Trump and (I’m Sorry) Sanders Lack Trade Policy Bona Fides

One of Donald Trump’s YUGE selling points to his under educated supporters on the campaign trail has been the supposed damage China and Mexico are doing to our manufacturing jobs. NAFTA, he proclaims, is the problem and he will impose YUUUUGE tariffs on them so that manufacturing will be more economical if done here in the States. His naïve implication is, like so many others, not grounded in governmental economic theory because he has no governmental economic knowledge. In fact, given his long record of business failures, I don’t know how he maintains the illusion that he knows anything about business economics either.cartoon-nafta1

But I’ll focus on just why his tariff policy will not only have a negative effect on trade, but a disastrous effect on what’s left of the middle class and the poor or fixed income Americans on pensions or Social  Security. Getting tough with our trading partners – Trump’s ignorant suggestion that by taxing their exports as they cross America’s borders – it will bring jobs and prosperity to the United States. It’s just nonsense.

An economic model of Trump’s proposals, prepared by Moody’s Analytics suggests Trump is half-right about his plans. They would, in fact, sock it to China and Mexico; both would fall into recession, according to their model, but if Trump did so, it would naturally set off a trade war and those countries would have to retaliate with tariffs of their own. The U.S. is in no shape to wage a trade war.

So, unfortunately, the United States would fall into another Great Recession as well with the resulting:

  1. Up to 4 million American workers would lose their jobs.
  2. Another 3 million jobs would not be created that otherwise would have been, had the country not fallen into a trade-induced downturn.

chart1a

Yes sir, that’s a TREMENDOUS idea. It’ll be great, GREAT!! Everybody will have a job and love Donald Trump!! Wrong!

To be fair, the job losses would be halved if China and Mexico chose not to retaliate to the tariffs of 45 percent and 35 percent, respectively. In which case U.S. growth would flatline, but at least the country would not fall into recession, but that’s a helluva gamble.

The amount of predicted economic damage surprised even Mark Zandi, chief economist for Moody’s Analytics, who prepared the model. He said it is exacerbated by the precarious — and historically comparable to pre-Great Depression levels of global lack of demand for goods, services, raw materials, etc. – not to mention the overall weakness of the U.S. and global economies right now: Under the Moody’s model, the Federal Reserve has little power to slow the recession, because interest rates remain near zero. Congress refuses to enact any stimulus measures, such as spending increases or tax cuts that might increase the federal budget deficit further, a supply-side, GOP blind-spot. However, stimulus-generated growth always follows governmental stimulus thereby reducing the deficit, not increasing it.

The model specifically shows a downward spiral of reduced economic activity and therefore, jobs. Prices will rise on imported goods from China and Mexico, which has the effect of reducing spending power for American consumers. If China and Mexico retaliate, U.S. exports fall, forcing layoffs at American companies that sell to those foreign customers. The resulting growth slowdowns spread to other U.S. trading partners, particularly in Europe, and cause stock markets to plunge. In the short term growth slows even more. Without significant stimulation, the long term growth outlook is worse.

From there, the model predicts that the U.S. economy is in recession within a year.

“It is a pretty ugly scenario,” Zandi said, “one that I think any rational person would want to avoid.”

There are, of course, critics of this model. The most common critique is of the model’s assumption that the tariffs would lead to little return to the United States of the roughly 1 million factory jobs that economists say have been lost to China over the past decade and a half. But that assumption rests on companies being uncertain about how long the tariffs might remain in place, which would likely make manufacturers reluctant to invest in an American alternative to Chinese manufacturing for years, not months. In addition, facilities that may have been closed when some of these “dirty-steel” type jobs are quickly becoming obsolete with robotics taking the palace of more costly and inefficient labor. If investments were to be made, it more than likely wouldn’t bring those exact same jobs back.

Of course, as I’ve said before, this is just an example of how the U.S. economy rarely stabilizes because of changes made with each passing election cycle rather than allowing economic cycles to run their normal course.

The Moody’s model appears to be one of the first attempts that I’ve seen to forecast the potential effects of levying a 45 percent tariff on Chinese imports and a 35 percent tariff on Mexican imports, as Trump has suggested.

The Wall Street Journal’s Bob Davis published an analysis from Peter Petri, a Brandeis University economist and trade expert, which forecasts the tariffs’ effects on trade flows between the United States and China/Mexico, but he did not model the broader economic effects of those tariffs. Petri’s estimates of trade-flow effects are roughly similar to Zandi’s, though some of their assumptions appear to differ slightly.

The Moody’s analysis projects the U.S. economy would be 4.6 percent smaller by the end of 2019 if America levies tariffs on China and Mexico and those countries respond, compared to where it would be with no tariffs. It forecasts U.S. employment would be 7 million jobs lower than it would have been, and that the unemployment rate would hit 9.5 percent in the middle of 2019. The federal budget deficit would grow to be 60 percent larger than it would have been.

If China and Mexico do not retaliate, the model predicts, U.S. growth would slow to near zero in 2018. The economy would end up with 3.3 million fewer jobs than it would otherwise have in a no-tariff scenario.

The Post asked trade experts from Roosevelt, which has criticized recent proposed trade deals as detrimental to American workers, and the Peterson Institute, a think tank that routinely supports proposed trade deals, to review the Moody’s analysis.

Mason, a fellow at Roosevelt who is also an assistant professor of economics at John Jay College-CUNY, expressed skepticism not only of the predicted employment and growth effects, but also at the idea that China and Mexico would retaliate, if such retaliation would only hurt their economies more.

Gary Clyde Hufbauer, a senior fellow at Peterson, said it’s difficult to predict what effects such a tariffs might bring, because the United States has not attempted to impose anything comparable in recent history. But he said he believes the Moody’s forecasts are in “the realm of plausibility. My own view is that the shock would be a tsunami in the world economy.”

Zandi said that the forecasts undercut Trump’s contention that trade is an area where some countries “win” at the expense of others. From a broad economic perspective, he said, shutting down trade is “a lose-lose” for the United States and its trading partners — and one that could have consequences in other areas of concern for Trump and his supporters: If tariffs cause Mexico to fall into recession, Zandi said, “you’ll have a lot more people knocking on the door” to immigrate to America.

The macro view of all this confirms the complexity that is involved any time politicians think they have the answers to economic questions. For instance, I share Bernie Sanders’ view that American jobs were lost to NAFTA, but only initially. As I’ve stated in previous posts from numerous non-partisan (not bi-partisan) sources, most of the jobs that went to China, Mexico, etc., were going to go away regardless because of the higher cost-of-productions inherent in manual labor being used in the United States. Robotics were coming. The job losses imminent, either by countries with cheaper labor or robotics. Provisions should have been made to re-train the American workers at risk or to provide adequate safety nets for those too old or undereducated to train, but the corporate interests should’ve borne the brunt of those costs with some government subsidization.

But the NAFTA trade policy itself was merely the convenient scapegoat, and Sanders should have done his homework. NAFTA, over both ten and twenty-year analyses, show that manufacturing jobs were not lost, they were simply shifted from one sector to another. And to now institute tariffs on those products being made more cheaply elsewhere would have either a highly inflationary effect due to the tariffs, or the jobs could shift back to the higher labor market here in the U.S. Both of which would be inflationary and would offset any gains in wage amounts.

Every trade policy has its own set of complex considerations, and the secrecy with which the Trans-Pacific Trade Policy negotiations is unsettling to say the least. But Trump’s charge and Sanders’ charge that trade policies themselves are the problem clearly lacks detailed specifics to judge what their overall impact would be, and could very well do more harm than good.

Globalization is here to stay, and more efficient ways to combat the lack of demand that has been re-distributed to corporate coffers overseas is the only viable path back to recapturing the taxes that have been avoided, not by instituting tariffs which will compound the problem through loss of jobs and increasing the lack of discretionary income. And evidence-based economic proposals should be forward-looking and performed in detail rather than talking points tied to political cycles and emotional reactionary promises.

Harvey A. Gold