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Trump threatens disastrous trade war

March 7, 2018

 

 

If President Trump gets his way and slaps 25 percent taxes on imported steel and a 10 percent tax on aluminum it could be disastrous for the U.S. and the world economy, especially if it leads to retaliatory tariffs by other nations on U.S. exports. A full blown outright trade war that threatens the gains from trade that have been made since the end of World War II could lead to drastic reductions in total U.S. and world incomes. It would threaten the very thing that Trump and his administration has promised, an uptick in U.S. economic growth.

 

Don't get me wrong, I sympathize with workers who have lost their jobs because of changes in and increases in international trade. My dad was a steel worker and he was adversely affected in the 1960s and 70s. He lost most of his promised pension when the mill he worked in closed and the firm declared bankruptcy. I worked in that mill alongside my dad before I was laid off from the mill and decided to go to university. But aside from workers that lose in industries that are suddenly open to competition from international trade, it is hard to deny that the gains from international trade are large.

 

Just look around and see all the foreign products in our market places is an indication that the gains from trade are most likely very large. Look at the range and diversity and the competition in the automobile market and the quality of the cars that are available, much of it due to international competition in the international automobile industry.

And don't discount the goods and services that the United States exports and the U.S. workers that work in those export industries. Data from the U.S. Department of Commerce show that U.S. goods exports supported 6.7 million jobs in 2015,  service exports supported 4.8 million U.S. jobs, and each billion dollars of exports supported 5,967 U.S. jobs. Exports to Canada supported the greatest number of jobs: 1.6 million. Between 2009 and 2015, the total number of jobs supported by U.S. exports grew by almost 1.9 million. The largest increases in the number of jobs supported during the time period were supported by exports to China followed by Mexico, Canada, Korea and Brazil.

 

Can we quantify the overall gains from international trade? How much richer are we in the United States because of the liberalization and increase in international trade?

 

In a well researched paper for the Peterson Institute for International Economics, economists Gary Clyde Hufbauer and Zhiyao Lu (Hufbauer-Lu) give a conservative estimate that increased international trade since the end of World War II led to a 2.1 trillion dollar increase in 2016 United States total income as measured by U.S. Gross Domestic Product. I'll write this out in order to bring out the magnitude. That is, total U.S. income in 2016 was $2,100,000,000,000 larger because of the expansion of international trade that took place over the period 1945 and 2016. To put it another way, in 2016 United States total income (GDP) was $18.6 trillion. Without the expansion of international trade, that GDP would have been $2.1 trillion smaller or $16.5 trillion. That amounts to a 12.7 percent gain in 2016 total U.S. income as a result of expanded international trade.

 

This $2.1 trillion increase in GDP translates into a per person annual income increase $7,014. On a per household basis it is an annual income increase of $18,131.

Those of you who are interested can refer to my previous blog posts that go over why and how international trade increases overall incomes. You can search my blog post under the tag "international trade" to bring up these past blog posts. But to sum up the gains from global trade to all countries engaged in it, we have gains from (1) comparative advantage (and some international trade can be explained by comparative advantage (think coffee and petroleum, for example, or even fish from Iceland and Greenland) (2) larger markets leading to large scale production leading to lower costs of production, and (3) the increased competition that results in less market power of very large corporations and a larger variety of products offered to consumers.

 

Now, it is true that international trade, while it increases overall income and many of us benefit from this (much of this gain in our real income is from the lower prices and increased quality of goods and services that international trade brings about) does hurt workers who work in industries that lose out in competition with imported goods (many other workers in export industries gain directly from trade). The Hufbauer-Lu paper provides estimates for the losses incurred by workers impacted from increased international trade. They estimate that between 2003 and 2016 a net figure of 156,000 U.S. jobs per year were adversely affected by trade, and that the costs to these workers were between $28 billion and $40 billion per year. This compares to the gains to the rest of the United States population in 2016 of $191 billion, five times as high as the losses to adversely affected workers. So as you can see, we as a nation could have easily compensated those that were adversely impacted by trade and still have come out way ahead of the game.

 

We do have the Trade Adjustment Assistance program administered by the United States Department of Labor that is supposed to aid workers impacted by international trade, but it is wholly inadequate, amounting to little more than extended unemployment benefits which are themselves restrictive and which rarely replace 50 percent of wages of workers who lose their jobs. While I was a staff economist at the Office of Policy at the Department of Labor, while working on the regulations for the program I was in a constant battle to liberalize the program, making adjustment assistance to trade impacted workers more truly consistent with the losses these workers suffer. I pushed for more generous relocation assistance to allow these workers to relocate to areas with available jobs and more job search money for these workers to search for jobs away from their home towns, but even these modest improvements to the program were always defeated.

 

Trump would do well to reverse his anti trade stance before it is too late. It was a mistake not to sign on to the Trans Pacific Partnership trade pact which could have further expanded the gains from international trade and importantly given the United States more influence in Asia to counter growing Chinese influence there, and now it will be an even bigger mistake if he slaps these steel and aluminum tariffs on our trading partners and induces an all out trade war that could bring the world back to the 1930s.

 

 

References: Gary Clyde Hufbauer and Zhiyao (Lucy) Lu, The Payoff to America from Globalization: A Fresh Look with a Focus on Costs to Workers,´May 2017, Peterson Institute for International Economics,

https://piie.com/system/files/documents/pb17-16.pdf

United States Department of Commerce, International Trade Administration, Jobs Supported by Exports,

https://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_005537.pdf

 

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