Trump has failed on trade (that’s good), but the economic damage is already done
Joseph E. Stiglitz – December 15, 2017
Quartz
It’s been almost a year since Trump has taken office. At the center of his campaign was protectionism and rewriting the international rules. Nafta was described as the worst deal ever. But so were other trade agreements. Americans can give a sigh of relief that he has failed; his rhetoric proved—so far—largely empty. But he has already done enormous damage to the rules based system, and he is well on the way to creating an even larger trade deficit. The threat to our system remains, and it is important to understand why so far he’s been so ineffective, how much damage he could do and what we might do to contain the damage.
Trump exploited understandable grievances among a large swath of American society, whose standard of living has stagnated for almost half a century. Defenders of globalization say that Trump has unfairly blamed globalization, when the real culprit is technology. Of course, Trump like so many demagogues prefers to blame others.
Though even without globalization, technological advances would have meant workers without a college education would be hard pressed, the reality is that globalization has played a central role: even without changes in technology, especially unskilled workers would have seen wages depressed. Globalization was oversold: the increase in output was less than hoped, and there were costs—especially the lowering of wages as the bargaining power of workers weakened.
It’s been almost a year since Trump has taken office. At the center of his campaign was protectionism and rewriting the international rules. Nafta was described as the worst deal ever. But so were other trade agreements. Americans can give a sigh of relief that he has failed; his rhetoric proved—so far—largely empty. But he has already done enormous damage to the rules based system, and he is well on the way to creating an even larger trade deficit. The threat to our system remains, and it is important to understand why so far he’s been so ineffective, how much damage he could do and what we might do to contain the damage.
Trump exploited understandable grievances among a large swath of American society, whose standard of living has stagnated for almost half a century. Defenders of globalization say that Trump has unfairly blamed globalization, when the real culprit is technology. Of course, Trump like so many demagogues prefers to blame others.
Though even without globalization, technological advances would have meant workers without a college education would be hard pressed, the reality is that globalization has played a central role: even without changes in technology, especially unskilled workers would have seen wages depressed. Globalization was oversold: the increase in output was less than hoped, and there were costs—especially the lowering of wages as the bargaining power of workers weakened.
One of the reasons that Trump has failed to consummate a new Nafta agreement is that he doesn’t grasp the extent to which the US has benefited from Nafta. He talks about the losers, but not the winners. Leaving Nafta would create a new set of losers—those whose livelihoods depend on trade with Mexico; but is unlikely to create a new set of winners—the jobs that are gone are not likely to come back. Indeed, without access to inexpensive auto parts from Mexico, our auto industry becomes less competitive, and jobs may actually be lost.
But another reason is that what he wants is just inconsonant with what a trade agreement is about: for instance, he wants agreements to come up for renewal every five years. But cross border investments won’t occur with a five year horizon. He somehow he wants the trade agreement to ensure that there be no bilateral trade deficits, but no one has explained how that could be achieved within any semblance of a free trade framework. And besides, as every economist repeats, bilateral trade balance makes no more sense than primitive barter.
The Mexican peso serves a good barometer of market expectations of whether the US will walk away from Nafta: it has improved significantly since Trump took office, though declined somewhat in the last few months. America would be shooting itself in the foot if it walked away from Nafta, and the American business community has made that clear. But Trump and Republican politics are not totally predictable: who would have thought that in an era with ever growing inequality Congress would pass the most regressive tax bill ever? If the US left Nafta, tariffs would shift to WTO levels, entailing truly small changes, which would be more than offset by exchange rate adjustments. And the changes would be adverse to the US, especially for agricultural exports. Of course, the US could walk away from the WTO, but that would require an act of Congress. Could Republicans who have so long sought trade agreements do a 180 degree about-face? Unlikely, but in this new world, we’ve learned anything is possible. But the rules based international system will survive, with or without the US. The US would be the loser if it withdrew, both economically and in terms of influence. There are others—including China—more than willing to step into our place.
Nonetheless, Trump has already done enormous damage with the hand grenade that he has thrown into the international economic system. For three quarters of a century, the US led the way in creating an international economic system in which borders were becoming increasingly unimportant. Now, Trump has reminded everyone that borders do matter. The world won’t be the same: the efficient supply chains that were created ignoring borders will have to be reconstructed for this new world.
Congress and the active engagement of the business community and civil society will be required if Trump’s damage is to be contained. The response to Trump’s proposal for repealing Obamacare showed that a concerted response can put a stop to some of his most malicious actions. The stakes are large—not just now, but for the long run.