President Donald Trump believes globalisation has not helped blue collar American workers
For more than 70 years, the United States has supported multilateral trade liberalisation, complemented by free trade initiatives at the regional and bilateral levels. But President Donald Trump has thrown traditional US trade policy into a state of turbulence.
During his election campaign he threatened to pull the country out of the World Trade Organization (WTO); in office he has taken steps to withdraw the US from the Trans-Pacific Partnership trade agreement and warned that the North American Free Trade Agreement (NAFTA) will be renegotiated in line with US requirements or be similarly subject to withdrawal.
The new trade policy does not necessarily preclude further trade liberalisation, however. For example, new bilateral trade accords could be agreed and WTO agreements might be advanced in areas such as intellectual-property rights. President Trump has supported the idea of a US bilateral accord with the UK, for instance, and has spoken of the need to improve protection of US trade secrets, an area where progress might be had via the WTO.
Mr Trump’s motivation for trade policy reform is anchored in the perceived negative impacts of globalisation for the US economy and its workers. He thinks trade arrangements are often unfair or outdated, and are abused by some countries. Existing trade agreements are regarded as failing to deliver appropriate economic opportunity for America.
His supporters point to allegedly unfair competition from China; US manufacturers outsourcing production (especially to Mexico); the persistent US trade deficit; countries that tax imports while exempting exporters; and currency manipulation.
US manufacturing output is reaching new highs and remains robust
In particular, some blame the loss of jobs in US manufacturing on the NAFTA agreement with Canada and Mexico, the US-Korea Free Trade Agreement, and China’s accession to the WTO.
But while the US had not had a current-account balance-of-payments surplus since 1991, many economists say this imbalance is driven by macro-economic factors, including the low US savings rate, rather than trade. It is thus not readily addressed by protectionist measures.
US household consumption is above par for a high-income country but its investment remains about average, requiring strong inflows of capital from abroad. And while export growth has been strong, imports have grown even faster.
US manufacturing output is nevertheless reaching new highs and remains robust, while US manufacturing employment is weak, down 29 per cent in 20 years. But this largely reflects improved productivity and technological change – not competition from imports. Import competition accounts for a quarter or less of the job losses.
Indeed, while Germany runs a substantial current-account surplus, its manufacturing employment has declined as a share of its economy too. And despite the US current-account deficit shrinking between 2006 and 2009, manufacturing employment continued falling.
While US manufacturing output has risen to new highs, services have done even better as the economy’s composition shifts from one sector to the other. Thus, a process of structural adjustment has been underway.
The US is not alone in seeking protectionist measures, though. Since the great recession, G20 countries have implemented 14 to 21 new measures a month, taking the total to 5,436 by January 2017 and affecting perhaps more than 5 per cent of global trade.
These measures already raise the costs, sometimes impeding trade entirely for certain products along specific corridors. Yet tougher US measures could provoke further protectionist actions in retaliation, weighing even more heavily on economic growth.
Protectionism is not the answer to the stress in the US labour market. Rather, policies to address distributional challenges and support adjustment are needed – for example, infrastructure investment, effective education and training, and an appropriate social safety net.
This research was first published on 20 January 2017.