Free trade has failed America, and nothing would do more to restore economic growth than finally getting international trade right—especially with China.
The economics behind free trade is simple. Lowering tariffs and other barriers to global commerce should foster more specialization among nations. Workers in America don’t stitch garments and assemble iPhones but instead manufacture high-end components, write software and sell banking and other services worldwide.
All that requires older workers to retrain, young people to enroll in technical programs, engineering and finance at community colleges and universities, and cities like Hickory North Carolina and Reading Pennsylvania to attract new industries.
That simply hasn’t happened or at least not enough of it.
Once strong industrial communities in those states and others like Michigan and Wisconsin have been devastated by imports and permanent unemployment. Among men opiate addiction, suicides and mortality rates are rising and deep despair about the promise of America abounds.
In the primaries and general election counties heavily impacted by Chinese imports swung to Trump—right past establishment candidates Jeb Bush, Marco Rubio, other Republicans and ultimately Hillary Clinton who are big supporters of the World Trade Organization and other global institutions.
Lax enforcement permits China to frustrate American exports and flood our markets with products benefiting from high tariffs and regulatory preferences, subsidies and according to World Bank purchasing power parity estimates, a currency trading at half the value it would be worth without its plethora of restrictions on the free flow of goods and capital.
As anyone who has studied modern international economics—to be wonky, the Heckschire-Olin model of comparative advantage—knows, free trade will deliver its manifest benefits only if exports are about as much as imports and full employment is reasonably maintained.
The bilateral agreement with the United States that facilitated China’s entry into the WTO in 2001 was supposed to sweep away barriers to U.S. exports to the Middle Kingdom. Instead, our bilateral trade deficit with the Middle Kingdom has soared to $320 billion. Our problems with trade are replicated with other nations and bring our global trade gap to $500 billion.
Defenders of free trade tell us the benefits outweigh the costs, and we simply need to compensate the unemployed in Hickory, Reading and points west along the sorry path of degraded communities.
The numbers don’t add up.
In 2015, U.S. foreign sales totaled $2.3 trillion and that permitted Americans to buy a like amount of foreign goods and services. Workers in export industries are about 10 percent more productive than workers in import competing industries, and the resulting specialization lifted U.S. GDP by about $240 billion.
However, American imports totaled about $2.8 trillion, and the global trade deficit destroyed 4 million jobs that were not replaced by exports. On net, lost demand for U.S.-made goods and services directly reduced GDP by $260 billion and at least another $130 billion if we count in lost spending by idled workers and shuttered businesses.
Along with the greater availability of government benefits—like Medicaid and food stamps for idle men and easier access to social security disability pensions—that is an important reason why about 7 million men between the ages of 25 and 54 are neither employed or looking for work.
Heavily impacted manufacturing supports directly and through supporting services the lion share of U.S. R&D—the wellspring of American innovation and productivity growth. Fixing the trade deficit would lift investments in intellectual property enough to raise economic growth, which has lagged along at about 2 percent recently, to 3 or 4 percent.
President-elect Trump will be well within his executive powers to impose a temporary 45 percent tariff on Chinese imports to leverage renegotiation and better enforcement of the U.S.-China bilateral agreement. However, announcing his agenda for the first 100 days he promised to nix the Trans Pacific Partnership—that agreement has not been submitted to Congress for approval, has no current effect on U.S. trade and requires no action at this time.
The folks that elected Trump want meaningful actions not symbolic gestures. If he expects to sustain their support—and to use the language of my progressive colleagues, deliver some economic justice—he should focus on what and who got him elected.
For Trump, fixing trade with China should be Job One.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.