What Donald Trump Gets Right, and Wrong, on Trade

An international freighter berths at the international cargo terminal at Tokyo's port on November 19, 2015. Japan posted a surprise trade surplus in October as the value of energy imports slumped on falling oil prices. The surplus came even as the value of exports declined for the first time since …
Yoshikazu Tsuno/AFP/Getty Images

An absolute torrent of pro “free-trade” commentary has been unleashed since Donald Trump emerged as the Republican frontrunner.

Economists, reporters, and pundits have argued vigorously in favor of the free-trade status quo, opposing Trump’s plans to renegotiate trade deals and perhaps impose tariffs. Although their approaches vary somewhat, all argue that deficits don’t matter and trade is working as advertised to benefit Americans. Thus Trump is largely wrong in highlighting trade deficits and unfair foreign practices, and we shouldn’t tamper with current trade arrangements.

How about the workers displaced by free-trade agreements?

The consensus solution is retraining and wage insurance supplementing the new, lower incomes of former factory workers. In a word, we must preserve free trade as-is by compensating through social welfare those negatively impacted. The big flaw, aside from requiring taxpayers to ameliorate trade’s job-loss effects, and in effect validate free-trade theory despite its failure to account for labor market realities, is that such subsidies do nothing to improve America’s competitive position internationally.

In fact, the best training/income-enhancing program is called a manufacturing job.

U.S. manufacturing, targeted by foreign rivals and largely neglected by our policy makers, is an important component of GDP, is responsible for the lion’s share of productivity increases and private sector R&D, has a high jobs-multiplier effect, and often creates new spin-off industries. Manufacturing jobs allow workers to increase skill levels over time, and earn higher pay. Manufacturing employs large numbers of scientists and engineers, as well as legions of accountants, financial specialists, managers, and the like. And, in spite of the punditry’s palpable disdain for non-college white workers, manufacturing has historically employed non-college blacks disproportionately to their population numbers.

Trump’s trade policy is ultimately a call for a cohesive national pro-manufacturing agenda.

Manufacturing is too important to America’s economic future to be abandoned to the vagaries of manipulated global marketplaces. As a businessman who buys all sorts of construction materials, sophisticated electronic systems, and finished goods for his hotels, Trump knows that entire U.S. industries have vanished or are so diminished that he has to go offshore to meet his needs.

Just as the displaced workers who support him, he can see that our manufacturing economy has been badly damaged — by a flood of goods on world markets artificially priced through rigged currencies, subsidies, lax regulation, worker suppression, and tax holidays, inter alia. Yet most free-trade commentators contend that manufacturing is healthy, citing output statistics. They miss the forest for the trees.

Trump also understands that American manufacturers face a much tougher time accessing foreign markets than vice versa, in part because the tariff cuts in trade agreements are countered with hikes in border-imposed VAT and consumption taxes. Japan, for example, in preparing for the Trans-Pacific Partnership (TPP), has raised its consumption tax to eight percent from five, and will soon move to ten percent.

Trump has gotten the diagnosis correct.

America needs greater economic growth through renewed manufacturing, taking back market share here and abroad. The critical point is that trade deficits at current levels subtract substantially from economic growth. Years of two percent growth has become the ‘new normal.’ However, eliminating our current large trade deficits would put growth back in the 4-5 percent range. And if we actually ran surpluses, our growth rates would climb even higher.

Trump, correctly, wants to re-boot the globally-imbalanced “free-trade” system, thus precluding a potential catastrophic crash. Case in point: The IMF reported recently that the risks from global financial instability have risen, especially in regard to emerging markets. China is now adding to its already massive debt to boost its slowing economy and is thus postponing a reduction of excess capacity instead of rebalancing toward expanded domestic demand. The Politburo’s decision to export China’s unemployment to its trading partners will keep the global economy off-balance for years to come — unless the exports are curbed.

Trump’s weakness, however, is believing that better trade agreements alone with China and others will do the trick and can be negotiated in six months’ time. In fact, negotiations with nations that have run export machines and used unfair trade practices for decades are not likely to be quick or to yield good results. And a more comprehensive goal than just halting oft-mentioned currency cheating is necessary.

The next president must start with a strategic blueprint for our economy and a plan for the next 25 years.

Trump wouldn’t build a hotel without a blueprint; one is needed here as well. Almost every other major trading nation has an industrial strategy. The U.S. does not, fearing the government might “pick winners and losers.” But deciding, for instance, that the beleaguered U.S. steel or aluminum industries are vital components of our economy, and must not be eliminated by Chinese dumping, is hardly picking winners.

The fact that we have suffered 40 straight years of trade deficits, with no end in sight, argues conclusively for a more strategic approach to trade policy — rather than continuing the current practice of enshrining agreements with free-trade rules that are likely to be broken.

New, quick response U.S. enforcement mechanisms are also a must-have. Dumping and currency manipulation, for instance, must be met with swift action, not years-long legal action during which our industries languish.

Without a trade blueprint to guide negotiations, the Chinese or others might move toward balanced trade by buying more scrap metal, waste paper, and soybeans, but could still leave us more dependent on them for advanced technology goods. The U.S. must know which industries and technologies are crucial to our national security and economic future.

Whatever objections one might raise to a Trump nomination, it is folly to dismiss out-of-hand his critique of

America’s dismal place in the current imbalanced global trading system, and argue instead that the status quo is fine, including growth-subtracting trade deficits. Throwing wage-insurance crumbs to disaffected non-college white workers will not increase economic growth, foster competitive industrial/technological capabilities, and pay down the national debt.

A new approach to our leave-industries-and-workers-behind trade policy is needed, with or without Donald Trump.

Kevin L. Kearns is president of the U.S. Business & Industry Council, a national business organization advocating for domestic U.S. manufacturers since 1933.