The Pandemic Depression
The Global Economy Will Never Be the Same
During his presidential campaign, Donald Trump had a consistent message for American workers: You have been betrayed by elites mesmerized by globalization and multilateralism. The North American Free Trade Agreement (NAFTA), the Trans-Pacific Partnership (TPP), and the World Trade Organization (WTO) are the problems, he said, not the solutions to stagnant wages and unemployment. Trump promised to bring back jobs by adopting an “America First” economic nationalism. That fiery message helped get him elected. But now Trump faces a problem: His solutions won’t work, and his supporters will soon realize that they’ve been had.
Few would reject Trump’s goals. He wants to ensure that American firms remain competitive and that the country’s trade partners do not discriminate against U.S. producers. But no matter how fervently he and his supporters believe it, Trump’s trade policies won’t help reestablish America’s once-commanding positions in such industries as steel, textiles, coal, or automotives. For starters, protectionist moves, such as slapping a 45 percent tariff on Chinese goods or penalizing China, Japan, and Germany for supposedly manipulating their currencies, will invite countermeasures. And that certainly won’t help American exports or create jobs.
Likewise, levying a border tax on the components that American firms import from their overseas subsidiaries will increase prices for consumers, effectively imposing a tax on consumers. That will not hurt the rich, who can better absorb the added costs, but rather the working-class people whose cause Trump claims to champion.
Then there’s Trump’s far-reaching attack on multilateral trade agreements. He insists that they are stacked against American firms, favor big exporters such as China, and encourage the flight of jobs to other countries. This diagnosis lacks nuance—unsurprising from a president who once crassly likened the Trans-Pacific Partnership (TPP) to “a continuing rape of our country.” Worse, it flies in the face of the facts.
For one, the United States largely wrote the international trade laws, beginning with the General Agreement on Tariffs and Trade (GATT) and culminating in the current WTO, that Trump savages. American negotiators made sure to include many provisions, such as the right to subsidize agriculture and to protect certain manufactured goods from “dumping.” These provisions offer targeted protection to American producers. Furthermore, the United States, along with the EU, sequenced negotiations on trade liberalization to benefit economic sectors in which it has enjoyed a comparative advantage, such as high-end services and agriculture. The Doha Round of WTO negotiations has been stalled for more than a decade in part because the United States (and EU) refused to dismantle agricultural subsidies.
Thus contrary to Trump’s claim that trade agreements amount to handcuffs, the United States remains the world’s leading user of non-tariff barriers to protect domestic producers. It also spends vast sums on subsidies; the agricultural sector alone receives $20 billion. So the United States isn’t haplessly playing the global economic game by someone else’s rules.
That doesn’t mean the international trading system is perfect. Trump is certainly right that, in spite of America’s role in designing the game, U.S. firms sometimes lose matches. Not only is the country sued more than any other is under the WTO’s Dispute Settlement Understanding, but it also loses a great many cases.
But some caveats are in order. The United States gets sued a lot because it protects its interests aggressively, often using means that violate WTO rules, for instance through an aggressive application of the anti-dumping rules. It isn’t that the WTO constrains Washington. It’s that Washington has been willing to risk sanctions when shirking its commitments. And that’s because the United States itself uses the system to sue trade partners it believes are violating the agreement. Moreover, Washington doesn’t lose at a higher rate than other WTO members do; 95 percent of all complainants lose whether they are taking action against big or small countries, rich or poor. A case in point: the United States has sued China, Trump’s favorite target on the trade front, more than 20 times since 2001, and the United States won most of those cases, including disputes over Chinese steel and raw materials.
Of course, the WTO’s enforcement record is imperfect. Winning a case is different from inducing compliance. Still, the right to sue when the rules are breached pushes countries to cooperate more than one might expect. During the 22 years since its creation, the WTO has helped clarify and enforce international trade law for all the major market economies. Indeed, the Dispute Settlement Understanding is held up as an example from which other organizations can learn.
If Trump really wants to renegotiate the WTO, he might be surprised to learn about the number of countries that line up to redress their grievances against America. Just ask Southeast Asian fishers and textiles manufacturers, Indian drug and energy companies, or African raw materials exporters.
Ultimately, Trump misses the point on trade deals. They aren’t just about liberalizing the marketplace. They are also about devising rules that lend stability to what would otherwise be a chaotic, volatile global economy. Moreover, the United States has a vested interest in shaping global regulations in crucial areas such as labor rights, environmental standards, and intellectual property laws. These and other rules serve the economic interests of American firms and workers by helping ensure that countries comply with standards that make doing business easier. One common criticism of the WTO has been that in areas such as intellectual property rights, its rules favor Big Pharma in advanced industrialized countries.
In Trump’s world, abandoning or revamping multilateral trade agreements will benefit the American workers. But that’s a naïve view. The plight of the Rust Belt and other economically distressed parts of the country can’t be chalked up to unfair trade agreements or the machinations of foreign governments engaged in currency manipulation and other such shenanigans. There are larger forces at work on the home front: a zip code-shaped school system that fosters disparities in income and diminishes the prospects for social mobility; the decades-long stagnation of wages of much of the working class; widespread automation that has reduced, even eliminated, the need for human labor across significant portions of the manufacturing sector; and growing economic inequality, the magnitude of which cannot be accounted for by pointing to variation in productivity.
Making these problems part of the conversation would complicate Trump’s tidy narrative. It would put on the table a host of issues about the distribution of power and wealth in the United States and the policies that underpin those asymmetries. In short, it would mean shifting the focus from the foreign to the domestic, something many politicians are loath to do. And that includes Trump. He presents himself as the consummate outsider who will fight for the country’s workers. In fact, meaningful policy solutions to unemployment and economic inequality will require sacrifices by the economic class from which he hails and that dominates the President’s Strategic and Policy Forum. Better, then, to continue bashing other countries for supposedly killing American jobs.