Tomado de https://www.project-syndicate.org
Trump’s Trade Disaster
In the second
year of his presidency, Donald Trump has doubled down on his “America First”
brand of economic nationalism, by making impossible demands of US allies and
escalating a multi-front trade war of his own making. In doing so, however, he
has all but guaranteed that Americans themselves will bear the costs.
WASHINGTON, DC – US President Donald Trump may
fancy himself a builder, but when it comes to international treaties and norms,
he has proved to be a one-man wrecking crew. And now, the chaos appears to be
spreading and deepening.
In the last few months alone, Trump’s “America
First” administration announced commercial sanctions against the Chinese tech
giant ZTE, but then reconsidered that decision, in the interest of – wait for
it – saving Chinese jobs. And just weeks after Secretary of the Treasury Steven
Mnuchin put a trade war with China “on hold,” the administration declared that
it would impose tariffs on $50 billion worth of Chinese imports after all,
while also slapping sweeping import tariffs on steel and aluminum.
Of course, even if Trump’s advisers have sent mixed
messages on trade, it may be the only issue on which Trump himself has
remained consistent, much to the detriment of US alliances and economic relations. Almost
immediately upon taking office, Trump mothballed the Transatlantic Trade and
Investment Partnership (TTIP) and withdrew the US from the Trans-Pacific
Partnership (TPP). The TPP would not just have united the US and 11 other
Pacific Rim countries within a single trade bloc; it also would have
established region-wide rules and standards that even China might have been
forced to follow, despite its exclusion.1
But whereas Trump had little trouble scrapping the
TTIP and TPP, the North American Free Trade Agreement between the US, Mexico,
and Canada has continued to draw his ire. NAFTA – and particularly Mexico’s
role in it – seems to epitomize all of the hot-button issues that fired up
Trump’s base during his 2016 presidential campaign. To hear Trump tell it, the
agreement is a source of lost manufacturing jobs, and a perfect example of the
supposed “unfairness” of all trade pacts. So he promised his supporters to use
the threat of abandoning NAFTA to force Mexico to pay for his “border wall,”
and to stem the flow of undocumented immigrants – whom he has described as
“rapists” and “animals” – across the border.
That strategy has not worked. But over the past
year, the Trump administration has been meeting with the Mexican and Canadian
governments to renegotiate the terms of NAFTA, and those talks are now
approaching their crunch point. Given that Trump has laid waste to every US
commitment he has touched, Mexico and Canada – and the world – have every
reason to prepare for the worst.
THE TRUTH ABOUT NAFTA
For decades after World War II, Mexico pursued many
of the same disastrous economic policies as other developing countries. It
maintained high protectionist barriers for manufactured goods, and relied
heavily on commodity exports, particularly oil. As a result, it experienced
recurrent stop-go cycles, whereby accelerating inflation and ballooning
balance-of-payments deficits would force a round of austerity, only for the process
to repeat itself after increases in commodity prices, but at a slower rate of
growth each time. Not surprisingly, the growth rate during these years waxed
and waned dramatically, and by the start of 1989, Mexico’s per
capita income was around $2,393 – about 11% that of the US.
But then came the early 1990s, when Mexican
President Carlos Salinas and his economic team reversed the country’s trade
policy and set the stage for negotiations on a free-trade agreement (FTA) with
the US. President Bill Clinton’s administration welcomed Salinas’s new economic
approach and quickly agreed to talks, which included Canada, because it already
had an FTA with the US. The US had long wanted Mexico to liberalize its trade
regime and permit more economic competition, and it now had a chance to see
those changes through.
Before NAFTA, between two-thirds and three-quarters
of Canada and Mexico’s total trade was with the US, and about one-quarter of
total US trade was with Canada and Mexico. But at the time, the average US
tariff on manufactured imports was around 2%, while Mexico’s average tariff on
US exports was around 10%. It was clear from the start that the US would gain
more from improved access to the Mexican market than vice versa.
Yet, despite the obvious benefits, there was a
great deal of political dissent within the US about the prospect of Mexican
workers threatening American jobs. In a 1992 presidential debate, the
independent candidate Ross Perot famously warned that an
FTA with Mexico would result in “a giant sucking sound going south.” Of course,
nothing of the sort happened.1
NAFTA entered into force on January 1, 1994, and
between 1993 and 2000, US unemployment fell from 6.9% to 4%. Today, it stands
at 3.8% – its lowest point in almost two decades. Professional economists
generally consider an unemployment rate of 4-4.5% to represent an economy near
“full employment” – meaning that virtually all who are willing and able to work
can find a job.
Put another way, total US civilian employment in
1993 was around 120.3 million, compared to 136.9 million in 2000 and 148.8
million in 2016. The rate of turnover in jobs today is about 20% annually, with
only a small share of the gains or losses attributable to Mexico. Overall,
though some American jobs were lost over the lifetime of NAFTA, more were
gained, owing not just to the additional exports resulting from lower Mexican
tariffs, but also to the falling costs of inputs for US producers, which
boosted their international competitiveness.
With NAFTA in place, US-Mexico trade grew rapidly,
in part because cross-border value chains multiplied. Mexican producers
employing unskilled labor exported components for cars and other goods to the
US. And the US manufacturers that imported those less expensive inputs were
better positioned to compete with Japanese, European, and other firms that
already had access to cheaper components from South and Southeast Asia and Eastern
Europe. Moreover, US firms also invested in Mexican facilities, which enabled
Mexican firms to expand their capacity faster and meet the growing demand from
US producers.
These invest t and trade activities have
undoubtedly benefited both countries. Access to cheaper components has lowered
US producers’ costs, while exports to Mexico have increased. Meanwhile, Mexican
output, employment, and wages have grown more than they would have otherwise.
For all three signatories, NAFTA represents a win.
BAD FAITH AND WORSE
OUTCOMES
Nevertheless, the Trump administration has insisted
on renegotiating NAFTA. To be sure, there are a number of ways that the
agreement could be updated to account for changes in economic activity,
including those spurred by technological advances, since the early 1990s. But
that has not been Trump’s focus. Instead, US trade negotiators have demanded
amendments to NAFTA that would turn it into a lose-lose-lose deal.
Some of the demands directed at Mexico, in
particular, are so outrageous that no country could ever accept them. Others,
such as the US proposal for more stringent rules of origin (which require that
a certain percentage of an imported article be fabricated within the NAFTA
trade bloc), are very problematic, but a compromise can probably be reached.
Unfortunately, the Trump administration’s extreme
approach has made meaningful progress impossible, even in areas that actually
could stand to be improved. One of the US’s most disruptive tactics has been to
demand that Mexico bring its auto workers’ pay up to the level of their US
counterparts. The minimum wage in Mexico is currently around $4 per day, and
around $6 per day in manufacturing industries. But the wage floor US
negotiators have reportedly demanded is $16 per hour – 21 times the average wage in
Mexican manufacturing. That is the equivalent of asking the US to raise its
auto workers’ wages to $588 per hour (based on the $28 average hourly wage for unionized auto workers).
Needless to say, no producer in the world could
absorb or pass on such a cost increase. Mexican firms would either have to
close or demand tariff protection, which, at best, would allow them to produce
only for the smaller Mexican market. And it is inconceivable that the Mexican
electorate would stand for one segment of workers earning $128 per day while
everyone else still earned an average of $4-6 per day. The social and political
backlash would be unmanageable. In fact, the Trump administration’s demand is
so absurd that even the US auto industry opposes it , not least for what it
would do to US producers’ value chain.
Another impossible US demand, which would affect Canada
as much as Mexico, is a sunset clause that would force each government to renew
the renegotiated NAFTA every five years. The fact that the entire deal could
potentially expire every five years would create a permanent state of
uncertainty for businesses throughout North America. Most companies base their
investment decisions and output plans on a time horizon of at least five years,
so it is hard to believe that any would make investments in Mexico to sell to
the US market under such conditions.
TINNY TRADE LOGIC
As if the situation was not bizarre enough, the
Trump administration has now subjected Mexico and Canada to import tariffs of
25% on steel and 10% on aluminum, after first trying to use exemptions from
such tariffs as a bargaining chip in the NAFTA negotiations. The sweeping metal
tariffs – which have now also been imposed on America’s European allies –
are highly objectionable for obvious reasons. They will raise costs for all US firms that
use steel and aluminum inputs – a group that of course includes the auto
industry.
The Trump administration has justified the tariffs
on national-security grounds, which makes absolutely no sense when one
considers that US allies are bearing the brunt of the costs. The exception is
South Korea, which was exempted from the tariffs because it agreed to quotas limiting its steel
exports to the US.
The Trump administration’s approach to both allies
and adversaries represents the worst kind of “managed trade,” which the US and
other countries with market-based economies have long condemned. South Korea
did not achieve strong, sustained growth until it liberalized its trade and
other economic policies, starting around 1960, with the encouragement of the
US.
But under its new managed-trade agreement with the
Trump administration, South Korea must now create an administrative apparatus
to limit its steel producers’ exports to the US. That means tracking 52
different categories of steel to ensure that exports remain at or below 70% of
their 2014-2017 levels. It is estimated that South Korea has already met its
quota for this year for nine categories of steel.
At the same time, there is a need to monitor and
regulate the inflow of steel and aluminum, whether by the US, South Korea, or
both. For the US, expanding its own customs service to perform this task would
carry enormous administrative costs; and the new dispensation will likely lead
to all manner of influence peddling as firms try to win scarce licenses from
customs officials.
DESTINED FOR FAILURE
There is little reason to think that Mexico or
Canada will accept the Trump administration’s demands unless they are
significantly watered down. But even if they do accept them in some form or
another, the result will be the opposite of what Trump and his team intended.
There are around 80,000 jobs in the US steel industry, more than 900,000 jobs in the US auto industry, and millions more in other industries
that use steel or aluminum. The Trump administration’s metal tariffs will drive
up the price of cars and reduce domestic demand, thus offsetting any increase
in auto-industry employment that Trump might have hoped for. And if Trump were
to follow through on his threatened tariffs of 15-25% on imported autos, car
sales across the US would decline, and the hundreds of thousands of workers who sell and service them would bear the costs.
Beyond the auto industry, the prices for all
products that use steel and aluminum will increase, thus depressing demand and
threatening output and employment across a wide range of sectors. Many steel-
and aluminum-using producers compete directly with producers from around the
world. But by protecting domestic producers, the Trump administration is
raising steel and aluminum prices within the US, while reducing them in the
rest of the world. In essence, Trump is conceding even more cost advantages to
non-US producers, for no good reason.
After World War II, the US led the way in establishing a rules-based trading system, first with the
General Agreement on Trade and Tariffs, and then with its successor, the World
Trade Organization. The past 73 years have shown that when there are legitimate
grievances between trading partners on issues such as high-tech secrets,
bilateral efforts to resolve them often prove ineffective, whereas action taken
through the WTO has a strong track record. Unless and until the Trump
administration recognizes this fact, Americans themselves will bear the costs
of its disastrous trade policies.1
Writing for PS since 2014
5 Commentaries
5 Commentaries
Anne O. Krueger, a former World Bank chief economist and former first
deputy managing director of the International Monetary Fund, is Senior Research
Professor of International Economics at the School of Advanced International
Studies, Johns Hopkins University, and Senior Fellow at the Center for
International Development, Stanford University.
