Trump's dangerous trade obsession

Washington

TRADE wars, encouraged by US President Donald Trump, are inching closer. The White House has rejected the Trans-Pacific Partnership (TPP), an agreement involving 12 Asia-Pacific countries, including the United States, Japan, Malaysia and Vietnam.

It is threatening to do the same with the North American Free Trade Agreement (Nafta) by slapping a 20 per cent duty on Mexican exports to the US. All this is advanced in the name of bolstering US manufacturing jobs, which are regarded as being sacrificed to imports and "unfair" foreign trade.

There's only one problem: it isn't true.

Contrary to popular opinion, trade is not a major cause of job loss. It's true that US manufacturing has suffered a dramatic long-term employment erosion, sliding from roughly one-third of non-farm jobs in 1950 to a quarter of jobs in the early 1970s to a little less than 9 per cent now, according to economist Bradford DeLong of the University of California at Berkeley in an essay posted on Vox. But the main cause is automation.

Note that manufacturing's decline began in the 1950s and the 1960s, well before the onset of annual trade deficits. In these years, we ran trade surpluses as Europe and Japan recovered from World War II. The first postwar US trade deficit occurred in 1971. But since then, haven't we been hurt by our trading partners' predatory trade policies and "offshoring" by US multinationals?

You can be excused if you answer "yes". We are constantly bombarded with images of shuttered factories and the message, implicit or explicit, that these plants closed because they couldn't compete with imports. This happens. It's not a myth. But the effect is overstated. We've lost perspective.

In his essay, economist DeLong makes a novel argument to demonstrate that automation and new technologies are the biggest causes of job destruction. Suppose, he says, we examine Germany, the world's powerhouse exporter. It seems to have done everything right. It has first-rate workers and engineers; it benefits from a weak euro (which make its exports cheaper); it has routine trade surpluses. If any country should have maintained its share of manufacturing jobs, it should be Germany.

It hasn't. Instead, says Mr DeLong, "it has seen the same pattern as the US" - that is, a steady decline of manufacturing jobs as a share of the total. From 1971 to 2012, German manufacturing employment fell from about 40 per cent of the total to roughly 20 per cent. About one-third of the decline reflected the closing of wildly inefficient factories in the former East Germany, but the rest reflected the normal "shedding" of workers at less-efficient firms. Fewer workers were "needed to make each car, each refrigerator, each chair" than in the past. That's true for the US as well.

This suggests that President Trump, though he may achieve some high-visibility victories in preventing large firms from moving factories abroad, will struggle to influence overall job trends. About 98 per cent of the 252,000 US manufacturing firms have fewer than 500 workers, reports the National Association of Manufacturers.

SLIGHT BOOST IN GROWTH

These firms will do whatever they can to improve competitiveness. Since 1950, Mr DeLong says, only 5 per cent or less of manufacturers' job losses reflect trade agreements, including China's entry into the World Trade Organization.

So what did Mr Trump get by killing TPP? Most economic analyses suggest that TPP would give its member countries a slight boost in economic growth by lowering tariffs and streamlining regulations. By 2030, US incomes would be 0.5 per cent higher and incomes in Vietnam - a big winner - would be 8 per cent higher, estimates a study for the Peterson Institute. That modest boost is gone.

"But the real benefit of TPP went beyond trade," says economist Russell Green of Rice University. "It was about leadership in Asia." A trading alliance led by the US would provide a counterweight to China's influence. The opposite has happened, says Mr Green. Leaders in the other 11 countries made difficult political decisions to ensure the TPP negotiations succeed. By "throwing it in the trash", Mr Trump has earned their distrust.

Will TPP's collapse foster a new trading system built around China, not the US? Will Mr Trump's abdication of leadership of an open and rules-based system inevitably lead to more trade conflicts, as countries adopt protection and mercantilist policies (tariffs, export subsidies and preferences for domestic goods)?

We don't know, but the prospects today are greater than yesterday. Already, some disappointed TPP countries are indicating interest in strengthening ties with China, says Jeffrey Schott, a trade expert at the Peterson Institute. He puts Australia, Canada, Chile, Peru and New Zealand in this group.

So what Mr Trump gets from his trade crusade is a (false) rallying cry for more US jobs. What the US gets, if anything, is less clear. THE WASHINGTON POST WRITERS GROUP