Donald Trump’s been saying it for decades: America’s getting ripped off on trade.
Michigan agrees. Pennsylvania agrees. Ohio agrees. In fact, Trump crushed Clinton throughout the rustbelt, the sad remnants of America’s old industrial heartland. Why?
Because Trump’s right. We’re getting screwed.
Countries like China, Japan, and Mexico are waging a trade war against America. China and Japan manipulate their currencies so as to steal our industries, and Mexico uses NAFTA like a straw to suck away our jobs. And we’re not even fighting back. Trump will change that.
But first, what’s going on?
America’s running a giant trade deficit, which means that we’re buying more stuff from foreigners than we’re selling them. How giant? In 2015, the deficit was over $736 billion dollars—$4,845 per working American. That’s bigger than economies like the Netherlands, South Africa, or the Philippines.
And it keeps getting bigger. Just look at China, over the last twenty years the deficit grew from $30 billion to over $365 billion. Or look at Mexico. Since Bill Clinton signed NAFTA in 1994, trade with our southern neighbor tanked from a modest surplus of $1.3 billion, to a massive deficit of nearly $60 billion last year.
The deficit is big, and getting bigger. But how does it hurt America?
It costs us jobs and economic growth. Think of it this way: everything we import replaces something we would otherwise make. For example, if American needs 10 million spoons, we can either make them, import them, or make some and import some. So, if we imported 8 million spoons, we would only need to make 2 million spoons (the imports replace our production, not our consumption of spoons). This is how the trade deficit works: imports replace our production, not our consumption of stuff. Therefore, the deficit is the value of America’s offshore production.
Offshoring production means offshoring jobs. How many?
In 2015, America’s trade deficit was $736 billion, or 4% of our GDP. Since GDP is simply the total output made by America’s working population, and since 4% of America’s GDP is imported, then it follows that 4% of America’s workers are displaced by these imports. This means roughly 6 million workers are replaced by imports. Worse yet, this probably lowballs the actual numbers, because labor-intensive jobs are more likely to be offshored.
Looking specifically at manufacturing paints a grimmer picture. American manufacturing contributes $2.2 trillion dollars to our economy. And since 78% of our trade deficit is in manufactured goods, this means that we’ve offshore $573 billion worth of production. That’s one-third of our manufacturing industry. And finally, since manufacturing employs 12.3 million Americans, then we know that roughly 4 million more are displaced by imports. But it’s higher than that.
Manufacturing brings wealth into a region, and therefore supports local services and supply chains. For example, a car factory supports hairdressers and accountants, but not the other way around. This “job multiplier” has been studied extensively. As it turns out, each manufacturing job usually supports 1.58 other service jobs. This means that since 4 million manufacturing jobs are displaced by imports, then about 6 million service jobs were also lost.
According to this method, the trade deficit costs America at least 10 million jobs.
This makes sense, especially when you consider how many Americans are truly unemployed.
We’re Not Losing Jobs Because Of Automation
A common misconception is that we are losing jobs because of automation and technology and not the trade deficit.
Employment is a balance between output (how much is made) and productivity (how efficiently it’s made). If output increases, more workers are needed. If productivity increases, fewer workers are needed. This means that better technology will indeed shed jobs (by raising productivity), but only if our economic growth (increases in output) doesn’t keep pace.
Between 1950 and 1979, manufacturing employment increased because output grew faster than productivity. This was great for America: wages were high, the middle class was healthy, economic inequality was decreasing—the rising tide raised all boats. However, this trend reversed, and by the year 2000 American manufacturing was in freefall. Productivity grew by 3.7% per year (it grew that fast since the 1950s), but output only grew by 0.4% per year.
Why? Because we moved our factories to China. We moved them to Mexico. We abandoned our workers in Michigan and Pennsylvania and threw them to the wolves.
Trump Can Fix It
Firstly, Trump will renegotiate (or scrap) the unfair “free trade” deals that currently hobble our economy. Just look at NAFTA, Clinton said it would create jobs for America. Instead, the deficit with Mexico has grown by double digits every year since it was signed and it’s cost us 850,000 jobs.
Obama told us that KORUS (the trade agreement with S. Korea) would help American workers. So far, it’s cost us 75,000 jobs. He’s saying the same thing about TPP (a Pacific-wide free trade agreement)—why will this be any different?
These “deals” need to die hard.
Secondly, Trump will put a 35% tariff (tax) on imports. This is just what America needs. Right now, American companies have no choice but to leave, because it’s just so much cheaper to build their factories in China. This is not only because China is poorer than America, it’s also because it manipulates its currency, artificially lowers labor costs, and provides subsidies to companies specializing in exports—all of which makes China a dirt cheap place to do business.
American companies don’t have a chance. They just can’t compete with State-backed Chinese companies without relocating to China. A tariff will level the playing field, and it will make it profitable for American companies to come home again.
Trump will bring back our jobs. Big-league.
First published on the American Revenant.