Why Trump needs to hit the brakes on his trade plans
Donald Trump’s protectionism is not just economically illiterate, it is dangerous
A man walks next to Chevrolet vehicles at a GM dealership in Miami, Florida: the Center for Automotive Research warns a tariff of 35 per cent could cut US car sales by 450,000 a year and cost 31,000 car industry-related jobs across the US. Photograph: Carlos Barria
Last year some two million cars were shipped to the US from Mexico. GM, the biggest US carmaker, imported 315,000 of its full-size Chevrolet Silverado and Sierra pickup trucks from there, 40 per cent of the 2016 US sales of the highly profitable models.
President Donald Trump believes that represents a colossal and unfair trade depriving American workers of jobs in manufacturing. He says he is going to get those jobs “back”. And, in promising to pull out of the free-trade Trans Pacific Partnership – pretty much dead – and recast the Nafta treaty with Canada and Mexico, he has spoken of a 20 per cent border tax on Mexican goods to “pay for the wall”.
Not surprisingly Trump’s tone was enough to see Mexico’s president rethink a scheduled meeting.
In Trumpian mercantilism – a form of economic nationalism largely abandoned in the 19th century – trade deficits are prima facie evidence of cheating by a trading partner, either through currency manipulation or just cheaper pay and production costs. And “protection” of domestic markets and producers would result in factories reopening in the US to do the business.
(NB: during the mercantilist period from the 16th to 19th centuries, military conflict between nation states was both more frequent and more extensive than at any other time in history.)
But trade dynamics are far from that simple. Complex supply chains and interdependence in the age of globalisation mean there is no trade zero-sum game.
As the Center for Automotive Research warns, a tariff set at the 35 per cent initially spoken of by Trump, could actually cut US car sales by as much as 450,000 a year and cost 31,000 car industry-related jobs across the US. Not least because Mexican-assembled vehicles are made up largely of US parts, engines, transmissions and other content – in 2015 an average of 40.3 per cent US content. The loss of Mexican imports would directly kill US jobs. As would the inevitable retaliatory measures by Mexico – it currently buys in over $185 billion (€173 billion) worth of goods from the US annually, everything from vehicle parts, iron, plastics and chemicals to agricultural products and computers.
But would producers in the US not simply expand production in the US to take up the slack? Not so easy. There is little open capacity in the US industry, and investment in new plant, which would take time, could amount to as much as $6.5 billion.
Far easier for companies like Ford, half of whose plants are already outside the US or Mexico, simply to export to the US from plants in other countries which have free trade deals or lower tariffs with the US.
China, South Korea and Japan could replace Canada and Mexico as the US’s and indeed Mexico’s largest car parts suppliers. The latter has free trade agreements with 45 countries other than the US. Unsurprisingly then there is much discussion in Mexico about pre-empting Trump by itself pulling out of Nafta.
Trump’s insistence that US outsourcing is the primary cause of unemployment is also based on a serious misapprehension. Economists say that product and process technological changes – robots – have done more to increase productivity gains and shift jobs than trade; an estimated 87 per cent of US manufacturing job losses are due to technology.
That reality is reflected strikingly in the story of Foxconn, manufacturer of quintessentially US products the iPhone and iPad, and one of the world’s largest companies with a workforce of 1.2 million. Last week its boss hinted Foxconn would soon invest some $7 billion in the US, creating up to 50,000 new jobs – a small step in Foxconn terms, but a PR coup for Trump who has been boasting that he is already getting business back to the US.
Yet there is no way Foxconn is moving out of China, and earlier this month it made an even more significant announcement that speaks volumes about the real tide in world business – that it has set a benchmark of 30 per cent automation at its Chinese plants by 2020 and has already automated away 60,000 jobs at one of them. Annually it produces 10,000 “Foxbots” – robots – to that end.
Trump’s protectionism, however, is not just a mark of his economic illiteracy but economically dangerous, if pushed to its logical conclusion. The normally sober Financial Times warns he could “bring the architecture of global trade policy for the past 70 years crashing to the ground”, while others point with concern to his break with trade multilateralism bringing real political consequences in major geopolitical realignments as China steps in to the vacuum left by the US in Asia.
These are strange times indeed when it falls to Xi Jinping, president of “communist” China, in a speech last week at the World Economic Forum to warn the West that “blaming economic globalisation for the world’s problems is inconsistent with reality”. Right on, comrade!