The manufacturing export-led growth model, arguing that the best way to grow and develop was to adopt policies promoting exports, especially in manufacturing, has had a good run—bringing enormous benefits to large numbers of those in the developing world that adopted it. That model was the basis of the success of the East Asian countries, whose growth was so rapid that it was widely described as a “miracle.”8 But with the shrinking of global manufacturing jobs, the export-led model may be reaching the end of its usefulness, and developing countries (such as those in Africa) that had not taken advantage of it earlier will, in part, have to look elsewhere for growth strategies.
There is no way to go back to these earlier eras, just as there is no way of putting the genie of technological advancements back in the bottle; and it’s not clear we would want to, to give up our iPhones, computers, or inexpensive clothing. True, had we managed globalization better, had we done a better job of equitably sharing the fruits of globalization, we would be in a different place than we are today. We probably wouldn’t be talking about the New Protectionism. But history moves on, and each generation’s task is to play with the hand they’ve been dealt.
Even if some manufacturing production were to come back (as well it may), I noted in chapter 1 that that production will likely entail robots and other automated equipment, requiring different skill sets than those of the many workers who lost their jobs one or two decades ago. The returning firms may well return to different locations as well. The textile industry which decades ago moved from New England to the U.S. South, where labor was cheap, has been moving on from there to elsewhere—to China, for instance. As China’s wages have risen, the industry has moved again to other countries where labor is still cheaper—Bangladesh, Sri Lanka, Vietnam, and elsewhere. But with unskilled labor of diminishing importance, wages of unskilled labor will become less of a focus. The quality of schools and the environment becomes paramount—areas in which the United States does not at present excel.9
America has become a widely diversified economy: manufacturing constitutes only 8 percent of employment, services some 80 percent.10 All the rhetoric about manufacturing seems to have forgotten this. There are more people now employed by sports teams and clubs than in mining. The United States derives significant amounts of foreign revenues from service sectors like tourism, telecommunications, financial services, and education and health. The fixation on manufacturing and coal mining reflects a country with a mind-set stuck in a world gone by. By one estimate, the U.S. solar industry already supports about twice as many jobs as the coal industry.11
To see the absurdity of the obsession with manufacturing, reflect back on what a conversation about the challenges facing the U.S. economy might have been like a century ago. Those with their heads looking back would be worrying about the decline in agricultural employment. It used to be that 70 percent of the labor force was engaged in farming or providing services to farmers. An economy without farming playing a dominant role was unimaginable. But the decline in farm employment was good news: increased productivity meant that fewer workers were needed to produce the food we needed to survive. The advanced countries managed the consequences: new jobs were created in manufacturing. Now, there is a parallel process under way: the transition from manufacturing to the service sector. The government should be facilitating that transition, for instance with job retraining, not trying to engineer a fruitless return to the past.12
Global Power Has Become Dispersed
Trump and his supporters look back toward the past in another way: to the years after World War II when the United States was the only superpower. The bloody conflagration had destroyed Europe and left the United States in a position so dominant that it could effectively write, by itself, the international rules of the game. In the decades following the war, the United States could, with its European allies, still do so—in ways that enabled them to exploit the developing countries, which had so recently been their colonial subjects. Indeed, for some European countries, it proved an even better deal than colonialism: they got much of the economic returns without a pretense of assuming the burdens of imperial responsibility.
While the period after World War II was unusual, the last two hundred years have been a historical anomaly. Since the eighteenth century, an enormous disparity opened up between incomes per capita in China and India, on the one hand, and Europe and North America on the other. In 1820, China and India had between them some 45 percent of global GDP. Because of colonialism, unfair trade agreements, and a host of other factors, that share declined to under 10 percent. It was at this moment of weakness that the West began writing the rules of the game, regulating the rules-based international order. Not surprisingly, the rules were typically written from their perspective, to advance their interests.13 With the rise of the emerging markets and the end of colonialism, however, that historical anomaly is now rapidly being corrected: China is currently the largest economy in the world, not only in purchasing power parity (the standard that economists use in comparing costs of living across countries, taking account of the different prices of goods in different countries), but also in goods traded14 and gross savings—in the latter, by more than 50 percent.15 One cannot now return to a world in which the rules of globalization are set by a few countries—or one country—for their own benefit, and especially for their corporations. We live in a multipolar world.
Those looking back at how the global economy has changed over the past third of a century too often take for granted that it was “right” then, and somehow, since then, things have gotten “unbalanced.” The global economy has, in fact, been “unbalanced” for two hundred years: those in Asia and Africa have suffered through two centuries of colonialism, neocolonialism, and then economic colonialism.
At the end of the colonial period, western powers discovered that they could get many of the economic advantages of colonialism by keeping the developing countries under their thumb through debt. The ex-colonies then suffered from the Washington Consensus, the set of policies based on Western interests and free-market ideology that served corporate interests so well.16 The West could continue to take resources out of Africa, and impose a set of policies that led to its deindustrialization.17 Their indebtedness—and threats about what might happen if they defaulted—enabled the West to impose these onerous conditions on developing countries.
But there were a set of countries that took a different course—that didn’t succumb to the dictates of the Washington Consensus or the neocolonial models.18 The countries in East Asia took advantage of a particular moment in history, a particular opening. Firms from America and Europe had made a discovery: workers in these countries were even more disciplined (and lower-paid relative to their productivity) than Western workers. Even if they were not as fully efficient, the wage difference more than made up for the discrepancy. East Asia became the factory to the world. And that, simply put, implied a declining role for the Western workers. The East Asian export-led growth model brought increasing standards of living to hundreds of millions of people, many of whom previously seemed to be condemned to a life of poverty.19
And then other countries, in different ways, followed that model—including India, and now, even Ethiopia (see the discussion in the afterword). All of these developing countries also benefited from globalization—it sparked their growth. They didn’t benefit as much from globalization as they might have had the rules not been set by corporate and financial interests in the advanced countries—but they benefited nonetheless.
There were many unintended results of this globalization designed by the United States and other advanced countries. No one had intended that some 800 million would move out of poverty in China. Nor did the Western powers intend that their share of global GDP would shrink as it has—that the United States would no longer be the largest economy (in terms of purchasing power parity), the largest trading economy, the largest saver, or the largest investor.
Especially after the crisis
of 2008, the global balance of geopolitical and geoeconomic power changed. The United States was still powerful. But it couldn’t, on its own, set the rules of the game. Trump may have a nostalgia for that world, but it won’t be coming back.20
HOW TRUMPIAN POLICIES WILL HURT THOSE WHO ARE NOW STRUGGLING
GAID, and what has happened since its publication, has made it abundantly clear that the benefits of globalization were far from what they were touted to be. But that doesn’t mean Trump’s answer, a wholesale pulling back—a New Protectionism, a rapid deglobalization—will actually improve the plight of those that he pretends to speak for. Quite the contrary. There are several reasons for this.
History Matters
First, history matters. We described earlier how, in the process of globalization, unemployment often increased as job destruction outpaced job creation. This is actually the story not just for globalization, but for the adjustment of the economy to any major change. And deglobalization—protectionism—is such a change. Just as in the process of globalization itself, so too for deglobalization: job destruction (in sectors losing their competitive advantage) often occurs faster than job creation in the benefiting sectors. Global supply chains have been created, with each country in the supply chain making its contribution at the point where it has the greatest comparative advantage, thereby driving down the overall cost of production—and “uncreating” them cannot be done overnight, and doing so will entail great costs.
Consider America’s auto industry. Today, it depends heavily on imported auto parts, from Mexico and elsewhere. If those parts were produced in the United States, the price of American cars would have to increase. But that would make America’s cars less competitive. The United States could, of course, respond by increasing tariffs against Japanese and German cars. But that would open up new fronts in a global trade war—more fronts than even General Trump might think he could simultaneously command. And the higher tariffs won’t help GM sell more American cars abroad. High tariffs just feed into a less competitive American car industry.
The Trade Deficit Is Determined by Macroeconomics—and Trump Will Worsen the Trade Deficit
Most important, as we explained in chapter 1, the trade deficit—what Trump is really complaining about—is not driven by trade policy, but by macroeconomics. This is something we teach in our introductory economics courses, but it is something that he seemingly has not grasped.21 The trade deficit is equal to the difference between domestic (national) savings and domestic investment.
Assume Trump succeeded in imposing his protectionist agenda. What then? The answer is simple: because it would likely have little effect on either national savings or investment, the trade deficit wouldn’t change, and the dollar would adjust to make sure that that is the case.22 If the United States can’t import as much from China and Mexico, we will import more from some other country. A stronger dollar will make these countries more “competitive.” It is not that they are manipulating their exchange rate. It is that Trump is monkeying around with U.S. trade policy in ways that have these unintended consequences.
But matters are worse. Because Trump has called for a tax cut for the rich and increased infrastructure investment, the trade deficit will actually increase. As this book goes to press, it is not clear how much of what he had originally promised in his campaign will be actually enacted. Even if he got only a fraction of this agenda through Congress, it would still increase the national fiscal deficit—that is, government savings would become even more negative, and so national savings (the sum of government, household, and firm savings) would go down. With national savings down and domestic investment up, our trade deficit would increase—again, brought about through an increase in the value of the dollar.
Trump has finally grasped the role of the dollar in the trade deficit and has responded (like many a politician before him) by thinking that he can talk the dollar down. (Others, believing in a strong dollar, have believed that they can talk the dollar up. Both are equally foolish.) Sometimes, a secretary of treasury, or even a president, can do this—rarely for more than a few days and normally not for more than a few minutes.
Standards of Living Will Go Down
While the overall trade deficit won’t change for all of Trump’s protectionism, Americans’ standard of living will go down because of the distortions in trade. The United States won’t be buying its imports from countries where it costs the least to produce, but from the low-cost countries toward which, for some reason, Trump has not (yet) expressed an animus. In the end, higher costs of cars means a lower standard of living for Americans. And this is true for the thousands of other items that the United States buys from Mexico, China, Japan, Germany, or anywhere else. Indeed, middle- and lower-income Americans—who spend such a large fraction of their incomes on imported goods, bought at Walmart and Target, not at Gucci and Bloomingdale’s—would suffer the most from Trump’s protectionism focused on China and Mexico.23
Protectionism will drive up prices; the increased inflation may induce the Fed to increase interest rates, which will have two further effects: it will slow down the economy and it will strengthen the dollar further.
ON THE ROAD TO A TRADE WAR?
Trump—if he gets his way—seems determined to start a trade war, unless he can be headed off. The world faced such a trade war once before, in the aftermath of the United States’ passing of the Smoot-Hawley Tariff Act in 1930. Much of the effort in creating a global rules-based system for trade after World War II was to avoid another such trade war, which is widely credited with having contributed to the Great Depression. These efforts have paid off: there have been skirmishes, but not outright war.24 Trump, who seems to love confrontation, may push the world to the brink.25 In fact, his bark may be worse than his bite, especially since the Republican Congress is unlikely to give him the powers he would need for full-scale combat. The Republicans have been pushing trade liberalization for decades—it has been the Democrats that have been skeptical. It would be the height of hypocrisy—not unheard of in the realm of politics—for them now to turn to a full-scale endorsement of protectionism. Everybody would be the loser from such a war—including America itself, as I shall shortly explain.
Checks and Balances: Limitations in the Powers of the President
There is considerable debate about what exactly the president could do on his own. To see what he can do, one has to understand the nature of the obligations of the United States under the trade agreements it has signed.
The WTO
The most important trade agreement is the United States’ membership in the World Trade Organization (WTO). Under the WTO, a country binds itself in a variety of ways, for instance, that its tariffs will not exceed certain levels (the bound levels) and it will not discriminate against any country (called the most favored nation principle, MFN). It also agrees to the WTO adjudication of disputes. When a country engages in a practice in violation of its obligations under WTO, the injured country can sue before the WTO, and if it wins, it can impose retaliatory tariffs or other trade sanctions. These can be finely targeted—where they hurt the most economically and politically. Countries have learned how to do this well.
The president cannot on his own withdraw from the WTO. He must get majority support from both houses of Congress—which is unlikely.
NAFTA
NAFTA, which allows free trade between the United States, Canada, and Mexico, is the trade agreement that Trump has vilified the most, even though in signing it, Mexico made far larger concessions than the United States. Because no one really contemplated the idea of a breakup, the negotiators left more ambiguity than perhaps they should have on the procedures of a breakup. But the critical point, according to some trade economists, is that what is called the implementing legislation—the legislation, for instance, that specified the zero tariff levels for Mexican and Canadian goods—remains on the U.S. books until it is repealed. Thus, without both houses of Congress repealing that legislation,
the zero tariff levels remain—whether NAFTA exists or not.
Even if the United States left NAFTA, and even if Congress repealed the implementing legislation, Mexico would be confronted with the “WTO tariffs,” which, under the most favored nation provision, would on average be at most just a few percent.
Thus, for Trump to impose 20 percent tariffs against Mexico, he would have to get a majority in both houses of Congress to vote to leave NAFTA and rescind the implementing legislation, and then get them to vote to leave the WTO—or at least impose these tariffs in violation of WTO obligations, knowing full well the serious consequences. Almost surely, Trump was either delusional or uninformed when he made the threats against Mexico.
In a Trade War, Everyone Loses
It appears that some in the Trump administration—and perhaps some in Congress—would like to start a trade war. Nationalists think that wars provide an opportunity for demonstrating their patriotism and the superiority of their country. The pro-war camp looks at our “assets” and that of our opponent, and confidently predicts victory. Every war has begun thus. In the case of trade, they look at China’s large exports to the United States—were these cut off, China’s economy (in this calculation) would sink. They are more dependent on exports to the United States than the United States is on exports to China, so they reason. But in practice, matters are more complex. China has been moving from export-led and -dependent growth to domestically driven growth. A trade war with the United States would simply hasten the pace of change. The U.S. economy is only about 24 percent of global output:26 China could sell much of what it doesn’t sell in America to other countries. That might drive down prices in those markets—hurting U.S. exports there and encouraging those countries to try to export more to the United States. Further, China is sitting on a war chest, some $3 trillion of reserves.27 China has much more control over its vast economy—making it easier for it to adjust to the change. And China is holding as hostage vast amounts of investment by U.S. firms inside China. Not surprisingly, China has exuded confidence: it believes it would win any trade war, and it has warned the United States of that.
Globalization and Its Discontents Revisited Page 12