Can the United States prevail in a Trade War?

For the simple-minded and impatient, all problems have a simple and quick solution. Problem is, when you try to impose simple-minded and quick solutions to complex problems, you only make matters far worse.

There is majority agreement in this nation that too many of our manufacturing jobs are now overseas and that trade agreements often don’t work in our favor. Some will make compelling arguments to the contrary, but I’m going to focus on the premise there is a problem, but the solution being presented by the Trump administration will only make matters worse.

The issue with Trade dates back before President Obama, in fact it dates back before Ronald Reagan who opened the door to corporate deregulation and tax incentives that became part of Trade agreements he started. Most blame Bill Clinton for NAFTA, but in reality the negotiations began under Ronald Reagan, pushed under George H W Bush and signed into law by Bill Clinton with a Democratic Congress. To be fair, the goal of NAFTA and other international trade agreements is to improve our standing in the world, increase exports of what we do grow/manufacture and help consumers here, pay less for items. In short, we can have our toys and not have to pay a lot for them. Unfortunately as we moved into a more consumer orientated economy from a manufacturing economy, better paying jobs were lost in the process. But hey, you can buy that huge 72 inch LED Television for a song. But I digress.

When we severed our ties from Great Britain, the nation actually didn’t have much of an industrial base. Under British rule (to maintain the British economy) the colonists were required by law to buy textiles and other goods from Britain and her allies. Under Alexander Hamilton’s plan, George Washington and Congress implemented our nation’s first Tariffs. The purpose was twofold. Tariffs would actually fund our fledgling government as opposed to taxing the people (although Tariffs do that too) and inspiring local entrepreneurial minded citizens to open shop and manufacture the goods and items the nation needed for a cheaper price than to buy abroad and pay a tariff on those goods and items. And it worked, but that isn’t the end of the story.

Our industrial base did not grow overnight, it in fact took several generations. All during that time, trade remained a divisive issue in this country throughout the early nineteenth century to today. Early on it was the Northern manufacturers who sought the protection of high tariffs on competing imports while the southern cotton producers backed open-trade policies to promote their exports.

Our nation, throughout the nineteenth century and early twentieth century wanted to remain isolationist. Despite our involvement in the Great War, we rejected the League of Nations and their call to end tariffs throughout the world in order to improve the economies of member states. The United States never ratified our membership in the League (despite it being created in part by President Wilson). The attempt to end worldwide tariffs failed and the major European powers enacted higher tariffs on more products. The United States followed suit and in 1930 passed Smoot Hawley that increased tariffs on over 20,000 imported goods.  Higher tariffs were placed on agricultural goods to aid our farmers and slightly smaller tariffs were imposed on manufactured goods to keep our nation competitive with Europe and Canada. However Europe and Canada retaliated and imposed higher tariffs on our goods. The trade war could not have come at a worse time as we were already in the Great Depression. Smoot Hawley made the depression worse due to our inability to sell abroad. US imports did decrease by 66% but our exports also decreased by 61%.

Under the Franklin Roosevelt administration, Free Trade took the driver’s seat in Washington as one of many projects to pull us out of the depression. In 1934 Secretary of State Cordell Hull, (who was a free trader) contemplated how best to remove the high tariffs under Smoot Hawley. Instead of going to Congress to reduce the tariffs (for fear they would only be raised again) he opted to begin to negotiate trade agreements with foreign nations. This became possible because Roosevelt was able to get Congress to pass the Reciprocal Trade Act of 1934. Since we had a surplus of manufactured goods, we were able to increase exports with the nations we negotiated with. Although trade barriers still remained high during the 1930’s, the trend was reversing.

After World War Two as a continuation of negotiating limited bilateral agreements with individual nations and in an effort to rebuild the post war economy, the United States led the creation of the multilateral General Agreement on Tariffs and Trade (GATT). Trade barriers were lowered around the participating nations. A series of “negotiating rounds” to reduce trade barriers continued through 1994. As a result United States Tariff rates fell from Smoot Hawley on average of 60% in 1930 to 5.7% by 1980. They are currently at 2.7%. In addition to improving our economy, these trade agreements helped bind free-market democracies together during the Cold War and effectively blocked the Soviet Union and People’s Republic from gaining a foothold around the world.

As noted above, by the Reagan administration, a concern developed with competition with Europe and Canada ending her economic isolationist policies to compete worldwide. Treaty negotiations between the US and Canada began as a way to improve our leverage in the growing Global Economy. Before the negotiations were ended, Mexico became part of the plan and NAFTA was born. Much has been said about manufacturing jobs moving to Mexico as a result of NAFTA and it’s true. However what many fail to recognize is that it also improved Mexico’s economy with minimal impact on our economy. In fact, with a more vibrant Mexico; California, Arizona, New Mexico and Texas had more trade opportunities with a growing consumer class in Mexico.

As bilateral accords shifted to regional accords that brought us NAFTA, CAFTA and the TPP, coupled with Republicans deregulating US based corporations and giving them tax breaks to move overseas where labor was cheaper, we began to lose more manufacturing jobs. In fact, over the course of the last 60 plus years, we have been transforming from a primarily manufacturing  based economy to a consumer based economy.

Since 2001 when China entered the World Trade Organization, American manufacturers have been shipping jobs overseas at an increased rates. As of 2009 we had lost 42,400 factories (including 36% of factories that employed over 1000 workers) to overseas nations that provide cheaper labor. In case you weren’t aware, President Trump and Ivanka Trump’s merchandise are manufactured overseas, not in this country.

By October 2009 manufacturing employment dropped to 11.7 million. The last time we had less than 12 million manufacturing jobs was in 1941. Further, October 2009 is the first time more people were unemployed (15.7 million) than were working in manufacturing.

In the eight years since, there has been improvement with unemployment dropping to 4.6%. However most of those jobs are in the service professions and government. Some manufacturing has returned but nowhere near what we once had. Further, the middle-class (the driver of our consumer based economy) income is stagnant and many believe it is shrinking. Despite increase in wealth among the wealthy few, the middle-class has been stagnant for over 25 years. Further, costs in housing, food, energy, healthcare, childcare, energy, etc. continue to increase. Since the middle-class is the driver of our consumer economy, without more disposable income available to them, our economy becomes stagnant and will crash.

I apologize for how long the preceding information was but it is important to recognize that our current problem is well over 80 years in the making and is very complex. Americans like cheap goods to spend their money on. However, to have your Flat Screen TV’s, cell-phones, tablets, gadgets and gizmos manufactured here significantly increases the costs to you. Like it or not, labor is cheaper overseas. Further, we’ve been losing manufacturing companies over a span of over 30 years. It’s unlikely you can bring back manufacturing overnight or even over one Presidential Administration. Historically it took generations for this nation to even create its first manufacturing economy.

Here’s the dilemma of President Trump’s simplistic solution to a complex problem. A trade war implemented now by imposing huge “Smoot Hawley” tariffs on any nation is in fact a tax increase on the consumer. We are a consumer based economy and will remain so until manufacturers return to our shores. Even if they did, it would take years and the costs of what they manufacture will also be higher than what consumers pay now. So spending decreases in our already fragile economy. As a result, we lose more of our disposable income due to job loss, increased cost of living and taxation. Less spending, fewer jobs in a consumer based economy.

We live in a global economy years in the making and as a result, we are almost fully dependent on goods manufactured elsewhere. With a fragile middle-class and a manufacturer base that has been decimated over the past 30 years, we would lose a Trade War with any other nation. We’re simply not armed to fight one and it would take years of government investment in infrastructure and people to get us to a place where we could even begin such a war.

It’s easy to say we’ll impose Tariffs, Jobs will come back, and American (will) be Great Again. However as with anything Trump, talk is cheap and we already “know how complicated” trade is in a Global economy that’s not going away anytime soon.

Trump has only recently discovered how complicated healthcare is. Healthcare is nothing compare to world trade and the underpinnings of our economy. However, what can you expect from a businessman who has no MBA and has declared bankruptcy four times in a business he inherited from his dad, not built himself.

Any efforts to improve our economy in the manner he proposes will certainly cost more jobs and drive us into another depression. No Donald, we cannot win a Trade War.

Trade Warus_china_trade-wartradegraph

 

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