Why Trump's trade war backfired
The 2016 election was a referendum on free trade, which many blamed for destroying millions of American manufacturing jobs. In 2020, it could be about the merits of trade wars.
During President Donald Trump's first term, he tore up deals, launched a trade war with China and renegotiated NAFTA. His campaign claims the war was a success and that his policies were bringing back manufacturing jobs – until the pandemic arrived – and so voters should give him another four years.
His Democratic rivals disagree.
“You lost that trade war," Sen. Kamala Harris snapped during her debate with Vice President Mike Pence, citing the loss of 300,000 manufacturing jobs during Trump's presidency and bankrupt farmers.
So who's right?
As an economist who researches international economic policy, I believe Trump's impulse to rethink trade policy was understandable. If free trade hurt American workers, it stands to reason that putting up barriers to trade – even being willing to “go to war" – might protect those workers.
But wars can backfire – and trade wars are no different.
Free trade's losers
Economic theory tells us that free trade means a greater availability of cheaper goods because everything will be produced where it can be made least expensively.
That sounds like a great deal for consumers and exporting industries like agriculture that find more buyers for their products. But it's a raw deal for manufacturing workers as factories move to countries like Mexico and China with lower labor costs.
In each case, manufacturing workers were among the big losers as employment in the sector plunged from just under 18 million in 1990 to a little over 14 million in 2004.
The tide turns against trade
As a result, many politicians became more cautious about supporting free trade deals.
When he was a senator in 1993, former Vice President Joe Biden and many other Democrats voted to ratify NAFTA. A little over two decades later, when a free trade bill with Central America and the Dominican Republic came up for a vote, Biden and nearly every Democrat voted no. The bill barely passed.
And although Biden's administration signed the Trans-Pacific Partnership in 2016 – which would have created the world's largest free-trade zone – opposition among leading Democrats as well as Trump imperiled its passage in the Senate, leading to the U.S.'s withdrawal in 2017.
When Trump launched his presidential campaign in 2016, opposition to trade deals like NAFTA was one of his signature issues. At a time when Republican leaders mostly were staunch supporters of free trade, his promise to bring manufacturing jobs back to the U.S. helped him win the primary – and ultimately the presidency – as a growing number of voters began to see trade as bad for Americans.
And as president, he followed through on his pledge and unilaterally imposed tariffs on a range of Chinese products – a list that now totals US$550 billion worth – as well as on most aluminum and steel imports. Thus, Trump's trade wars began.
My research with colleagues at Boston University shows that trade agreements have indeed hurt U.S. workers. But Trump's trade wars have not solved the offshoring problem that they were designed to fix.
The trouble with trade wars
Trump has claimed “trade wars are good and easy to win."
Trump seems to have based this on the assumption that America's trading partners would not retaliate. He was wrong.
Over many rounds of tit-for-tat, China has retaliated repeatedly by placing tariffs on $185 billion of U.S. exports, most notably agricultural products. After U.S. soybean farmers saw their largest market dry up, the Trump administration was forced to spend $23 billion to offset some of their losses. All told, more than one-third of farm income will come from government subsidies in 2020.
And when the Trump administration planned to impose steel tariffs on Canada earlier this year, America's northern neighbor vowed retaliation, which would have hurt U.S. exporters. So Trump backed down.
That's the problem with trade wars. Intended to protect a country's own workers, they wind up doing a lot of self-inflicted damage, as retaliatory tariffs drive up the cost of exports, hurting businesses and workers at home as well as abroad.
At the same time, U.S. policy seems to have lost sight of the original enemy: the offshoring of American jobs, which has continued to grow. The 2017 tax cut, for example, actually made offshoring more profitable and attractive – making it even harder to achieve the primary goal of the trade war.
Trade wars pay off only if they have a clear vision and lead to meaningful changes in how everyone does business. That hasn't happened either.
While Trump did reach a “phase one" deal with China in January, it actually looks like it will make the offshoring problem even worse. As part of the truce, the U.S. agreed to reduce its tariffs on Chinese goods and China said it would buy a lot more American products, especially soybeans.
While it may make up for some of the damage caused by the trade war – such as by aiding ailing soybean farmers – it will make offshoring easier by making it more advantageous and profitable for American companies to transfer operations to China. That's because China also agreed to stop requiring foreign companies that seek to do business within its borders to transfer technology to domestic partners.
A better way to protect workers
One notable exception to all this is the U.S.-Mexico-Canada Agreement, Trump's replacement for NAFTA that became law in July.
That deal is likely to prevent more offshoring to Mexico because of bipartisan support for labor and environmental provisions that raise minimum Mexican automaker wages.
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This points to one of the best ways to actually stop manufacturing offshoring: Negotiate trade agreements that set higher labor and environmental standards for all signatories. This not only helps workers and communities in other countries get better treatment, but also makes U.S. workers more competitive by raising the cost of doing business there. That makes American companies less likely to move operations overseas.
The evidence suggests the best way to limit offshoring is through negotiation and cooperation, not war.