How Donald Trump Could Terminate that “Job-killer” KORUS
(Source: PIIE Briefing 16-6: Assessing Trade Agendas in the US Presidential Campaign)
For months Steph Haggard has been on my case to write about Donald Trump, the political economy of trade, and KORUS. I counselled patience, but he got so frustrated that he even took a shot himself. Good things come to those who wait, and today we unveil the Big Kahuna.
For the last few months, Gary Hufbauer, Sherman Robinson, Tyler Moran and I have been working on an analysis of the two major presidential candidates. In our report, we take Hillary Clinton to task for her opposition to TPP. We think that such opposition is wrong on both economic and geopolitical grounds and is not in the best interests of either the United States or South Korea. But as any American with a cable TV subscription knows, Secretary Clinton’s opponent, Donald Trump, takes her reticence on trade policy to new radical depths. Trump has advocated punitive sanctions on Mexico and China, at times advocating firm-specific tariffs (which are historically unprecedented, illegal, and probably unconstitutional), has talked about abrogating “disastrous” free trade agreements (including that “job-killing” KORUS agreement, which along with NAFTA, he seems to regard with particular ire), and even talking about withdrawing from the WTO which could undo 80 years of economic diplomacy and plunge the US back into the Smoot-Hawley world of the 1930s. When asked about trade wars, he insouciantly replied “who the hell cares about a trade war?”
In this trade war, the American casualties would be drawn disproportionately from the ranks of less-educated, low-income workers, those most vulnerable to this kind of shock.
So we decided to look into this. In addition to being a formidable economist, Gary Hufbauer is a lawyer. His essay in our report examines the legal basis by which the president could implement Trump’s trade promises: imposition of tariffs, withdrawal from FTAs, and withdrawal from the WTO. The sobering conclusion he reaches is that the president has considerable executive authority to do these things, and even in the end, if he were stopped by the Congress or the courts, that process would be both costly and time consuming, giving President Trump ample time to wreak havoc.
So having established his capacity to do what he says he is going to do, what would be the economic implications? The analysis conducted by Sherman, Tyler, and I is a conservative one: we look only at the potential tariff wars and don’t go into the issues of abrogation of FTAs or withdrawal from the WTO, not because these issues are unimportant, rather they are simply difficult to model in the framework we use. We also don’t allow the government to shrink—if we let the public sector contract, the job losses would be even greater. To repeat: ours is a conservative assessment.
We find that in a full trade war where we impose tariffs on Mexico and China and they respond symmetrically, the economy slumps. (The interactive map above forecasts results from this scenario in 2019.) The hardest hit sectors are mostly in capital goods, but the decline in trade and investment is strongly propagated to the rest of the economy, and the biggest job losses in absolute terms are in so-called “non-traded sectors” such as retail sales, restaurants, and employment agencies. In this trade war, the American casualties would be drawn disproportionately from the ranks of less-educated, low-income workers, those most vulnerable to this kind of shock. The worst hit state would be Washington, with a fall of private sector employment for more than 5 percent relative to baseline. A broad array of states including a number of so-called battleground states (including, ironically, Indiana, home of Trump running mate Mike Pence) would suffer employment declines of more than 4 percent. Los Angeles would be the worst affected county in America (176,000 jobs lost) followed by Cook county Illinois (Chicago) (91,000), and Harris county Texas (Houston) (89,000). Other less populous counties across America are hit with even more severe loss losses, with 29 counties suffering employment losses of 7 percent or more. Santa Clara county California loses 64,000 jobs or 7.6 percent private employment, for example. The detailed results are available on the Peterson Institute website—you can look up your own home county and see how it might fare under various trade war scenarios.
In addition to the symmetric full trade war, we also examine other possibilities. What might happen if, instead of applying an across-the-board tariff on American exports China responded by targeting individual sectors such as aircraft, business services, or soybeans? We find that in this trade war the iPhone might be China’s secret weapon: while Chinese value-added is minimal (and hence the self-inflicted harm might be low) by intervening in the supply chains of US firms, China could make US consumers howl. Maybe that might stop President Trump.
Hillary Clinton’s trade policies are sub-optimal. Sinking TPP is not good for the US (or South Korea) either economically or strategically. But Donald Trump’s casual invocation of “trade wars” is reckless and dangerous, threatening the livelihoods of millions of Americans.