Defense In Depth
Why U.S. Security Depends on Alliances—Now More Than Ever
As 2018 wears on, talk of a trade war has refused to fade. China and the United States are planning to slap tariffs on tens of billions of dollars of their bilateral trade. Both have placed new limits on foreign direct investment from the other, with murmurings of broader controls in the offing. U.S. tariffs on aluminum and steel from much of the world remain firmly in place. And the United States continues to haggle with Canada and Mexico over renegotiating the North American Free Trade Agreement, even as U.S. President Donald Trump periodically threatens to withdraw from the accord altogether.
Some analysts argue that this is all so much sound and fury, signifying nothing. The possibility of a U.S.-Chinese trade war will almost certainly fade away, they maintain, and when it does, the world economy will continue on as if nothing had happened.
That optimism misses the very real costs of current U.S. policy. Even if the United States avoids a full-blown trade war, the country is already incurring economic damage by raising uncertainty about future economic policy and eroding its authority in international policy making.
There is substantial academic research demonstrating that companies respond to greater policy uncertainty by hiring fewer workers and cutting investments in physical capital and research. The economic intuition is simple: investments are inherently risky things. Greater uncertainty makes them even more so, by raising the odds that something goes badly wrong in the wider economy and prevents the company from realizing the hoped-for returns. Uncertainty today reduces growth tomorrow, even if disaster is averted.
Since Trump was elected president, many measures of policy uncertainty have jumped. Take the widely used monthly U.S. Policy Uncertainty Index created by the economists Scott Baker, Nicholas Bloom, and Steven Davis, which tracks discussions of policy uncertainty in major U.S. newspapers. From 1985 (when the index began) through October 2016, the index averaged a value of about 109. Since Trump’s election, it has averaged 149, a rise of 37 percent.
Major multinational companies have had the worst of it. Think of the many multinationals—Amazon, Boeing, United Technologies—that Trump has attacked on Twitter. The attacks matter because these global companies and others like them account for outsized shares of U.S. capital investment, R & D, trade, and high-skilled immigration. In 2015 (the last year for which data is available), the U.S. parents of U.S. multinational companies spent $700.5 billion on new capital investment, 43 percent of all private-sector non-residential investment in the United States. They exported $794 billion worth of goods, 53 percent of all U.S. goods exports. And they spent $284 billion on research and development, a remarkable 79 percent of total U.S. private-sector R & D.
That translates directly into good jobs. In 2015, U.S. multinationals employed 28.3 million Americans (making up 23 percent of all private-sector jobs). Those employees earned an average wage of $77,656—about a third above the average for all other private-sector U.S. jobs. These firms also support millions of American jobs in their suppliers. Contrary to the conventional wisdom that most U.S. companies buy parts and raw materials from abroad, these firms bought fully 90 percent of all their intermediate inputs—some $8.7 trillion worth of goods—from other U.S. companies. Clouding the ability of U.S. multinationals to assess the future will dull their ability to create productive, high-paying jobs in the United States.
RESPECT IS EARNED, NOT GIVEN
Threatening to start trade wars imposes an even broader cost on the United States in the form of lost authority abroad. Trade and investment agreements typically take years to negotiate, in no small part because it takes time for leaders and delegates to build the trust necessary to make them work. A United States that sows confusion and fear about its trade and investment policy is a United States that all countries will find less reliable in global economic partnerships. That will hurt Washington’s ability to influence the terms of new deals in its favor and cut Americans off from the growth that those agreements bring.
Consider the Trans-Pacific Partnership. In January 2017, in one of his first actions as president, Trump formally withdrew the United States from the pact, undercutting years of U.S. efforts to craft it. Undaunted, the other 11 countries involved marched ahead and, earlier this year, signed a finalized agreement with an eye to speedy implementation. Then, this April, Trump announced that the United States might, under certain conditions, seek to rejoin it after all. The statement was met with a mixture of confusion and skepticism in foreign capitals. They were right to be wary. Just five days later, Trump doubled back on himself yet again. “While Japan and South Korea would like us to go back into TPP, I don’t like the deal for the United States,” he wrote on Twitter.
Other countries are responding to the United States’ withdrawal from international negotiations by proceeding apace on their own.
Beyond the TPP, countries around the world are responding to the United States’ withdrawal from international negotiations by proceeding apace on their own. This March, over 40 African countries signed an agreement to create the African Continental Free Trade Area, with commitments to eliminate tariffs on 90 percent of goods and to curtail many non-tariff barriers. Granted, the accord was not perfect; for example, Nigeria—the continent’s largest economy and most populous nation—did not sign it. Yet imagine the economic, political, and symbolic benefits that the United States would garner if it volunteered to join and help implement the CFTA. Once, African leaders might have welcomed such an overture. Today, it seems unlikely that they would even take it seriously.
AMERICA THE UNPRODUCTIVE
All this damage comes at a bad time. U.S. productivity growth is already worrisomely slow. According to the Bureau of Labor Statistics, from 2011 through 2017, annual growth in labor productivity in the U.S. business sector (a measure that excludes agriculture) averaged only 0.67 percent. That marks the worst extended stretch of productivity growth since records began in 1947.
Poor productivity growth has translated into poor income growth. In 2016, U.S. real median household income was $59,039. That was only $374 higher (again, in real terms) than it was in 1999—and only in 2016 was that previous high-water mark surpassed. That translates into an average annual increase in U.S. median household income over the past generation of just $22—less than 0.04 percent. Look at individual workers, rather than at households, and the picture is even bleaker. In 2016, the average American man working full time earned $51,640—4.4 percent less than the peak male full-time earnings reached all the way back in 1973.
Slow or stagnant income growth for most workers is even more worrying as it comes even as the United States has basically returned to full employment. To fix things, the United States desperately needs to boost productivity. Threatening trade wars will accomplish exactly the opposite—whether or not fighting actually breaks out.