single country. The modern production process is divided into many fragments, located in different parts of the world, depending on where each is the cheapest to perform, e.g. low-skill tasks in China but high-skill and research-intensive ones in America. Obviously, this process requires imports of semi-finished goods and inputs produced abroad. Destroying international production networks, through import restrictions, will not take much time. However, the creation of new domestic networks will not happen overnight and will take considerable time. Such networks, if and when completed, will result in much higher costs of production and lower firm profitability than under free trade. Costlier domestic inputs will reduce the ability of American firms to compete in the world market with foreign firms, and, in turn, seriously hurt their exports and production. As a result, many American firms may be thrown out of business and many workers out of their jobs. Thus, protectionist policies, that superficially look job-creating for the US, may end up destroying many American jobs. This argument applies not just to goods but also services that are part of global production networks. There is speculation that the cap on H1-B visas will be reduced and the minimum salary for processing such visas will be raised significantly. This will restrict hiring high-skill workers, brought on these visas, needed to supervise and communicate with service-sector workers in their home country performing tasks located there by global American firms. Thus, apart from being a barrier to skilled immigration, H1-B restrictions will block imports of services, often used as inputs, in combination with domestic US workers, into production by American businesses.
Adding to the administration’s anti-globalisation stance is the flawed argument by their National Trade Council chief that a reduction in trade deficit will increase GDP. In very good times, often the US has had a large trade deficit. The US trade deficit with China means that the goods and services Americans send to the Chinese cannot fully pay for what we get from them. The US pays China for that difference by selling them financial assets, such as US Treasury bills. This means China is lending us money, adding to the supply of loanable funds here and pushing down the cost of borrowing (or the rate of interest). Therefore, restricting or ending trade with China will reduce or stop these “capital inflows” and make borrowing more expensive in the US. Besides hurting home ownership, higher education, domestic investment, entrepreneurship and anything else that requires borrowing money, this will be a big blow to Trump’s infrastructure building plan aimed at creating new jobs, as such a plan can only be financed by government borrowing in the presence of huge proposed tax cuts for the rich.
To conclude, the solution to our jobs problem is not trade protection but social protection and subsidised higher education. Those low-skill manufacturing jobs of the past are not coming back, no matter what the policies are and who the president is. The future of this country is in high-skill jobs, for which we need more government investment in higher education and worker retraining. We also need a more generous unemployment insurance system, along with a robust system of wage insurance, with a wide coverage, that partially makes up for the lower wage in the new job that a worker might have to take up, in case technological change or globalisation ends up destroying her old job.
Featured image: Republican U.S. presidential nominee Donald Trump holds a campaign rally in West Bend, Wisconsin August 16, 2016. © Eric Thayer / Reuters
About the Author
Devashish Mitra is Professor of Economics and Gerald B. and Daphna Cramer Professor of Global Affairs at the Maxwell School of Citizenship & Public Affairs, Syracuse University.
