Economy and Trade: the next 20 years

There is a shift afoot.

The election of Donald Trump means a change is coming in economic thinking at the policy level. Globalization has defined the trading order for the last 25 years or so, but like a rusty freighter it is starting to show its age. Assembly line workers who saw their jobs outsourced have always felt cheated. Replacement jobs and training haven’t been there for laid off men and women hoping to replace big incomes. It isn’t just Donald Trump who is pulling back from economic entanglements; the Europeans are seeing a rising tide of nationalism. This is bound to change the international thinking on economics and determine trade policy for the next 20 years.

Economics is theory, the big picture stuff. It won’t explain why cotton prices suddenly jumped up in June or why steel prices dropped in December, that’s business. It can give you scenarios where prices might swing, or historic trends where political and social pressures existed on the market. Economics is a snapshot of the existing trading system and a historic record of how it got that way.

It isn’t a surprise that it’s changing; the dismal science is due a makeover. Economic Nationalism is on the rise in America and across Europe. Economic Nationalism is a phrase used by Steve Bannon (one time Trump advisor) to explain his view that the U.S. government should support American companies through tariffs, subsidies, tax breaks and quotas at the expense of other countries. So basically everything once thought of as anti-competitive Steve is for. Did you hear the president’s inaugural speech in January? That was Bannon. He wrote it. It pitted ‘elites’ against regular folks, politicians against citizens and nations against nations. It wasn’t exactly nasty but it laid out a case (in some minds) for a government that hasn’t valued its citizens. It has chased after foreign investment and low wage workers.

 Like multiple theories of economics though, there is some good and some bad.

Why do protectionist policies lead to sluggish growth? because any business or industry that isn’t pushed to keep prices low gets lazy. Companies that rely on regular installments of federal money tend to relax their research and development side and pay higher wages. The downside is Uncle Sam just took away the small firm’s ability to compete. 

The wild tiger is more likely to hunt than one in the zoo.

I always go half-way with Bannon. Foreign countries like China play a different version of trade than we do. The economic models we learned in school that show how trade benefits everyone are seriously lacking. You remember the Ricardo ones don’t you? Country A has sheep and makes wool clothing, country B grows gapes and bottles wine. Instead of country A growing grapes and bottling their own wine and country B doing the same with sheep and wool, they trade. This trade creates an advantage for both nations since they specialize and gain the comparative lower costs.

The model works well on a mathematical level but there are too many missing pieces that throw off the balance. The missing pieces get chalked up to ‘elites’ benefiting themselves at the expense of hard working Americans. But it's really tough to draw a straight line between jobs going to China and long term unemployment in the US. The gains are spread out, more diffuse. They mean lower prices at Target and Kohls but lower wages for workers. Gains for some, losses for others.

 It’s a tough sell for politicians: “Vote for me and you’ll probably lose your job but don’t worry, the gains will be marginal and spread out.”

Trade is anything but fair. Modern economies have all sorts of clever ways around straightforward competition. Tariffs aren’t used a lot anymore since a lot of work has been done to eliminate them. Countries still use subsidies to prop up their industry. Agriculture in the US couldn’t survive without them, neither could Chinese steel manufacturers or Japanese car makers. So the Economic Nationalists are right about foreign cheaters either helping their companies or propping up the currency.

“Why bother playing by an old trade model where we get screwed every time? How about instead we help our own companies first and trade later”? He figures.

Mainly because in order to grow big companies need overseas markets and blocking tires from Mexico means they’ll refuse to buy machinery from us. Also, I don’t think Steve realizes that certain manufacturing jobs don’t pay what they used to. Everyday market forces make it impossible. Foreign car companies like Honda, Nissan and Volkswagen started getting better and cheaper, right around the early nineties. Americans began buying them and putting a squeeze on Detroit. Putting up tariffs on Japanese and Korean car makers would have held off the onslaught for a while, but GM and Ford couldn’t compete overseas forever. Legacy costs also hampered the American companies; paying ruinous fees to retired workers would have undercut their ability to be competitive anyway. 

Banon and Trump are right to be skeptical about Chinese business and current iterations of ‘free trade’. For both Republican and Democrat lawmakers any international trade deal was considered good, because ‘free market’ equals good—or something like that. 

The Trump version of economics, which is really Bannon’s, insists companies look first ‘in country’ for tax deals and breaks before leaving for a low wage environment. As to how the policy toward economics will be affected it remains to be seen. Most supporters of globalization (free trade) sound a little humbler these days as populist politicians get elected all over the Western world. They admit that the benefits of trade have been gradual and slow while the downsides have been immediate and ugly—losing a job always is. Globalists aren’t ready to change their belief in the free market (neither am I) but admitting to missteps is a start. Agreeing to reconsider, and walk away from, large scale trade bills is a good move.