Launch of Assessing Trade Agendas in the US Presidential Campaign


September 22, 2016, 12:15 PM to 1:30 PM EDT
PIIE Webcast, Washington, DC

Gary Clyde Hufbauer (PIIE), Marcus Noland (PIIE), Sherman Robinson (International Food Policy Research Institute) and Mark Zandi (Moody's Analytics)

Event Summary

The Peterson Institute for International Economics (PIIE) presented a new PIIE Briefing, Assessing Trade Agendas in the US Presidential Campaign, on September 22, 2016. The lead PIIE authors, Reginald Jones Senior Fellow Gary Clyde Hufbauer and Executive Vice President and Director of Studies Marcus Noland, presented the striking results of their research on what the candidate proposals would actually do to the US economy. International Food Policy Research Institute Senior Research Fellow Sherman Robinson discussed the rigorous reproducible methods behind these results, and Mark Zandi, chief economist of Moody's Analytics, discussed this analysis in the context of his own and other mainstream projections of the US economic outlook under the two candidates.

The Institute undertook this research project because US trade policy has taken on an unprecedented prominence in this year’s election campaign, and because the two major party candidates for president have announced unprecedentedly anti-trade positions and proposals. This original indepth examination goes beyond the obvious fact that these proposals might be bad for the growth of US business and for relations with key allies at a broad level—the PIIE study reveals the shockingly great capability of the next US president to implement protectionist policies and even start a trade war on their own legal authority, and the specific harms that would be done to US incomes, communities, and security if they were implemented.

Gary Clyde Hufbauer has been the Reginald Jones Senior Fellow at PIIE since 1992. He was formerly the Maurice Greenberg Chair and Director of Studies at the Council on Foreign Relations during 1996–98 and deputy assistant secretary for international trade and investment policy of the US Treasury during 1977–79. He is a noted expert on international trade law, which he taught previously at Georgetown University, as well as on international economics.

Marcus Noland has been associated with PIIE since 1985. He was previously a senior economist at the Council of Economic Advisers in the Executive Office of the President of the United States. He has held research or teaching positions at Yale University, the Johns Hopkins University, the University of Southern California, and Tokyo University.

Sherman Robinson is a senior research fellow at the International Food Policy Research Institute (IFPRI) and is also a professor of economics (emeritus) at the University of Sussex. During the Clinton administration, he was a senior economist at the Council of Economic Advisers, on leave from the University of California. At the Council, he worked primarily on trade issues, including regional trade agreements, GATT/WTO negotiations, and the North American Free Trade Agreement.

Mark Zandi directs economic research at Moody’s Analytics, and is a cofounder of He is the author of several books, including Paying the Price: Ending the Great Recession and Beginning a New American Century, which provides an assessment of the monetary and fiscal policy response to the Great Recession. He recently coauthored the indepth analysis of the macroeconomic consequences of both Ms. Clinton and Mr. Trump’s economic policies.


Unedited Rush Transcript

Adam Posen: Good afternoon everyone and welcome back, I hope, to the Peterson Institute for International Economics. I'm Adam Posen, President of the Peterson Institute. And I am very proud today to be presenting our new study, our new PIEE Briefing, "Assessing Trade Agendas in the US Presidential Campaign." As some of you may have noticed, the contents are a little less innocuous than the title.

I have often said, and I believe it reflects both our history and our future. We're intellectually honest pro-globalization pro-free trade people. Our job is to go out there. We do have a core and ideological value that we believe is based on real economics in the real world and we're not compromising that. But at the same time, we're non-partisan not just in our tax code but in our genes.

The trade has taken on an absolutely central role in this year's presidential public discussion and in the campaigns. And this may be others in the room can think about this. This may be the most explicit and prominent trade issues have been ever in a presidential campaign certainly in my career.

Some of these obviously is due to the diminished, deservedly diminished, credibility of American and western elites for their reaction to the financial crisis and the slow recovery since. Some of these is certainly due although, I think, it sometimes gets exaggerated how much to the fact that a large share of American middle class people have seen their income stagnate in recent years. That goes back to the issue of if you care about middle class people, care about all of those who are affected not just those whose miseries can be putatively blamed on the Chinese.

But even if it's understandable why politicians today are leaping on trade, it remains short-sighted. It remains profoundly wrong. There are solid reasons why American presidents both Democrats and Republicans for 50 years plus actually now going on 70 years since the war have not shied away from free trade, have not docked America's responsibilities in the US's own self-interest. Make no mistake. The proposed trade policies of both Former Secretary Hillary Clinton and Mr. Donald J. Trump are huge deviations from that decades of consensus. And that frankly is why we did the study.

Think tanks have a long history. Our friends across the street were some of the progenitors of these. Every four years, you run through what are the candidates' budget policies? What are the candidates' tax policies? Occasionally, what are the candidates' foreign policies? And you try to do sort of an independent evaluation. And generally, we've never had to do that on trade because there was continuity. There was bipartisanship. This time we had to and I think we've done it well. And I'm grateful to our authors, Marcus Noland, Gary Hufbauer, Sherman Robinson, and Tyler Moran for doing that.

What would happen and what this study reveals is that if we do go down the path of trade conflict, let alone trade war, it will not only be bad for the economy in some abstract level of national aggregate accounting or foregone but very real potential gains for the US economy. It will matter to lower income workers and vulnerable communities that have not yet fully recovered from the financial crisis.

This ultimately to my mind is the contribution, one of the two key contributions frankly, that this study makes is it makes concrete, what it means to the US economy is integrated with the world economy, what it means for working people. It's not about a headline number of this will happen to US exports. This will happen to US growth though that matters. It's about you can go and look and say, "Santa Clara, California because they've been really good at building equipment that is important to the world outside the US will lose." And that in community like that where the loss has come, it will be the retail workers at Wal-Mart and Target and Costco, not the big fancy people in this room or in New York or in Washington who will be hit.

And it is material and real and concrete as my colleagues show in the study that it's not just about the abstract. Oh there will be cost of protectionism. The cost of things will go up. It means actual products in the stores that people will no longer be able to afford. And so to me, one of the two main contributions to repeat is about making tangible not by anecdote but by analysis. What are the ways that ill-founded trade policies by either of the presidential candidates would harm actual American communities and households?

The second main contribution of today's study, which is particularly due to Gary Hufbauer is to go through the state of executive privilege or executive discretion that now exists for US presidents particularly with respect to trade. I think many of us have known and seen since the days of the Bush-Cheney reaction to 9/11 that the executive branch now has huge power to implement directives. Some would say President Obama has used that power aggressively in his pursuit of various environmental standards and criminal justice things.

The point that Gary conveys I think persuasively is if you go through the actual statutes, there is a huge amount of President Trump or President Clinton though she does not threaten to do this. A huge amount of President Trump could do to ruin American trade relations on their own unilateral authority either directly, temporarily, or doing it and waiting for some other country to sue you in the WTO or NAFTA court or whatever.

As I think you have seen, we have a presidential candidate who doesn't mind acting first and getting sued later. This is a genuine threat. And part of our goal is to remind Congress and remind the courts and remind the people who talk to Congress you have to be wary of this. In fact, I believe Gary it's up to him to make with his statement of what he recommends. But I believe Gary goes on to say we should be reviewing the statutes at least in the trade area that give the President such authority.

Let me make two other points or three other points quickly so my colleagues who are going to give you the substance don't have to. The first is we evaluate what the candidates say. So there always will be someone who will tell you, "Oh he didn't mean that. That's just a threat or a negotiating ploy." Or "she didn't mean that. In her heart of hearts, she really loves trade agreement," not specifying any pronouns here.

We did it by looking at their statements they came back repeatedly to and what they maintained on their websites and their campaign materials. We're not fools. It is possible that something is just a negotiating ploy or something is just a temporary pander. But let us also not be foolish.

Any negotiator, not just Donald Trump, knows that if you make threat, there has to be at least a chance that you're going to carry it out or else the threat is worthless. Any person in politics knows that if you make a series of statements saying I could never do that, it's a little hard to turn around later and say I didn't mean it.

What we hope to accomplish in part through the study and through all of you, I hope, disseminating the messages of the study is to tell people hold these candidates accountable. Let them correct their mistakes. Let them say, "Well, I didn't really mean that and there is good reason." We're happy with that. But let's be clear that their statements have to be taken seriously and those policies that are being stated are dangerous.

Second point, we are non-partisan. Despite my remarks of various kinds, we set out to do this as I said from the start because we feel both candidates are deviating in significant ways from the post-war consensus and from good policy. But we are not some at pieces of the media. We are not going to pretend false equivalence so we don't get accused of being unfair. We're not going to pretend that there's something on each side.

What our study shows and what I believe to be true is that while Secretary Clinton's proposed policies would be harmful, they would be foregone opportunities. They would be losses on our foreign policy. They are not horrendous. They are as Mark and Sherman have argued fundamentally status quo, just not moving forward.

Mr. Trump's proposed policies would, as the study shows be horribly destructive. That is a genuine difference. That is not a partisan call. I don't care for purposes of this report who says the bad policies and I don't care who implements the bad policies. I just don't want them to happen. And I think that's what I and all my authors share, our authors share.

Finally, there is always the question about numbers and data. And many of you have seen we've received, I think deservedly but we're appreciative for it, widespread coverage of the early release of the study throughout all the major mainstream media, which may mean that 50 percent of the electorate hasn't bothered to find out about it yet.

As good as many reporters have given reports on this study, they often headlined this will cause a recession. This will cause $4 million job loss. That's not quite what we're saying. My colleagues will spell out what it is we're actually saying. There's not one big number here that we're staking everything on.

What we are doing what my colleagues have achieved is they have made an analysis that's empirically grounded that's granular that made sense. That if you start messing with the trade of the United States and its trading partners it will channel through the US economy in identifiable ways with identifiable industries and identifiable communities. It's real.

And so I ask you all to carry out the message to tell people, yeah. If we had foreign trade war, there probably is a recession and probably is millions of jobs. But really just look at this as a way of thinking. Doesn't it make sense that if you stop American companies from investing and exporting at what they do best and getting inputs from where they should get them it's going to cost jobs? Doesn't it make sense that you can figure out that it's actually the poorer people who are going to be hit on both sides because they're the ones losing the jobs? They're the ones whose communities get hurt. They're the ones who can't afford the higher prices. That is the message we hope as many people in America will take away and consider as a result of the study.

So let me know go to the stars of the show, our authors. Leading off will be Dr. Marcus Noland. He has been associated with the Peterson Institute since 1985. He was previously a Senior Economist at the Council of Economic Advisers. He's held research or teaching positions at Yale, Johns Hopkins University, the USC, and Tokyo University. Not a bad list. And of course, he is also our Executive Vice-President and Director of Studies.

He will be followed by his own and the Institute's longtime friend and colleague, Sherman Robinson. Sherman is a Senior Research Fellow at the International Food Policy Research Institute. During the Clinton administration, he was a Senior Economist at the CEA as well, on leave from the University of California. He's worked on a variety of trade modeling issues and trade policy issues through the years and will be taking us through some of the methodological innovations that they've done in the study.

Third speaking is the aforementioned Gary Hufbauer who, of course, is the Reginald Jones Senior Fellow here at the Institute since 1992. He was Director of Studies at the Council on Foreign Relations and previously Deputy Assistant Secretary for international trade and investment at the US Treasury. One of the wonderful things about Gary and there are many but just so you all know is he's one of the few people who brings together international trade law and economic analysis in a first rate way having taught international trade law at Georgetown. And that's why he brings to us his unique perspective on making it real that this isn't some abstract idea. This is what the President could actually do.

Finally, we have a distinguished discussant today from the outside who I'm grateful to have with us, Mark Zandi, who directs economic research at Moody's Analytics. And he's the co-founder of Many of you have read his books. I wish some of our books would sell as well as Mark's. He and I have interacted many times on the advisory panel of the Congressional Budget Office at various Federal Reserve Bank conferences. He's very well-known to everyone. And he has co-authored recently what I think is the best mainstream analysis of the broader macro policies of the Clinton and Trump economic proposals. And that played a key role as an input into our study. And Sherman, he will also be talking about that. But Mark is really here as a commentator.

Thank you very much for joining us. Please forgive the length of the introduction. But I feel this is the Institute's mission. And I'm grateful to my colleagues for carrying it out and I'm grateful to our supporters who told us don't be afraid and we're not. Thank you.

Marcus Noland: Thank you for that very generous introduction and thank you all for coming out this afternoon.

Once when I was in South Korea, I had to traverse a mob of student protesters to get to a conference venue. And the mob surrounded me and demanded identification. They were concerned that I was with the CIA. And I thought to myself, "I'll be damned if I'm going to give these kids my passport." And then I realized I had my John Hopkins University faculty ID on me. So I handed over my faculty ID and they passed it around the crowd and they eventually decided I wasn't with the CIA and they let me go. And when I made it to the conference venue, I said to one of the hosts. I said, "You know I'm an economist and I normally work on boring, arcane, uninteresting topics. I've never had to show my library card to a mob to get to a conference."

I feel a bit the same way this afternoon. There has been a rough consensus in the US about the desirability of an open international trade order for decades. Trade policy has seldom, if ever, become a top-tier political issue. But the mob is bearing and the 2016 presidential campaign has departed from the norm. So what I'm going to do in the next few minutes is summarize a research that I've done together with Sherman Robinson and Tyler Moran.

Now, Hillary Clinton, the Democratic candidate, has expressed skepticism about trade ,but in effect represents stasis. Donald Trump, the Republican candidate, offers a sharp departure from the status quo. And for this reason, the presentation will devote more time to his policies.

Both candidates oppose the Trans-Pacific Partnership which is regrettable on both economic and strategic grounds. But Trump goes much further than Clinton. He threatens to slap punitive and possibly even firm-specific tariffs on products imported from China and Mexico, abrogate existing free trade agreements such as NAFTA and KORUS, and possibly even withdraw from the WTO.

If implemented, these policies would put the livelihoods of millions of Americans at risk. And the American trade war casualties would be many people working in non-trade and good sectors who probably don't think of their livelihoods as being connected to international trade as well as being disproportionately drawn from the ranks of the lower skilled and lower income, that is to say, people least able to absorb such a shock.

The proposals to renegotiate or abrogate our existing FTAs could harm US economic and strategic interest in Asia, the Middle East, and Latin America. And withdraw from the WTO could land the United States back in the Smoot-Hawley world of the 1930s.

So let me start with Secretary Clinton. Secretary Clinton in her long career in politics has not taken a dark or narrow position on trade. She opposes TPP, which research here at the Peterson Institute suggests would give at least or bring at least $130 billion a year of benefits to the US economy. She advocates creating a chief trade prosecutor position reporting directly to the President. Triple the number of officials monitoring the implementation of trade agreements by America's trade partners. Create an early warning system to detect implementation problems.

She opposes granting China market economy status, which would make it harder to impose anti-dumping sanctions, which is to say she wants to continue to make it relatively easy to put anti-dumping measures on imports from China. And she has also expressed concerns about the currency manipulation by China and other countries. And she backs legislation to impose countervailing duties against countries that maintain undervalued currencies to gain an unfair advantage in trade.

And in some sense, the difference between Secretary Clinton and Mr. Trump can be encapsulated in that last point. As my notes say, she has expressed concerns about currency manipulation by China and other countries. And she backs legislation to impose countervailing duties against countries blah blah blah. If you go to the Trump website, the first day in office he will name China a currency manipulator and it goes from there.

Now, assessing the trade policies of Donald Trump posed a certain analytical changes. Unlike his carefully scripted opponent, Mr. Trump often communicates his positions extemporaneously and, in addition, some commentators including a number of his economic advisers interpret his statements as mere negotiating gambits. But three considerations suggest that Trump does indeed represent a sharp departure from the, until recently, prevailing consensus.

His campaign has blamed wage and unemployment problems in the United States on trade and, in particular, on disastrous trade agreements. He has repeated these views since at least the 1980s suggesting that he might actually hold them. And even if the statements were strategic, acting on them can intentionally or not produce escalating cycles of retaliation by trading partners.

When planning a war, it's probably not advisable to assume that one's adversary will surrender upon the first shot being fired. Trump's advisers repeatedly cite the example of Ronald Reagan's policies towards Japan in the 1980s to explain how their policies of threats will work. But it goes without saying that the relationship between the United States and China today is vastly different between the United States and Japan in the early 1980s. At that time in the context of the Cold War, the United States was Japans' ultimate political and military guarantor. And the Japanese, however grudgingly, in the end would comply with US demands.

If anything today, the United States and China are strategic rivals. China actually could gain diplomatically by standing up to the United States. So the idea that lessons from 1982 can be applied to 2016 are unwarranted. And for these reasons, as Adam said, we take Trump's word just as we take Secretary Clinton in hers.

In particular, Trump has stated his intent to impose a 35 percent or possibly firm-specific tariff on Mexico, impose a 45 percent tariff on China, renegotiate existing trade agreements, and if things don't go his way, withdraw from the WTO. And Gary Hufbauer, in a later presentation, will assess his ability to carry out these promises. For the purposes of my presentation, I'll just assume he can.

So let me go to the modeling. We produced three illustrative scenarios. First, there is a full trade war in which the United States imposes a 35 percent tariff on Mexico and a 45 percent tariff on China; who then respond symmetrically imposing their own tariffs against the United States. We have an asymmetric trade war in which rather than imposing a uniform tariff against the United States, China retaliates by retaliating against specific sectors. And then we have an aborted trade war where the tariffs are removed after one year.

For the full and aborted trade war scenarios, we start with the Moody's Analytics macro model for baseline and scenario runs. So we'd like to thank Mark Zandi and his colleagues for their generosity. And I look forward to listening to his remarks. Together, China and Mexico account for a quarter of US international trade in goods and services. So the shock associated with imposing a 35 or 45 percent tariff are not trivial.

And extending the Moody's model, what we do, and Sherman Robinson in the next presentation will go through the specific methodology, we basically disaggregate these effects to sectoral and then state and even county level effects using the methodology that Sherman will discuss.

So what I'm going to present right now is a snapshot of the year 2019 which is the worst year in these scenarios. And I will show you figures on employment effects. Those employment effects will be transitory. Eventually, the economy will recover. People will be re-employed though there's no guarantee they will be re-employed at the same level of income that they were earlier.

And before I go into the details, let me just underscore two points. Our assessment of Trump's policies are conservative in two senses. First of all in the two sets of scenarios based in the Moody's model, we hold the public sector fixed. We hold publics sector output fixed. So the effect is only on the private sector. So we're actually getting less of a shock than Moody's gets in their original run. And secondly, we only look at the tariff war scenarios. Because of the modeling framework, we don't investigate the possibility of abrogating FTAs or pulling out of the WTO. So we're only looking at a subset of Trump's policies.

I should also mention I think this is very important that these models do not capture the disruption to cross-border supply chains that these policies could create, which could be particularly profound in electronics and motor vehicles where the supply chains are very extensive. And China and Mexico are very important hubs in those two industries.

These supply chains are impossible to model because only the firms involved actually know the specific supplier relationships and the potential alternatives. And only these firms know how they might react to the proposed policies. Neither the model here nor I would underscore the Trump campaign can capture these highly nuanced relationships.

And it's likely therefore that the model that we're going to present actually underestimates the disruption that would likely accompany the contemplative policies simply because it's impossible to disaggregate these relationships to the necessary level of granularity.

So let's get into the actual results. The basic Moody's results used in the full trade war and the aborted trade war are presented in this slide. The left-hand side panel shows the evolution of GDP. As you can see easily in the full trade war scenario, there is a significant slowdown in the economy and loss of output. The impact in the aborted trade war scenario is much more mild. In terms of a GDP output, these scenarios fall almost heavily on investment both because of the role of investment goods in US exports as well as the collapse of investment as the economy itself slows down.

So in the full trade war scenario, we hold public sector output fixed and we disaggregate the shocks to 369 sectors. The results again are presented for 2019, the worst year of the scenario. And the job losses are measured as deviation from baseline. In terms of sectors, capital goods and mining are the hardest hit reflecting as I said both the export loss and the slowdown of investment with output of employment in some of these sectors declining by 10 percent.

However, that trade policy shock is propagated through the inner industry linkages very forcefully to the non-trade and goods sector. So in absolute terms, the greatest number of job losses are actually in non-trade service sectors such as retail distribution, restaurants, and temporary employment agencies.

These sectors disproportionately employ low-skill, low-income Americans. And many of the people who would be adversely affected in this scenario probably do not think of their jobs as being connected to international trade. Now, we pushed the results even further down looking at the results by state using state and county level employment data that link to our sum multiplier model.

Washington state is the worst affected with 5 percent employment decline relative to the baseline. There is a swath of 19 other states as you can see particularly across sort of industrial midwest where the decline in employment is on the order of 45 percent. And an interactive map is available on the Peterson website.

As I mentioned, we actually pushed those all the way down to the county level. In terms of counties or municipalities, Los Angeles, Chicago, and Houston are the hardest hit. Santa Clara County in California, which is San Jose is arguably the worst affected county in the country because it combines both significant decline of employment in absolute and percentage terms.

We produced a map in which we start coloring in some of these counties. It's a little hard to read unfortunately. And the coding is a little difficult because some counties get hit in more than one scenario, but as you can see—well, I'll just leave it at that.

And before I go onto the asymmetric trade war, let me simply say in passing that in the aborted trade war, the results are not identical. But they tend to be similar by sector and they tend to be similar in terms of the state and the county level geographic impact as well. They're just much smaller.

So in terms of asymmetric trade war, we provide examples of a number of ways that China could potentially retaliate in the paper, and we formally modeled three of them. These are China ending aircraft imports, engaging in a "Buy No American" policy in which it instructs the state-owned enterprises to stop buying US business services, which we modeled as a 40 percent reduction in US business service exports to China and putting on an embargo against US soybean imports. And as I said, the paper discusses other avenues of retaliation, but we don't formally model these.

These scenarios are not contingent on the Moody's model. And they just come straight from our model. Again, I'm going to show you a first order shock. Eventually, the impact would dissipate. Eventually, people would be re-employed though, again, no guarantee at the same level of income. That might happen most rapidly in the soybean case.

Soybeans are a commodity. You might think that shifting the pattern of trade or trade diversion to make up for the shock would be the easiest in the soybean case. We looked at a similar embargo in the 1980s where USDA found it took a year for trade to reorient in itself. So that gives you a sense of the duration of the shock even in the simplest case.

So what we find in the case of aircraft is nearly 180,000 jobs are displaced. Aircraft production is concentrated. So, relatively few areas such as Wichita, Kansas, the Seattle-Tacoma-Everett area of Washington State, Los Angeles County and Orange County in Southern California would bear the brunt. These are color-coded blue on the map except for counties like King County, Washington, Snohomish County, Washington, Los Angeles County, which come up in multiple scenarios and are coded yellow.

Ending purchases of US business services by state-owned enterprises if you look at this map of worst affected areas, it's practically constitutes of map of the high tech urban areas of the United States. The worst affected areas are Los Angeles, Seattle, New York and its suburbs, Chicago, Houston, Boston, Silicon Valley, Dallas, Phoenix, along with some smaller tech hubs such as the suburbs of Washington DC.

And then in the case of soybeans, we get a very different result. At least in the case of business services while people might be losing their jobs, they're losing their jobs in the context of large urban labor markets. In the soybean's case, some of these lightly populated rural counties would take enormous hits once the direct and indirect effects were taken into account. And you can see these in this green belt of counties that goes up through Mississippi, Arkansas, Tennessee, and into Missouri where a number of the counties experience employment declines of 10 percent or more.

Final scenario is the aborted trade war. The motivations of the aborted trade war is we started trade war, but then we backed off. And one possibility is Mexico and China surrender. Probably more likely possibility and Gary will discuss this is the administration loses in the courts or the Congress somehow overturns the policy.

Probably the most likely way you would get the aborted scenario, however, is this simply causes so much disruption in the United States and there's such a public and political outcry that the administration is forced to stand down. Some of the mechanisms for that would be shutdowns of supply-dependent factories in the United States. The best analogy is the 9/11 where we closed the border with Mexico. And within about a week, automobile assembly in the United States was being affected. The anguish in Detroit was so great that the policy had to be reconsidered.

There would be turbulence in the financial markets as major US firms started marking down their revenue and earnings as they lost products. They lost access to supplies. And they face retaliatory tariffs. Plus a threatened or real sell-off of Chinese assets in US financial markets.

Finally, you could get shortages and rises in consumer price products. And in this trade war, the iPhone may be China's secret weapon. Less than 4 percent of iPhone value-added is put on China. So disrupting the production of iPhones in China would not be a great self-inflicted loss to the Chinese. But it would be very costly to try to reproduce an iPhone without access to those facilities in China. Moreover, with the Chinese moving into the smartphone, not only could they disrupt production of the iPhone, they could offer to sell you the alternative. They could sell it in the world markets, but they probably couldn't sell it in the United States because they'd be facing a 45 percent tariff.

Now, the problems associated with this trade policies are not limited to the loss of income and employment that I've discussed thus far. But they extend to broader reaches as well. Basically, both Clinton and Trump opposed the TPP. Failure of the TPP would cede leadership to China in the trade policy-making area and I think eventually other diplomatic areas in Asia to China. Such a forfeiture of leadership would be taken as potential unreliability by the United States and undermine US national security interest more broadly.

Abrogating the free trade agreements could further harm US interests both with long-time allies like South Korea, Singapore, and Australia, but also moderate Arab states where their free trade agreements with the United States are an important component of their economic development strategy where they face a very important youth bulge and issues of radicalization.

And abrogating the free trade agreements with Latin America could always obviously cause problems there. The most clear example is the case of Mexico. US and Mexico long had problematic relations. In the 1980s, Mexico began a process of reform. Part of that process was to reach out to the United States and initiate negotiations over NAFTA.

It would be wrong to claim that everything good that has happened in Mexico in the last generation is due to NAFTA. But I think it's hard to argue that the closer political and economic relations with the United States has not supported the economic, political, and social modernization of Mexico that we've witnessed over this period.

Abrogating NAFTA would be a blow to Mexico economically, politically, and socially. And ironically, the blow to the economy could actually stimulate undocumented migration to the United States as well as an expansion of illicit activities precisely the opposite effect that Mr. Trump says he wants to achieve.

So in conclusion, Hillary Clinton supports strengthened enforcement of existing rules and getting tougher on currency manipulation. But she opposes TPP, the only major trade agreement currently under consideration, agreement that has been estimated to yield significant benefits to US economy.

Donald Trump advocates policies that could overturn the existing US-led rules-based international trade system. He's promised to slap high tariffs on China and Mexico. We consider or abrogate US participation in existing free trade agreements and contemplate withdrawal from the WTO itself.

The most intensely hit sectors in the Trump trade war would be in manufacturing and mining. But the largest job losses would be in sectors such as retail distribution, restaurants, and temporary employment agencies.

These policies place at risk the livelihood of millions of Americans most of whom probably do not think of their jobs as connected to international trade. The American casualties in these trade wars would be disproportionately drawn from the ranks of the lower income and lower skilled. Some localities could experience devastating job and income losses if only on a transitory basis. These adversely affected regions include high tech centers like Silicon Valley, business services hubs like Los Angeles and New York, manufacturing sectors or centers like Everett, Washington, and rural counties in states such as Mississippi, Arkansas, Tennessee, and Missouri.

The results presented in this analysis constitute a conservative assessment of the damage to the US economy that could result from of the trade policies advocated by Mr. Trump. Other policies that he has proposed such as withdrawing from the WTO could be cataclysmic. Undermining 70 years of US economic diplomacy and pushing the United States back into the Smoot-Hawley world of the great depression.

The opposition of both candidates to TPP is regrettable. But Trump's casual invocation of trade wars is reckless and irresponsible, jeopardizing the livelihoods of millions of Americans. A far better response would be a combination of liberalization and improved adjustment support, the package that this Institute, I am proud to say, has long supported and advocated. I will now turn things over to Sherman and I look forward to further interaction in the question and answer period. Thank you very much for your attention.

Sherman Robinson: You've heard why we did it, some of the results. Now, I'm going to give you the five-minute version of how we did it.

Basically, we're looking at a short to medium run impact of a shock. The argument is that the sorts of things that are being proposed are going to cause a macro shock and we want to track that shock. And it's the trade-induced shock part of it so it's both macro and more trade specific in sectors. And we want to sort that out.

What we've heard is a bunch of scenarios that we've drawn from what Trump had said and basically two kinds of scenarios; the macro shock which causes a lot of sectors and hits lots of parts of the economy and then very firm-specific or sector-specific shocks. These are scenarios. They are not forecasts. We are not in the business of predicting the future. We are doing "what if" analysis.

For example, the Trump campaign has come out with a statement that criticizes a couple of our specific shocks because they are wildly unrealistic. If I were in the USTR's office, for example, I would be very interested in analysis of the potential things that your opponent and negotiation might do. Even if you don't think they're likely, you'd like to understand what they will do. All those specific shocks you should think of as scenarios along those lines. And I would hope the next administration would think about that sort of thing.

We've worked with the macro model for the macro shock. It's a macro-econometric model. You'll get the details later. Basically, it's a class of Keynesian macroeconomic models, macro-econometric models that go back, I don't know, 50 years. They've been around a long time. What makes them relevant for this sort of analysis is they embody an assumption that there's a Keynesian link between shifts in aggregate demand and supply-enhanced employment. So they allow the possibility of involuntary unemployment. That is a major driver of what we're trying to do.

There are other models in the same family. The Oxford Economics in Oxford, England has a model and has done a similar analysis and gotten somewhat similar results. We can fuss about the details of the models. That's an interesting discussion, but not particularly important for us.

The underlying story is there's going to be a macro shock if you go down this route and it's very hard to imagine there won't be. And we want to track out a perfectly reasonable scenario at the macro and what if it does when we get down there.

The underlying assumption under both of these is it's hard to do a reaction to the shock. And I think in an environment where monetary policy is kind of at the end of its rope and you can't do fiscal policy because the Congress would simply not allow it, you've got sort of limited abilities. So I'm not at all surprised by the kinds of stories that come out of the macro model.

Now this is a diagram you usually see in an EC1 course, but it's useful in this context. This is a picture of the circular flow of the economy. Here are producers; industries. Here are the consuming side households, government, savings, investment, and the rest of the world. This is a supply side of the economy. This is the demand side.

What you're seeing from the macro model is working with these macro aggregates, household consumption, government, investment, imports, exports. They work at a very aggregated level, sometimes a little disaggregation depending on the model. And there is where the macro action is. And those models have all kinds of interesting macro features, financial systems, what have you.

The result of it is a shock on aggregated consumption, aggregated government, aggregated investment and trade. What we then do is take that shock on demand and translate it into shock on production. They worked at either the aggregates or maybe a few sectors. We worked at 389 industries. So you're seeing we're on this side, but it's being driven from that side. So that's the philosophy of what we're doing.

We used an input-output model as a core database. It's a long tradition. These models they go back to Wassily Leontief who won a Nobel Prize for this. They focused on inter-industry relations. And to go back, they're focusing on this. And that is where all of the indirect linkages come from. If you hit airplanes, you're going to hit airplane parts. Airplanes are produced in Seattle. Airplane parts are produced in all kinds of places. And that reverberates through the entire system 389 x 389. So there are a lot of causal supply chains in that and we track them.

It catches all the direct and indirect demands for it. This class of models taking it down to the regional level and state level is a long tradition in the US. Again, it goes back a long way. There are in fact two companies you can hire; the IMPLAN which started with the US government data and something called the REMI model, Regional Economic Models, Inc, that will do this kind of analysis for you at the state and local level. If you think there's a shock, they'll come in and tell you what's going to happen. You have to pay them for that. And they have their own private proprietary models. They're actually closely related, I suspect, although I've never been inside them to what we're doing.

So what we've done is take that input-output structure and convert it to what's called a social accounting matrix. That is an accounting framework developed by Richard Stone who won a Nobel Prize for that work. It is the foundation of the System of National Accounts. And it captures all the links between the economic actors; households, governments, savings, investment, the rest of the world, and the production side, in one large accounting framework.

So we end up with a matrix that's 389 industries, 389 commodities, and a whole bunch of final demands. We differentiate trade by county of origin and destination. We're talking 400 and something—well 800 and something when we're done.

We then run that through. We turned that into a multiplier model which is a very simple model. It assumes linear relationships and fixed prices. What we're doing is downscaling disaggregating the impacts that are being driven from the macro side.

So that's linked and we are working at a very disaggregated thing. This same multiplier model has been around again a long time. We understand how that works. In a third step, we disaggregated from the national 389 industry sectors down to states and then down to counties using a whole bunch of state and regional data. In fact in the US, you can get input-output tables at the state level. So that's a third step and that's a process in its own right.

So basically, we are top down. We're going from Moody's macro models down or particular sector shocks down. The model disaggregates that in a way which is pretty simple, but quite consistent with a short to medium run macro model story and then a separate model which is basically taking the employment effects alone all the way down to the county level.

Last slide. The methods are not novel. I mean this technology has been around for 30 or 40 years. So there are lots of advantages in both types of models, but it's not like we're inventing some magic black box. It's out there. Our contribution is to link them to be able to take the results at a very high level of aggregation and disaggregate them down. And with that, I will move onto the next speaker.

Gary Hufbauer: And maybe you could give me the clicker. Well, let me start by saying that Tyler Moran who is here did a lot of this work. They borrowed him from me and Jeff Schott for the better part of a couple of months. And he did enough work to get his PhD down in Duke. So he came up here today for lunch. So, Tyler, thanks very much.

And I want to especially thank, for the work that I'm going to present in a moment, the eminent legal scholar, Michael Gadbaw, as well as Phil Levy at the Council in Chicago and Doug Irwin, a great well-known economist at Dartmouth for reviewing everything that I'm going to be talking about in a moment. And he's giving me a pass on this and especially Michael Gadbaw who worked with Fred and me in the Treasury years ago and is a very careful legal scholar.

So if you read what Justin Wolfers had to say in the New York Times on Tuesday, you've got the message and it would be a good time to go for dessert and coffee. He summarized it very well.

Okay. We all know what Trump said on trade. And as both Adam and Mark emphasized, this could all be a bluff. That's what his adviser, Peter Navarro, essentially said that it's all a bluff and none of this is going to happen. So we've been to that, but the statements are strong as Mark emphasized.

Okay. Turning to the legal ground for what he's talked about, as you know, the Constitution consigns the regulation of trade internally and externally to the Congress. But what is not so well known in America at large, it's probably known in this room but not in America at large, is that Congress over the last century has delegated enormous amounts of power to the President to restrict trade. And on occasion when we have trade agreements coming up, they grant temporary power to the President to liberalize trade.

So Congress could amend these statutes which I'm going to briefly run through. But amending a statute is always a very difficult proposition especially if President Trump with an office. And it seems almost impossible that you could have any amendments before January of 2017. The probably more critical point which I've had a little pushback from one legal scholar in New York is that I don't think the courts would intervene or would not intervene to a sufficient extent to stop the kind of trade policies or proposals or actions which Trump has talked about.

My analysis on this respect is very much guided by Justice Scalia, the late Justice Scalia, who basically said and what I think is one of his permanent imprints on American jurisprudence. You should absolutely read the statutes. Read the statute first and only much later go back and look at the context to modify or inform or the legislative history, but read the statute. And so that's what I did in this exercise.

So we can start with the NAFTA Implementation Act which is very similar to the trade acts or free trade agreement. And it has a termination clause, which is very common. And it also has a further clause -- and this is also common -- that the President can proclaim additional tariffs to rebalance the general level of concessions. You might ask. What's the rebalancing needed? Well if you've listened to Trump's speech as you know, a lot of rebalancing is needed. He's run on that platform. So there you go. That's his power. To withdraw from NAFTA and to do some rebalancing.

In the WTO, this does seem cataclysmic, as Mark said and I don't draw very much on this. But we have the Column 1 tariffs which are the most favored nation tariffs and then we have the Column 2 which are the Smoot-Hawley tariffs. If we actually withdrew from the WTO kind of what's left. I mean the reason we have the Column 1 tariffs is because we belong to the WTO. Well what is left is there's a provision if you actually read it in the Uruguay Round Agreements Act that allows the President to proclaim tariffs. It's not limited in time. So maybe Trump could invoke that to spare us from the Smoot-Hawley tariffs.

Moving right along, we have some cold war statutes, which gave the President powers, which are I would call more limited. So in the Trade Expansion Act of 1962 which has not been much used, the President can impose tariffs for national security to preserve national security. This has been used once as I mentioned in a broad way by President Nixon.

The Trade Act of 1974 goes a little bit further because it has a Section 122 which was enacted by Congress because they thought maybe Nixon didn't have really the proper legal ground to do what he did at the time of the Smithsonian episode. So it gives the President power to impose a 15 percent tariff for 150 days or have quantitative restrictions for that period of time, 150 days, roughly half a year. You can do it generally or for particular countries where we have a balance of payments problem. And I think Trump would say we have a balance of payments problem with China and probably Mexico.

Then we have Section 301 which was used quite a bit before we had the Uruguay Round of negotiations. But the Section is still there, I mean, read the statute. I know in Uruguay Round we agreed not to use it, but the statute is still there. The President still has that power. You say what did those guys do in the Uruguay Round? Throw that out of the window. And so it's any unfair restrictions of commerce that's a pretty broad concept. And then the President can redress against that.

Then we have a couple of statutes, which are almost unlimited. And I know that some people would say, Well, it was never contemplated that these would be used in the manner that Trump could use them and not threatened to use these particular statutes," I want to emphasize. But, again, I say read the statute. Don't go back to what Congress was thinking in the first World War or when Fred was running the Treasury in the Carter administration. But actually read the language of the statute.

And these are very broad statutes. The Trading with the Enemy Act was widely used for economic sanctions until IEEPA came along. And now, it's mainly used for economic sanctions. And that's been the use for sure. But it's not limited to economic sanction. And the scope goes all forms of commerce; intellectual property, trade, you and me, et cetera, et cetera. So those statutes are there.

Now, certainly this would be, I guess, a delight to case read because the amount of legal talent, which he brought against Trump is enormous, all the auto companies, I assume -- apparels, Apple, and so forth. I mean if any of these was invoked, these firms will certainly rush in with very capable lawyers to challenge President Trump. So there'll be no end of litigation.

I urge those who think the litigation will quickly prevail to read the two cases, which are cited there where the President was challenged for his use of executive powers. And I think they are easily distinguished for reasons I set forth in the brief.

But I would mention, and here I thank again Michael Gadbaw, emphasizing this. There are 90 federal jurisdictions in the US and many of them have many federal judges, but 90 jurisdictions. So that gives the plaintiffs a lot of room to find a federal judge of which there are some 500 or so at the lower court or district court level to put in a preliminary injunction to stop him. That's how it could be stopped. My argument is that it would be hard because he has all these statutes in his hand, and it would be an uphill battle. But I don't say that you couldn't find a federal judge in some district who would think he had gone overboard.

Now as for US trading partners, they could, of course, go to the WTO and seek nullification or impairment remedies. The WTO machinery works fairly fast as legal machinery goes. But it does take a year or 18 months to get to a final resolution by the appellate body. That's a long period of time if you're losing trade. So many countries might simply retaliate which is what Mark talked about.

So quickly to conclude, I think the threats are amply supported by existing statutes. I don't think that American people can rely on the courts or Congress to quickly stop these threats from being carried out if the President were to decide to carry them out. We can expect legal battles obviously in our own courts and in the WTO. And I think this whole array really raises the issue which Congress should look at as to how much power it has delegated the President over the last 100 years to restrict trade. Thank you very much.

Mark Zandi: Well, I want to thank the Peterson Institute and Adam for the opportunity to be here. Thanks for the hour to speak, Adam, very kind of you. Yeah, I'll be quick.

No, actually, what's impressive is you filled a room with folks standing in the back. In this room, we're talking about Leontief input-output models and Section 301 of the Trade Act of 1974. That's like really that's pretty good. A bunch of geeks. I'll be quick. I'll make three points.

And by the way, I enjoyed the comments immensely. I don't think we really ever found out whether Mark was in the CIA or is he still in the CIA. You see how he kind of didn't let us know that. It looks a little tricky over there, taking the clicker and everything. And I do applaud the fantastic work you've done. Incredibly creative work making some of the things that we've done at Moody's very granular and real. And people get a better grip on things when they see what it actually means for their community and for specific industries. And so, I think, that's a very valuable contribution.

But I'd like to make three points in my remarks. So point one, I don't think there's any doubt that globalization and I know the conversation here has been centered around trade. But this is a broader conversation about globalization. And globalization is trade for sure. But it's also immigration and just as a tangential point, I don't think I can think of a single policy step that would matter more to raising the economy's long run potential growth in a shorter period of time as comprehensive immigration reform. I think that's key and that is a vital distinction between the two candidates, which I'll come back to.

The globalization is immigration. It's trade. It's foreign investment. And I don't think there's any argument that the US economy would be a shadow of what it is without the process of a globalization that's occurred since World War II. It's hard to know what the counterfactual is here. People take a crack at it and I've taken cracks at it. But there's no doubt.

And I think even more importantly, I think we'd all be losers without the process of globalization. Not only the folks who had benefitted the most, high income, educated, skilled workers, but also those people who feel left out, lower income, less educated, less skilled workers. Their standard of living, their wealth would be lower as well. Globalization has raised everyone's fortunes over the past 50 years.

But trade matters and I would make the case that there's more debate about trade and how that's affected economic activity over the years. But in my view, there is no doubt that trade has been a significant positive for the economy particularly over the last decade.

Now, I created this chart. Usually, one of my economists will create the chart for me. So I'm sure there's a mistake here so my fault. But I do like the colors, I picked the colors. Very good. And what I've done here is I decomposed the trade balance as a percent of GDP into four parts. I'm showing you as much historical data that's available for each of the components from the Bureau of Economic Analysis, BEA.

The green line is the trade balance with regard to services. The orange line is the trade balance with regard to capital investment, industrial supplies, ag. Blue is consumer goods and that also includes vehicles. So I included that in the consumer goods. And finally, the yellow line is energy, mostly oil. The shaded area is just to allow your eye to fix on the last decade.

And you'll note that in that period the trade balance when you add it all up has narrowed quite substantively. If you go back into the early mid-2000s before the recession, the trade balance we have deficits of somewhere between 5 and 5-1/2 percent of GDP. Today, the deficit is somewhere between 2-1/2 and 3 percent, so a significant narrowing in the balance.

You can see how we got there. A lot of it is because of the gains in trade on energy and oil. The tracking revolution has made us much less energy dependent and that's a very positive thing. Now, the improvement in the trade balance, roughly two-thirds of that improvement is in energy. But the other important aspect of that improvement is the rising trade surplus in services. And this is very, very important particularly when I get to my second point about where we're headed.

You'll also note, and I think this is also very important, that the trade balance with regard to CAPX and consumer goods has essentially been unchanged over the period. So this is no longer really an issue with regard to the economy's performance. And, I think again, going forward, we can look forward to some improvement here as well.

One final quick point, the service sector is very labor-intensive. So I would argue that one of the reasons why we're enjoying very strong employment growth, 15 million jobs have been created since job growth resumed back six years ago. And we're now experiencing a longest streak of consecutive monthly job gains in economic history is because of globalization and specifically of trade. Trade is key to keeping the economy together as well as this has been kept together. It's a significant plus for economic growth. It is not a negative for economic growth.

And by the way, the service jobs, they cut across all paid skills, and obviously, high-paid jobs and professional services. I employ a lot of people because my economists are building models for banks that are doing stress testing around the globe. That's a service export. But this also includes a lot of—this, of course, includes the tourists that come here, people who come here to take advantage of our healthcare system and our educational system. There's a lot underneath and it creates a lot of very important jobs.

So point number 1, trade, globalization, an undeniable, very significant net plus for our economy, the US economy. Point number 2, I think this is going to become more of a plus. And the reason is we are very, very competitive. I mean if you are a manufacturer that has survived what we've been through in terms of what's been going on overseas, the value of the dollar, you're doing something very, very well. You have a market niche. You have a low-cost structure. You got a product or service that no one else has. We're going to compete and we're going to compete very, very well. And this is going to create a lot of wealth and a lot of jobs.

And a lot of it is going to come into service sector. And I fully anticipate that the service surplus will continue to rise. There's no economy on the planet that does services as well as the United States of America bar none. Maybe the only country that comes even close is the UK. There's only 60 million British. There's 330 million of us. So there's a lot of room here. And we've been doing it a long time so we know what we're doing.

And I don't think people really understand that services are a lot of things. I mentioned a few; pharmaceuticals, artificial intelligence, logistics. Just even think about retailing and what retailing is all about, setting up a store requires human resource, management, financial services, logistics, many of the things that we do very, very well. So I think our prospects are very, very good here. And it would be a dark irony, in my view, if we step back from the process of globalization at the time when we were at the cusp of enjoying significant benefits of it.

Our trade with the rest of the world has lifted those economies. The deep middle classes that exist in many emerging countries like China and Brazil and Indonesia, South Africa, Turkey, they're there because we've traded with them and we've lifted those economies. And they're now at a point where they need exactly what we're producing, and to step back from that would be just very wrong headed and a big mistake, a big mistake.

Okay. Point number 3 and let me preface this by disclosing it's important. I am a Democrat. I'm a registered Democrat. I did contribute to the Clinton campaign in the primary. I have worked on Republican campaign. I have -- [inaudible 1:09:48] and I have worked on our campaigns. And I worked on the John McCain campaign for two years. So I had spent a lot of energy on that campaign, so just so you know who I am. I think that's important. Actually, I learned this the hard way with the recent study that we put out.

But let me say that there is no comparison between Mr. Trump's policies on globalization and Ms. Clinton's. They can't be even in the same conversation. Mr. Trump has got a very different perspective on trade. He's flipping US trade policy on its head. In my view, US trade policy since certainly World War II has been about embracing the world, bringing them into our frame, providing them a governance structure.

And yeah I agree that sometimes they don't get it right. They make mistakes. They do things that are inappropriate. But by embracing them strongly, we showed them the way. And we become more closely aligned. Our interests are more closely aligned which is obviously very good from an economic perspective, but I don't think well understood and completely underappreciated from a geopolitical perspective. If you were tethered at the hip economically, it's much less likely that you'll shoot each other. And obviously that's very, very important in the world that we live in.

So he takes a different perspective. His perspective is I'm going to take instead of embracing the world; I'm going to take a stick to the world. And if the world doesn't do what I think is appropriate, then we're going to impose tariffs. We're going to make life difficult or at least we're going to threaten to do that. And I think as the results have shown, our results have shown as the results of Peterson Institute have shown, if you go down that path, it's a very dark one.

And by the way, I talked to all of the Trump and Clinton economists on policy. And the thing that I learned and I think that is very important is that, yes, maybe we won't get a world with a 45 percent tariff on China, a 35 percent tariff on Mexico. But it will be a very different world. They have a very different perspective on trade and trade policy. And it will lead down a path that is not—you can see it. You can see it in the results.

I mean just to give you a sense of it, in my work, I found that if you take Mr. Trump's policies at face value, take them as he stated them. Then the economy as measured by real GDP will be $600 billion roughly smaller in 2021 at the end of his first term and would have otherwise been the case if there was no change in policy. The result will be close to a loss of 5 million jobs relative to what it otherwise would have been. That is meaningful. That is the flooder for a very bad economy, a recessionary economy, an economy that we don't want to go down.

And Mrs. Clinton and I'll end here, yeah, she's cautious on trade and I agree with you. I would take a different approach on trade. But she's all in globalization and that's evident from her immigration policy. She has endorsed the 2013 legislation, the Gang of Eight legislation on reform. And in that, we would have a path to legalization of citizenship for the undocumented. And we would increase legal immigration. We've doubled it. Instead of a million per annum, we'd have two million per annum. And in my mind that is a very significant and ultimately the biggest difference between the two candidates and their economic policies. It's two very different paths. Thank you very much. I appreciate it.

Adam Posen: Thank you, Mark. If I could invite our other speakers to join Mark up on the stage left to right in the order in which they spoke. We've run a little long and I apologize for that. But I think the substance has been worth it. I think it's not so much about geeks loving statutes and ASM models as engaged citizens loving their country. But, hey, I'm an idealist.

We'd like to open this up now to the floor for questions. This is all on the record all being web-streamed. Two ground rules. First, please identify yourself when recognized to ask a question. And second, you're allowed to state an opinion but then it should be brief. The more it's like a question, the more time you get.

There is a traveling mic upfront. There's also a standing mic in the middle. Who would like to go first? Please, could I ask you to go to the mic right there?

Will Mauldin: Hi. Thanks so much for having this. Will Mauldin with the Wall Street Journal. I guess I wanted to tap your institutional historic knowledge a bit. I hear from a lot of foreign officials and multinational corporate executives that this presidential election season is different from what we've seen before.

Looking at what you guys have talked about today, the difference seemed to be Donald Trump. But I'm wondering if Trump is defeated, then that suggests the result of this presidential election wouldn't be that different from years past. But some of these officials obviously speaking to in companies think there's something deeper at play. I'm wondering if that's a party switch on trade if it's the increased skepticism in Congress if it's the political basis that we've seen at the election or if it's the fact that either Trump or Hillary Clinton as president would be fairly hemmed in on trade and globalization. Thanks.

Marcus Noland: I'm not sure that we are the best people to address that question. But I would say that over the last 50 years, the share of international trade in the US economy has roughly tripled from 10 to 30 percent. And because of the nature of the US economy being a relatively high income labor scarce economy, when we open up to trade with lower income countries, that's going to put a certain downward pressure and wages in labor-intensive import competing sectors.

The appropriate response in that situation is to have adjustment policies that help people exit those sectors to higher productivity more remunerative forms of employment. Politically, we have failed and we have not done that. And as a consequence, we've gotten liberalization and we've gotten stresses in the labor market. But we haven't had the appropriate public policy response.

So I would say that the reaction we're getting is in part driven by that failure. And unless the next administration and the next Congress take that on, you're going to have continual disaffection, if not pressures to actually move backwards and protect which is in effect the Trump agenda.

Adam Posen: Okay. Thank you. Krishna.

Krishna Guha: Thank you. Krishna Guha with Evercore ISI. Obviously, China has a range of options with which to retaliate relative to any trade tariffs or other restrictions far in excess of let's say of Mexico. So I wanted to zero in on China.

Now in this analysis, you essentially modeled trade for trade retaliation, right? We put up tariffs. They put up tariffs. Or we put up tariffs. They selectively put on tariffs. But of course, there's a much broader suite of options available to them mentioned in brief, dumping US Treasuries. I would add something that I don't think was discussed which is allowing the currency to depreciate significantly relative to the US dollar, which we've seen already in the last year or two has been significantly disruptive on occasions.

So can just whoever feels comfortable taking this walk us through what you think the full spectrum of retaliation options are? And how do we think the Chinese authorities would sort of select from that menu if these negotiation processes were to turn a bit ugly?

Adam Posen: Thank you very much, Krishna. Mark and Sherman, if I could ask you in addition to answering that very profound question, expand a little bit on what I know you've written about why you find it credible that Mexico and China would retaliate and why it's not Japan in the 1980s.

Marcus Noland: Sure. Let me start with the last part first. I mean as I said in my remarks, Japan in the 1980s ultimately was going to comply because of the geostrategic situation. China is in a very different position today. If anything, it has an incentive politically to resist the United States

Both China and Mexico have histories of when we've gotten into they're not generally high profile. But when we've gotten into trade disputes, both of those countries have shown a willingness to retaliate. And there's nothing wrong with that. So I think you're dealing with two partners that have not shown some sort of reflexive compliance in the past.

Now in the interest of time, I would simply refer you to page 34 and 35 of the report where we list some of the ways that China could retaliate. They could do the "Buy No American" thing, which I mentioned. They could start interfering actively in supply chains. They could terminate purchases of particular products. They could intervene in financial markets. They could renege or slow implementation of existing agreements. And there's a whole list of these things. A lot of it is IPR and service area agreements. They could send their aircraft carriers sailing around the Spratly Island. I mean it isn't even limited to the economic sphere. There's plenty of ways that China could show its displeasure in this kind of scenario.

Krishna Guha: Do you have any insight into what governs the decision as to how you make selections from that menu?

Marcus Noland: My degree is in economics, not psychiatry. So I would not deign to peer into the brain of Xi Jinping

Adam Posen: Please come up to the mic if you would. This is an excuse for me to remind you and all the people that our study is available for free download from the IIE website. Moreover, all the data, all the sources, all the computations are available for people to replicate and check if they're interested. Please, sir.

Steven Tokarick: I'm Steven Tokarick from the International Monetary Fund. I have a question about methodology perhaps best directed to Sherman. When I think about changes in tariffs, I think immediately about changes in relative prices. Yet the methodology that you seemed to talk about and emphasize was fixed price multiplier models and SAM models. So why not a model that captures changes in relative prices shows how protection in one sector, taxes, another sector? I was expecting a relative price model rather than a fixed price model. Can you comment on that?

Sherman Robinson: You have to understand that Steven and I worked together years ago in the Economic Research Service building exactly such a model of the United States.

The question here is and it's really quite explicit is we are looking in a short-run shock with a perseverance of about five years or a little bit longer, not time enough for major readjustment in the factor markets which is you get involuntary unemployment in such model. The kind of question Steve is asking and I have spent a lot of my career analyzing those kinds of questions is a longer run question of what happens after you adjust the economies and look at the new structure of the economy 10 years later. And those models typically are full employment models.

And we're very good at them. We use them a lot. And I have spent a career working on them. But it's a separate question. It's a long-run issue. It would be very interesting to do such an analysis if we actually move towards a much more autarchic economy in the US, how that would reverberate. You're going to have winners and losers across sectors. You're going to have a very different world trading system. Very interesting questions but long-run questions. We restrict it ourselves to a short-run analysis.

Mark Zandi: I hope I don't overstep. But in the Moody's macro model, we're picking up those relative price effects, right, which you're using to distribute. So those price effects are built into the results. So they're there. In fact, that's one of the key ways this all works, the relative price effects.

In fact just to give you some numbers, US import of Chinese products is 500 billion per annum. Mexico is 250 billion or 300 billion per annum. You do a little bit of arithmetic here in your own mind. You can see that this has very large price effects and has all kinds of implications not only in terms of real incomes and spending power, but in terms of the distribution of activity and what kind of effects it has distribution across the economy.

Sherman Robinson: That's the valid point. We took the scenario from them. They handled that part of the problem. Our job was to disaggregate it.

Adam Posen: Let me add one more thing and then we'll go. I think one of the things which Sherman and particular in Mark but all of us have wrestled with through the years is whenever you try to do trade modeling like the modeling we did at [inaudible 1:24:33] and Robert Lawrence did and Tyler Moran on TPP. You always have a difficulty projecting what the effects are on productivity.

In the end, the real point of trade isn't about the short-term gains in prices. It's about the competitive effects, putting resources in the right places, making things as best as possible being forced to innovate is the productivity one hopes gains. And in this case, it would be productivity losses.

And so it's analogous to what Mark has pointed that about jobs that people lose jobs when there's a dislocation. The vast majority of them in the US economy get other jobs after some lag of time. They are not necessarily getting back what it cost them in that process and being used as well as they were before.

And so we talked about these relative price effects. So we talked about these long-term things. The way to think about the autarchic model or the world going backward and this is not exaggeration is look at the import substitution policies that Brazil and India and Argentina and others pursued in previous decades. Look at what it cost them. And then think about a limited version but a real version of that for the US. What would it cost us? And that is above and beyond in addition to what they're talking about here.

Mark Zandi: Although we do pick up again in the macro model level and this is embedded in the results. You saw the effects on investment, which affects the capital—

Adam Posen: I understand, Mark. But even I, as big a fan as I am of your macro models, that kind of dynamic scoring is not in this kind of thing you're doing in a three-year horizon.

Mark Zandi: Just defending the model.

Adam Posen: I wasn't attacking the model, but it goes beyond the model. Mike.

Michael Gadbaw: My name is Michael Gadbaw. I'm with the Georgetown Law School. My question is whether any of the authors felt a certain frustration in preparing this critique of the candidates and our electoral preoccupations. In drawing the circle too narrowly around trade when what's really going on in the economy implicates a broader set of policies including financial regulation, monetary policy, investment, tax, which means that ultimately when the President sits down to govern they will need a strategy, an international economic strategy. And will we be hurt in that sort of hangover from this election that we won't really have a mandate for such a strategy and what we could do about that?

Marcus Noland: Well, I actually thought you're going to go even further because in the original draft, there were material that got cut out. I actually think that some of what we're seeing politically is not just the fact that we've greatly expanded our exposure to international trade and it's had impacts on factor markets. There's I think pretty obviously something deeper going on given the concerns about migration and the way that much of this is being expressed. So I thought you were actually asking for an even broader lens.

I think in terms of the focus on trade, look, we faced the practical problem. I mean the election is in early November. We needed to get this report out kind of like now at the latest. And you have a limited amount of period of time so you have to scale what you're going to investigate to a scale in which you can actually implement this project in the necessary period of time. And that meant focusing on trade, not taking on immigration or many of the other subject areas that you mentioned.

Adam Posen: But also it's not just because I gave them an unreasonable deadline. It's a coherent point of great topicality. And it is a place where we had a comparative advantage thanks to our authors to point out what was going on. You're absolutely right, Mike. In the German, it's nice to have [inaudible 01:28:47] concept. It's nice to have an overall policy.

But I think the other thing to be said is in the current state of US government and in part this is a good thing because Gary reminds us because of the enormous powers already given to the executive. No US President can walk in and say, "Here's my plan for every piece of the US government which will now act in concert tomorrow." They might aspire to that, but that's not what's going to happen as you know better than I.

I think it is important and valid to say this is what happens on trade. As Mark and Mark both have pointed out, immigration more broadly the openness of orientation of the US to the rest of the world is a theme that runs through all kinds of economic policies and which ultimately is what you want to manage to take advantage of rather than run from.

But I'll stand by deadline notwithstanding the worth of the intellectual limits on this exercise. Anyone else care to comment, please.

Matt Miller: Matt Miller with Capital Group in LA. I appreciate the intellectual and policy conviction that animated doing this report at this time. But I'm curious also what if you're wrong? What if Trump wins and he views these powers as a negotiating ploy? Can you imagine a scenario where it would be welfare-enhancing by your light? In other words, is there some scenario where you would eat this report two years hence?

Adam Posen: Yes, please, Gary.

Gary Hufbauer: I want to say something constructive about Trump. I think he has had some very good ideas on corporate tax policy. And so, I give him that. But on balance, given his plentiful and extreme statements on trade specifically and globalization generally, it is hard to see that he would reverse himself on those issues. And those issues, you know, it really is hard to see that that would be a positive for the economy. Maybe he could somewhat counteract it by taxes, but he has to get those to the Congress. Not easy to do.

Adam Posen: Mark.

Mark Zandi: Just one quick comment. I mean your—no, I wouldn't eat it. No. Even with barbecue sauce, I wouldn't eat it. But your line of questioning presupposes that the line of policy that we're on and had been on is leading is in the wrong direction. It's not. I mean I think the process of globalization, the trade policies we've got in place, had put us in a better place. And we should continue on that path because it's reaped enormous benefit.

Some people benefitted some people more than others no doubt and I agree with Mark's comment that we have been as a nation miserable in helping the people who have lost. And that's more observing now on why this process is in jeopardy, this thing that has really benefitted all of us.

So no, the answer is no because the process that we have in place that we've implemented we've engaged the world on is working. It has worked. It's been an amazing success. And in my view, it's going to become patently obvious that our biggest problem in the next decade isn't going to be unemployment. It's going to be underemployment. We're not going to have people. There's just not going to be enough people. I can already feel it in my business. I hire lots of people all over the planet and I'm hiring them in other places in the world because I can't hire them here. I can't bring them here. So I don't think there is a scenario that Mr. Trump will take us down that will lead us in a better place, no.

Adam Posen: Sherman.

Sherman Robinson: Yeah. A couple of points about that. The trade policy—trade negotiations are really about fighting in the sandbox. They push you. You push them. Look at the redress on the WTO. You win a WTO case and that gives you the right to put as much damage on them as they did on you. I mean that's the way it works in trade. It's very hard to imagine any rapid restructuring of that that wouldn't be incredibly destructive. I mean it's just the way the whole system works.

Second, as a profession, I think we economists, the development economists from my end of the field, seriously underestimated the speed at which China grew up into the system. And the value chains of Southeast Asia were dramatic and rapid. So we underestimated the speed at which that would hit American labor markets. The Congress did nothing about those shocks. And I think you're paying a price for that. I think you're seeing deep unhappiness about that process. And they're blaming the process now which is also I think we've all made it irreversible at some level. So you're not going to put Humpty-Dumpty back together again in some magic way.

But what really bothers me here is it's really eerie—you look in Europe, BREXIT, others, it's an eerie echo of the 1930s. You're seeing the far left and the far right and really deep unhappiness. That's very worrisome as far as economically politically.

Adam Posen: Just on that matter, I want to reemphasize what Mark Z. and Sherman said. Even if Trump gets his fantasy as we understand it from his statements and from his adviser's statements, it is a bad outcome. Because what his fantasy is, is that you diminish the number of imports from other places. You diminish the price advantages that average working people and companies trying to compete in the US get. You diminish the amount of competitive pressure on US industry.

So if he gets everything he wants and there is no trade war and the Chinese caves. The Chinese government caves the next day and the Mexican government caves the next day. He's fundamentally pursuing a destructive goal. His main economic adviser was quoted in the last couple of days saying concentrate on the trade deficits. Good things will happen. Well, you know, Japan concentrated on the trade deficits for 50 years. It hasn't gone that well for them for the last 25.

The reason this is bad is because it's analytically fundamentally wrong. We can talk about the 1930s and I feel that I assure you as much as Sherman and we can talk about the dislocation cause. But ultimately, it's like Sherman said about the sandbox. This doesn't achieve anything. It's a whole fancy way of taxing American people in business to make us worse off by taking us away from efficiency. There's no good outcome there.

This will be our last question, please.

Manila Chan: Hi. Thank you. My name is Manila Chan with the News with Ed Schultz on RT America. My question is for Mark Zandi. In your opinion, Mark, why do all major trade unions such as the UAW and the Steelworkers of America et cetera? Why do they oppose the TPP and the TTIP if your economic models purport that this would benefit everybody?

Mark Zandi: I think that trade has hurt certain—thank you. I really didn't want you to hear what I was going to say. No, I love the microphone as you can tell.

I do think there had been winners and losers in trade particularly at different points in our economic history. So I do think in the 1970s, 1980s, parts of the 1990s, the manufacturing sector of the economy, which is heavily unionized, was hurt by trade policy by trade by the fact that our trade balance deteriorated with the Japanese back in the 1970s and the 1980s, with Mexico in the 1990s, with China around the WTO entrance in the early 2000s. So I think it's undeniable that certain groups have been hurt by this. And it's fair to say that many union groups have suffered as a result of that. So I think that's reasonable and fair.

But what I would say to these groups is that going—at least over the last decade according to the data and going forward, I think the trade will be an unambiguous positive for everyone including those groups that are now opposed to it that this will become more evident over time. But I think their opposition to it is misplaced.

Now having said that, I do think that every trade deal can be improved upon. And so it's very reasonable to think maybe the TPP, TTIP, other trade negotiations can result in a better place that is more equitable for everyone involved including these groups, these various unions that you enunciated. So that's a very reasonable thing to be engaged on, to be discussing, trying to work through. But at the end of the day, in my view, trade, globalization, last decade, unambiguous positive, going forward, a slam dunk positive for everyone involved including these groups.

Adam Posen: Marc Noland, do you want the last word?

Marcus Noland: Yeah. I think that I would not want to speak for the unions that you listed. I mean they have their own internal processes and by which they came to those conclusions. My sense is that there is in some ways they reflect an oddly similar thinking to Donald Trump, which is that they are unhappy with trends they see within the American economy. They identify trade as the source of their woes. And they would like to divert or change the prevailing trends.

I think that what we can say about TPP and I know all my colleagues don't agree with me on this, but I believe that TPP will bring aggregate benefits to the US economy that are quite substantial. It will have the effect in certain areas unless you have compensatory policies of increasing inequality. And if you put a very high weight on inequality relative to general welfare gains, you might oppose it.

And then finally, there's just the issue frankly of false consciousness. I'm always astonished by the positions that some of the public sector unions take on things like international trade agreements which have no direct impact on their members and arguably are good for their members simply because they improve the general state of the economy and hence the ability for the rest of us to support the public sector. But that's another conversation.

Adam Posen: Right. So thank you all very much for joining us today. Thanks to Mark Zandi for discussing. Thanks especially to Gary, Sherman, Mark [inaudible 1:41:11].