Last week, there was a moment in the podcast “The Indicator” that crystallized the fundamental illogic of Trump’s trade war (I strongly recommend following this excellent podcast). The show’s hosts, Stacey Vanek Smith and Cardiff Garcia, were interviewing the owner of a Chinese factory that makes American flags. At one point, the hosts reflect on the following:
Garcia: This is incredible … he makes flags, the symbol of a country’s pride, which he sends to America, which makes the [American-made BMW] car that he drives, which was designed in Germany, not to mention that he’s also talking to us on an iPhone 7, designed in the U.S., made in China.
Vanek Smith: And he’s on his way back to a factory where he’s busily filling an order for thousands of blue and white Trump 2020 flags, supporting the campaign of a man who has been speaking out against businesses like his.
The largest BMW plant in the world, by the way, is in South Carolina, which is also home to a new Volvo plant; Volvo is a Chinese-owned company, headquartered in Sweden. Government data show that the Honda Odyssey contains 75 percent “domestic” content, with its engine, transmission and final assembly made here in the United States. The quotes around “domestic,” however, are there because the U.S. government lumps U.S. and Canadian statistics together because auto production, supply chains and even union membership are so tightly integrated between the two countries.
In other words, globalization is an omelet that cannot be unscrambled.
That doesn’t mean that it’s all sunny-side up. Many people and communities have been hurt by exposure to trade, especially American-style, unbalanced trade, with little social policy to offset the losses of those thrown into competition with workers earning much lower wages. In fact, the denial of trade-induced wage and job losses by center-left-to-right-wing politicians was something Trump skillfully tapped during the 2016 campaign, enabling him to vanquish opponents who implicitly argued that Rust Belt voters simply weren’t smart enough to realize how much “free trade” has helped them.
But the globalization omelet means that Trump’s tariffs won’t work. Why not? Because they target so many inputs into American production (“intermediate” and capital goods) and threaten, through retaliatory actions, lucrative international supply chains tapped by American exporters (follow the money soybeans). They will hurt more Americans than they will help, and, in most cases, the economics of replacing imported goods with domestic content won’t make economic sense. As Paul Krugman put it, “What’s notable about the Trump tariffs … is that they’re so self-destructive.”
It’s bad enough that team Trump doesn’t do anything to help those hurt by trade. Now, it is enacting policies that will hurt those helped by trade. They promised win-win; they’re delivering lose-lose.
Which raises the question, what would a winning trade policy look like from both perspectives: those hurt by trade and those exporters, actual and potential, who have tapped or want to tap its benefits?
Starting with exporters, large-scale tariffs are unlikely to help, for the reasons noted above: global integration and retaliation. Consider that tariffs in the Reagan years helped Harley-Davidson stave off Japanese competition at a critical time in its growth. Now, to Trump’s immense chagrin, Harley is planning to move some production overseas to avoid his tariffs’ impact on the company’s foreign sales.
Narrow tariffs, such as a duty on a particular grade of tires or chicken parts that are clearly being dumped below cost by an exporter willing to take a loss to grab market share, can be effective. But trade-war-inducing tariffs will not only do more harm than good, they will also fail to achieve Trump’s goal of reducing our trade deficit, as they tend to strengthen the dollar and reduce both imports and exports.
Two straightforward policies would help our exporters: Fight back against exchange rate manipulation and seriously beef up the Manufacturing Extension Partnership. The former levels the playing field by taking action against countries that buy dollars to make our exports expensive in their currency and their exports to us cheaper in dollars. The MEP, which Trump zeroes out in his budget, is a Commerce Department agency that can help small manufacturers get a regional foothold and even find their way into global supply chains.
To help the people and communities hurt by trade, we must invest some of the benefits of expanded trade into places where our persistent trade deficits and job outsourcing have undermined opportunities. In fact, this is entirely consistent with the rationale for expanded trade, even if it is largely forgotten by its contemporary proponents. These investments should take the form of direct job creation, significant wage subsidies, training for new jobs, infrastructure investment, and what economist Tim Bartik describes as “life-cycle skill development, including high-quality child care, high-quality preschool, K-12 education, college scholarships, and adult job training.” As he puts it: “better skills for local workers help attract and grow higher-wage jobs.”
It’s a simple recipe for a complex problem: Level the competitive playing field by targeting manipulated exchange rates, while providing direct support for people and places hurt by trade.
Clearly, Trump’s trade advisers do not listen to such reason. They will continue to pursue the elusive, nonexistent recipe for unscrambling the globalization omelet. However, once their efforts fail, and better policymakers take over, there is a way forward that is consistent with preserving and expanding the benefits of trade while truly helping those who have been hurt by it.