Wellesley Economics Professor Explains Possible Effects of Looming International Trade War
The current trade battle ratcheting up tensions between the United States and China will have worldwide ramifications. The Daily Shot asked David Lindauer, Stanford Calderwood Professor of Economics, about the Trump administration’s policies.
Q: Why does President Trump believe the U.S. needs to address international trade?
David Lindauer: President Trump often says that the large trade deficit the U.S. has with some nations, including China and Mexico, is a huge problem. He believes other nations are taking advantage of the U.S. Trade deficits, according to the president, result in fewer jobs and lower wages for U.S. workers, and stand in the way of “Make America Great Again.”
Most economists disagree. George Schultz and Martin Feldstein, two distinguished economists who served in Republican administrations, wrote recently in the Washington Post, “If a country consumes more than it produces, it must import more than it exports. That’s not a rip-off; that’s arithmetic.”
Most economists agree that the large federal budget deficit—the direct result of Congress and the president cutting taxes while increasing government expenditures—has more to do with our trade deficit than does the behavior of companies in China, Mexico, or anywhere else.
Q: Is a “trade war” with China and other nations a good idea?
Lindauer: During the presidential primaries and the general election in 2016, political candidates from the left and the right criticized international trade and the trade agreements the U.S. had entered. Bernie Sanders, Donald Trump, and many others shared a similar platform: International trade hurt U.S. workers, and trade agreements like NAFTA and the TPP (Trans-Pacific Partnership), which was under negotiation at the time, did not serve U.S. interests.
Had you interviewed professional economists back then, most would have disagreed and very few would have recommended starting a trade war. Of the economic challenges facing the nation, international trade was not high on economists’ lists. The U.S. benefits from the liberal global trading system the nation helped to build. Consumers extend their budgets by paying less for goods they consume; businesses benefit from selling goods abroad.
Economists recognize that wages for the majority of working Americans have grown little and jobs in manufacturing have been lost, sometimes dragging down entire communities. Trade plays some role in this process but so do many other factors, including automation, the weakening of trade unions, and the failure to maintain the real value of the minimum wage.
At an aggregate level, trade simply isn’t a large enough part of the economy to be responsible for all the harm attributed to it. Today, U.S. imports represent 15.3 percent of GDP and our exports of goods and services 12.6 percent. The rest of the economy is domestic and largely unrelated to international trade, suggesting that domestic factors play a larger role in determining the wage and employment problems facing the nation.
Q: Is protection of U.S. intellectual property a significant problem in China?
Lindauer: Yes, it is, and we need to craft trade agreements that protect U.S. innovations. Just as we have patents and copyright protections in the U.S. that encourage innovation, it would be desirable for similar protections to extend beyond our borders. Raising tariffs on Chinese imports may result in progress on the protection of U.S. intellectual property, but so might other forms of negotiation which will be far less costly to us and our trading partners.
Q: Who is the trade war hurting right now?
Lindauer: There are winners and losers. The imposition of tariffs on imported steel benefits firms that produce steel in the U.S. These firms have raised prices and seen profits grow (although steelworkers have not yet seen a significant increase in their wages). U.S. firms that use steel face the opposite. Mid-Continent Nail, America’s largest nail manufacturer, in Poplar Bluff, Mo., has had to raise prices. Orders have fallen, and the company laid off 150 of its 500 employees. If the steel tariffs remain in place, the plant may close and move operations to Mexico. There are thousands of companies like Mid-Continent Nail that are hurt by one of the many tariffs imposed by the Trump administration.
Tariffs also invite retaliation. China, Mexico, and others have responded to U.S. tariffs by imposing their own. Chinese tariffs on U.S. soybeans have taken a toll on U.S. farmers, as have Mexican tariffs on U.S. producers of apples, cheese, and pork.
Tariffs are taxes, with the final consumer bearing most of the burden of paying them. As U.S. consumers pay more for thousands of products, they spend less on other things—whether a meal out, getting their teeth cleaned, or buying something at the mall. This hurts those Americans whose livelihoods depend on such sales. They are victims of the trade war too, even though they are unaware that is why their hours have been cut or their wages have failed to grow.
Q: What are the alternatives to a trade war?
Lindauer: Reducing trade deficits, whether with individual countries or for the nation as a whole, should not be a target of U.S. trade policy. The U.S. has run a trade deficit continuously for over four decades, in good economic times and bad ones. The trade deficit simply is not the terrible outcome the president suggests.
Still, we must remember that many U.S. workers are not doing well. But it is not just trade or even primarily trade that has left people behind. We need an increase in labor productivity, requiring improved education for all Americans, better job training, and more support for research and development. We need better safety nets for those who lose a job to trade or automation, or because we now buy more online and less from local retailers.
Trade with other nations did not cause most of the problems facing America’s working class, and tariffs and a trade war won’t solve them. International trade is not one of the major challenges facing our nation, but the rise of an ill-informed economic nationalism might become one.
Photo: A loaded China Shipping cargo ship at the Port of Oakland, the fourth busiest container port in the United States.