Protectionism has grown quite popular as American workers continue to worry about losing jobs to other countries.
And politicians have zeroed in on these anxieties as they vie for the top job in the White House.
Bank of America Merrill Lynch’s global economist Ethan S. Harris and US economist Lisa C. Berlin argue that this shift has two major near-term implications.
“First, we now believe the Trans-Pacific Partnership is less likely to pass the US Congress,” the duo wrote in a note to clients. “Given the recent very negative rhetoric from both sides of the aisle, we now think passage of TPP is a very close call under a Clinton Presidency and is unlikely under Trump.”
And “a second implication is that conflicts over currencies could escalate,” they continued.
As they explain in greater depth regarding point two:
“The US Treasury has been flirting with naming China and other countries ‘currency manipulators’ for many years. Recently, they put a big spotlight on China, Japan, Korea, Taiwan and Germany. They said that each had exceeded two of three thresholds for being designated for ‘bilateral engagement’ — (1) a bilateral trade surplus with the US of over $20 billion, (2) an overall current account surplus of 3% of GDP, and (3) persistent purchases of foreign currency that amount to more than 2% of GDP over a year. Under a Clinton administration, we would expect Treasury to follow through on these rules, while they would likely be tightened further under a Trump administration.”
Although the aforementioned short-term implications are certainly interesting to consider, perhaps the more interesting thing about this whole populist shift is the huge gap between economists’ opinions on free trade and those of regular Americans.
Mainstream economists pretty much all agree that free trade is “good” for an economy in the long-run (even though within an economy there will be some people who benefit less), while trade-restrictive measures hurt consumers.
However, many everyday regular people believe that free trade actually hurts the US — which is likely a reflection of their personal experience. According to Pew Research statistics cited by Harris and Berlin, 89% of Americans think that the loss of US jobs to China is a somewhat or very serious issue. Moreover, they added that only 46% of Americans think NAFTA was good for the economy.
Notably, there is some empirical evidence to back up Americans’ grievances. Back in January, labour economists David Autor, David Dorn, and Gordon Hanson published a paper showing that increased trade with China actually caused some really big problems for American workers.
From the paper’s meaty abstract (emphasis ours):
“China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labour markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. … Adjustment in local labour markets is remarkably slow, with wages and labour-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialise.”
Just to be clear, it’s way too much of an exaggeration to say that free trade is not “good”. After all, it’s definitely easier on consumers’ wallets to not pay 45% tariffs. Plus, one could argue that 15 years isn’t enough for the global and US economies to adjust to the huge China shock.
But it’s still interesting to think about the split between what’s “good” for the global and US economies versus what’s “good” for your everyday regular American worker — and how these kinds of issues will be addressed going forward.
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