Donald Trump is wrong on trade. So are his liberal critics.
That Trump has rightly identified international trade as a problem for Americans is mainly the happenstance of a broken clock being right twice a day
More and more, Donald Trump sounds like a standard Republican on economics: Slash taxes and regulations to unleash the wealthy, so the bounty they create can shower down on the rest of us.
The one exception is Trump's diehard opposition to trade deals like NAFTA and the TPP. In vehemently criticizing these trade deals, he's not just rejecting GOP orthodoxy, but a lot of establishment Democratic orthodoxy, too. After all, Bill Clinton was instrumental in creating NAFTA, and Barack Obama is TPP's biggest backer.
This scrambling of ideology can leave liberal critiques of Trump's trade stance a bit wanting. Take this broadside by Vox's Matt Yglesias against under-the-radar economist Peter Navarro, who made a much-more-detailed-than-usual case for Trump's economic agenda.
Part of Navaro's case centers on how environmental regulations and high taxes on the rich and corporations are bad. But the trade portion is what drew Yglesias' ire. And that's where things get a lot trickier, because Navarro's basic point is sound: The United States' trade deficit — which was a whopping $500 billion in 2015, or about 2.7 percent of GDP — is a major drag on the economy.
A trade deficit means there are more U.S. dollars leaving to drive economic activity in other countries than foreign currencies coming into the U.S. to drive economic activity here. By definition, this makes it harder to create more American jobs than if the two flows were balanced, or if we had a trade surplus. Closing the trade deficit would go a long way to helping us reach full employment — a point made repeatedly by prominent left-wing economists.
Yglesias, however, accused Navarro of making "a mistake that would get you flunked out of an AP economics class." Suppose the U.S. suddenly made it illegal to import oil and petroleum products, thus wiping out $180 billion of the trade deficit in one swoop? "What would actually happen," Yglesias wrote, "is that gasoline would become much more expensive, consumers would need to cut back spending on non-gasoline items, businesses would face a higher cost structure, and the overall economy would slow down with inflation-adjusted incomes falling."
Yes, if you make an imported good more expensive (by slapping a tariff on it) or just force people to buy the more expensive American version (by legal fiat), prices will rise, which could slow down the economy. But Yglesias ignores that more spending on American-made goods means more income in Americans' pockets, which drives up domestic demand and creates more jobs. Instead of reducing growth, it could just reshuffle growth's composition. This is basically the same mistake critics of the minimum wage make when they assume that raising the "price of labor" will mechanically result in less demand for labor.
We do have a problem with higher-priced American exports leaving us with a trade deficit. But this is a systemic problem that needs to be addressed systemically. This is where the question of currency manipulation comes to the fore. Basically, governments and central banks in other countries — most notably China — have bought up huge stockpiles of financial instruments denominated in U.S. dollars. That drives up demand for our currency, raises its value relative to other currencies, and makes our exports more expensive.
Strengthening rules against currency manipulation in our trade deals, as Navarro recommends, would be worthwhile. Unfortunately, Navarro mainly looks to retaliatory tariffs as punishment. A much better solution is what's called "countervailing currency intervention" — in plain English, have the U.S. government or the Federal Reserve buy up financial instruments denominated in offending countries' currencies until the effects of the two stockpiles balance out. Rather than throw up walls to trade, address the imbalances at their source.
The problems with trade deals and the trade deficit are very technocratic and nuanced. And the idea that a thuggish reality TV star is going to thoughtfully deal with them seems unlikely, to put it very mildly. Trump seems to think the absence of his own strutting, bullying ego is the main thing holding back better trade policy. And rather than seeing international trade as a problem of global power-brokers manipulating a byzantine system to the detriment of workers around the world, he views it as raw tribal combat between his team (Americans) and other teams (crafty foreigners). That Trump has rightly identified international trade as a problem for Americans — one long-ignored by elites in both parties — is mainly the happenstance of a broken clock being right twice a day.
Reforming U.S. trade requires a nuanced understanding of how all the policy gears interact, and a populist iron-gut willingness to throw some calcified establishment wisdom out the window. The tragedy revealed by the 2016 election is that America has lots of people with one of those two qualities, but few with both.