North Korea: Witness to Transformation

The Political Economy of Trade: I

Stephan Haggard (PIIE)

This blog has focused on the positions of the two presidential candidates on trade and investment because they are defining features of the US presence in Northeast Asia and in the Asia-Pacific more generally. In the first post I will address major economic policy speeches given by both candidates in the last two weeks. Their positions are of interest not only in their own right, but because of what they reveal about the preferences of the electorate. In a second post I review an important new study on whether individuals’ support for Donald Trump is tied to imports or vulnerability to offshoring.

The Speeches

Donald Trump’s major economic speech in Detroit and Hillary Clinton's rejoinder both provide insight into the candidates’ approach to trade. For those with an interest in Northeast Asia, the Trump speech was of interest because it specifically targeted the KORUS as exemplary of trade deals gone wrong. Although Trump’s “Seven Point Plan” on trade—reproduced in full below—does not target the KORUS for renegotiation, it does promise (or threaten) to renegotiate the NAFTA. The passage is worth quoting in full, in part because of the irony of a Republican presidential candidate citing the center-left Economic Policy Institute, which does good work in tracking wages, employment and social issues:

“Let’s talk about South Korea for a moment, because it so perfectly illustrates the broken promises that have hurt so many American workers.

President Obama, and the usual so-called experts who’ve been wrong about every trade deal for decades, predicted that the trade deal with South Korea would increase our exports to South Korea by more than $10 billion – resulting in some 70,000 jobs.

Like Hillary Clinton’s broken promises to New York, these pledges all turned out to be false. Instead of creating 70,000 jobs, it has killed nearly 100,000, according to the Economic Policy Institute. Our exports to South Korea haven’t increased at all, but their imports to us have surged more than $15 billion – more than doubling our trade deficit with that country.”

EPI analysis looks at static models of trade outcomes derived from projected liberalization, compares them with what actually transpired, and then attributes all of those changes to the trade agreement itself. As Dan Pearson at the (admittedly libertarian) Cato Institute points out, this method is completely flawed because it does not consider the counterfactual of what would have happened in the absence of the trade agreement. Changes in exports, imports and the current account deficit are the result of many things beyond trade agreements, including macroeconomic factors, technological changes, and shifting consumer tastes (such as for Samsung phones, which would have been imported virtually duty-free with or without the KORUS).

I am not a Pollyanna: trade and investment have effects on employment and wages and enforcement actions against a number of Asian trading partners are long overdue. But tearing up existing trade agreements and failing to reach new ones may or may not protect workers, and certainly won’t if job loss is driven by technological changes or other factors. There is nothing in Trump’s seven-point plan that helps the displaced or increases the American skill level to compete in the world economy; the effort to protect workers falls entirely on trade policy instruments.

Trump also routinely overlooks the fact that the US is an exporter as well as importer. For example, he appeared to choose Detroit as the site of the speech in order to invoke the auto industry as an example of the weakness of the TPP. However, he overlooks that the agreement actually has provisions that could expand auto exports, such as reducing tariffs in Vietnam (40%), Mexico (24%) and Malaysia (19%; for a summary of the agreement, see the Peterson Institute's analysis here).

Trump’s speech in Detroit opens by highlighting the decline of the city in almost apocalyptic terms; Secretary Clinton’s is more upbeat and leads with some success stories, including firms involved in exporting. Indeed, exports get as much play in her speech as imports. She is explicit in outlining what can only be called an industrial policy and places much greater emphasis on skill acquisition, and not only through college but for apprentice programs.

The candidates sounded at least broadly similar on trade, but details matter. Here is the heart of Secretary Clinton’s speech on the issue:

“But the answer is not to rant and rave – or cut ourselves off from the world. That would end up killing even more jobs. The answer is to finally make trade work for us, not against us.  

So my message to every worker in Michigan and across America is this: I will stop any trade deal that kills jobs or holds down wages – including the Trans-Pacific Partnership. I oppose it now, I’ll oppose it after the election, and I’ll oppose it as President.”

Clinton does not talk about renegotiating existing trade agreements, placing more emphasis on future agreements and on enforcement. Although enforcement is also a central plank of Trump’s trade plan, Clinton is somewhat more discriminating in talking about targeted retaliation tied to specific violations of existing multilateral and preferential agreements:

“So as President, I will stand up to China and anyone else who tries to take advantage of American workers and companies. And I’m going to ramp up enforcement by appointing, for the first time, a chief trade prosecutor, I will triple the number of enforcement officers, and when countries break the rules, we won't hesitate to impose targeted tariffs.

Now Mr. Trump may talk a big game on trade, but his approach is based on fear, not strength. Fear that we can’t compete with the rest of the world even when the rules are fair. Fear that our country has no choice but to hide behind walls.”

Trump, by contrast, explicitly invokes the more unilateral measures contained in Section 201 and 301 of the Trade Act of 1974. These measures provided wide latitude for the US to declare itself aggrieved even where foreign practices were not covered by existing agreements.

 

Election Watch: Witness to Transformation posts on the contest for the presidency:

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