John Edward teaches economics at Bentley and UMass Lowell. This is the fourth in a series of columns he has written on economic issues related to the upcoming presidential election. The first column, “The 100 Percent,” appeared on May 16, 2016; the second, “Voodoo Two,” on May 23, 2016; the third. “Paying for the Wall” on June 22, 2016.
Presumptive Republican presidential nominee Donald Trump long ago violated Ronald Reagan’s 11th commandment — “Thou shalt not speak ill of any Republican.” If elected, Trump appears ready to violate one of Adam Smith’s commandments – thou shalt not start a trade war.
Allow me to speak ill of Trump’s trade policies.
Actually, Trump raises valid concerns regarding United States trade policy. Trump and presumptive Democratic presidential nominee Hillary Clinton agree on some trade issues. For example, both oppose President Obama’s Trans-Pacific Partnership (TPP).
Critics fault Clinton on the TPP. She was for it when the Obama administration was negotiating the agreement. She was perceived to be cautious in coming out against it.
The TPP has good and bad points. Trade is a complicated issue. If caution means carefully weighing the positives and negatives, as they evolve, then cautious is good.
As observed by The Huffington Post: “Clinton’s opposition to the TPP is not a flip-flop but a perfectly reasonable stance… Clinton’s positions on trade… show a commendable willingness to scrutinize the specifics.”
Trump is not cautious. Trump is not careful. Trump does not scrutinize the specifics.
Moreover, some of Trump’s claims are just wrong. Some of his concerns are not valid.
Most critically, some of Trump’s trade policies would be damaging to the economy.
Trump is proposing a 45 percent tariff on imports from China. That is to say, a 45 percent sales tax. His proposed tariff on imports from Mexico is “only” 35 percent.
Many consumer products would become much more expensive. Trump can afford it. Many of the people shopping at Wal-Mart cannot.
It would be reasonable to expect China and Mexico to retaliate. A trade war would be bad for the economies of China, Mexico, and the United States.
The most likely result, according to Moody’s Analytics: the U.S. goes into a recession. By 2019, 7 million jobs are lost. Unemployment goes up to 9.5 percent. Gross Domestic Product is 4.6 percent lower.
Trump rails about our trade deficit with China. We do import a lot more goods from China than we export to them. Two responses: first – duh; second – it does not matter.
Of course we buy more from China than they buy from us. It is not because of currency manipulation (discussed next). It is not because of subsidies. It is because we have a lot more money to spend. It is because they make stuff a lot cheaper than we do.
A trade deficit with one country is not important. Much like having a trade deficit with your supermarket does not matter. What matters is that total income balances total spending. The critical question posed by the Foundation for Economic Education: “Donald Has a Trade Deficit with His Grocery Store – Should He Boycott It?”
We have merchandise trade deficits with most countries. However, they are offset by a huge surplus in our capital account. The capital account tracks investment flows. People from all over the world are investing in our stocks, bonds, and Treasury securities. That includes people from China and Mexico.
The Chinese alone own 1.2 trillion dollars in U.S. Treasury securities. That is more than twice the size of the trade deficit that Trump is so worried about.
He should be worried about what would happen if China stopped buying these securities. That is to say, stopped lending our government money. That is what they may likely do if Trump starts a trade war. That is what a lot of countries will do if they lose faith in our economy because of Trump’s policies. Interest rates could soar.
Trump claims China is devaluing its currency by 15 to 40 percent. Trump cited China’s supposed manipulation as a reason to oppose the TPP. It fell to Rand Paul to inform Trump that China is not part of the TPP trade deal.
Here is the headline from the response in The Wall Street Journal: “Myth of China’s Currency Manipulation.” Forbes said: “Sorry, Trump, but Chinese currency is actually way overvalued.”
Contrary to Trump’s rants, the Chinese Yuan gained in value against the U. S. Dollar between 2004 and 2014. That is what Trump says he wants, yet the trade deficit continued to grow.
Trump squawks about the Chinese government subsidizing their export industries. Better he focus his sights, and vitriol, at home. The U.S. government hands out over $100 billion a year in subsidies to corporations via tax exemptions. The largest subsidy is for multinational corporations deferring taxes on foreign profits.
Candidate Trump has raised valid concerns regarding trade policy. Among those are protecting intellectual property, worker rights, and pollution. It was issues like these, which caused candidate Clinton, after careful consideration, to oppose the TPP.
Trump’s trade policies are a reminder of the Smoot-Hawley Tariff Act (1930). Former Fed Chair Ben Bernanke, a scholar of the Great Depression, said, “Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression.” According to Politico, “Some historians have concluded that the tariff, by straining the world economic climate, deepened the Great Depression and fed political extremism, enabling such leaders as Germany’s Adolf Hitler to come to power.”
We need to consider trade issues in a cautious and considerate fashion. We need to base trade policies on reality.
The reality is that trade wars are bad public policy. A recent The Boston Globe op-ed by Simon Johnson, former chief economist at the International Monetary Fund, and now a professor at MIT, was titled: “Trump’s tariff proposal would gut US export jobs.” He cited Department of Commerce estimates that a million people in the U.S. have jobs producing products for export to China.
If Trump wins the presidential race, the next race may be which of his policies will cause a recession first. It could be tax policy, it could be budget policy, immigration policy, or his trade policies.
On the other hand, it could be his health care policies. Next up: how Trump wants to make America sick again.
An informed voter is our best citizen.