Donald Trump’s been saying it for decades: America’s getting ripped off on trade.

He’s right.  We are.

Countries like China, Japan, and Mexico are waging a trade war against America.  China and Japan manipulate their currencies so as to steal our industries, and Mexico uses NAFTA like a straw to suck away our jobs.  And we’re not even fighting back.  Trump will change that.

I’ll tell you how.  But first, what’s going on?

America’s running a giant trade deficit, which means that we’re buying more stuff from foreigners than we’re selling them.  How giant?  In 2015, the deficit was over $736 billion dollars—$4,845 per working American.  That’s bigger than economies like the Netherlands, South Africa, or the Philippines.

trade-deficit

America’s Trade Deficit (Millions of USD)

And it keeps getting bigger.  Just look at China, over the last twenty years the deficit grew from $30 billion to over $365 billion.  Or look at Mexico.  Since Bill Clinton signed NAFTA in 1994, trade with our southern neighbor tanked from a modest surplus of $1.3 billion, to a massive deficit of nearly $60 billion last year.

The deficit is big, and getting bigger. But how does it hurt America?

It costs us jobs and economic growth.  Think of it this way: everything we import replaces something we would otherwise make.  For example, if American needs 10 million spoons, we can either make them, import them, or make some and import some.  So, if we imported 8 million spoons, we would only need to make 2 million spoons (the imports replace our production, not our consumption of spoons).  This is how the trade deficit works: imports replace our production, not our consumption of stuff.  Therefore, the deficit is the value of America’s offshored production.

Offshoring production means offshoring jobs.  How many?

In 2015, America’s trade deficit was $736 billion, or 4% of our GDP.  Since GDP is simply the total output made by America’s working population, and since 4% of America’s GDP is imported, then it follows that 4% of America’s workers are displaced by these imports.  This means roughly 6 million workers are replaced by imports.  Worse yet, this probably lowballs the actual numbers, because labor-intensive jobs are more likely to be offshored.

Looking specifically at manufacturing paints a grimmer picture.  American manufacturing contributes $2.2 trillion dollars to our economy.  And since 78% of our trade deficit is in manufactured goods, this means that we’ve offshored $573 billion worth of production.  That’s one-third of our manufacturing industry.  Finally, since manufacturing employs 12.3 million Americans, then we know that roughly 4 million more are displaced by imports.  But it’s higher than that.

Manufacturing brings wealth into a region, and therefore supports local services and supply chains.  For example, a car factory supports hairdressers and accountants, but not the other way around.  This “job multiplier” has been studied extensively.  As it turns out, each manufacturing job usually supports 1.58 other service jobs.  This means that since 4 million manufacturing jobs are displaced by imports, then about 6 million service jobs were also lost.

According to this method, the trade deficit costs America at least 10 million jobs.

This makes sense, especially when you consider how many Americans are truly unemployed.

We’re Not Losing Jobs Because Of Automation

You’re probably thinking: “the reason we lost manufacturing jobs is because of automation and technology, not the trade deficit.”

That’s where you’re wrong.

Employment is a balance between output (how much is made) and productivity (how efficiently it’s made).  If output increases, more workers are needed.  If productivity increases, fewer workers are needed.  This means that better technology will indeed shed jobs (by raising productivity), but only if our economic growth (increases in output) doesn’t keep pace.

Between 1950 and 1979, manufacturing employment increased because output grew faster than productivity.  This was great for America: wages were high, the middle class was healthy, economic inequality was decreasing—the rising tide raised all boats.  However, this trend reversed, and by the year 2000 American manufacturing was in freefall.  Productivity grew by 3.7% per year (it grew that fast since the 1950s), but output only grew by 0.4% per year.

Why?  Because we moved our factories to China.  We moved them to Mexico.  We abandoned our workers in Michigan and Pennsylvania, and threw them to the wolves.

Trump Can Fix It

The trade deficit costs us jobs.  Trump will balance the books and bring them back.  How?

First, Trump will renegotiate, or scrap, the manifestly unfair “free trade” deals that currently hobble our economy.  This would help.  Just look at NAFTA.  Clinton said it would create jobs for America.  Instead, the deficit with Mexico has grown by double digits every year since it was signed, and it’s cost us 850,000 jobs.

This always happens.Obama told us that KORUS (the trade agreement with S. Korea) would help American workers.  It did the opposite.  So far, it’s cost us 75,000 jobs.  He’s saying the same thing about TPP (a Pacific-wide free trade agreement)—why will this be any different?

These “deals” need to die hard.

Second, Trump will put a 35% tariff (tax) on imports.  This is just what America needs.  Right now, American companies have no choice but to leave, because it’s just so much cheaper to build their factories in China.  This is not only because China is poorer than America, it’s also because it manipulates its currency, artificially lowers labor costs, and provides subsidies to companies specializing in exports—all of which makes China a dirt cheap place to do business.

American companies don’t have a chance.  They just can’t compete with State-backed Chinese companies without relocating to China.  A tariff will level the playing field, and it will make it profitable for American companies to come home again.

Trump will bring back our jobs.  Big-league.

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Posted by Spencer P Morrison

JD candidate, writer, and independent intellectual with a focus on applied philosophy, empirical history, and practical economics. Author of "America Betrayed" and Editor-In-Chief of the National Economics Editorial. Say hi on Twitter @SPMorrison_

3 Comments

  1. Spencer, could you please explain how what you are advocating for differs from bullionism or mercantilism? It seems like you and many Trump supporters hold a world view where the global and domestic economies are a zero sum game and rent seeking is somehow a completely appropriate and even encouraged behavior. These approaches have not only been debunked by “arrogant” and “elitist” academics, but have actually failed in practice, in Europe, many times over.

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  2. Spencer P Morrison November 15, 2016 at 9:24 pm

    Hi there,

    Thanks for taking the time to reply to my article. I welcome all criticism openly, and would like to offer a reply of my own.

    I am currently enrolled in a doctoral program. However, I don’t think schooling equates to education: some of the most well-educated people I know have never set foot in a university—and vice versa.

    It’s out of a sense of humility, not lack of achievement, that I do not include my education. I also think that to highlight one’s education is a tacit call to authority fallacy—I would prefer that my arguments stand on their own merit.

    Regarding your criticism.

    Your argument (and I’ve heard it before) is that trade with China or Mexico lowers the cost of goods, which benefits all Americans. Furthermore, you argue that the cost gains more than offset the damage done by lost jobs or industry.

    You’re wrong. Here’s why.

    First, you’re only looking at one side of the equation (consumption). Although the goods might be hypothetically cheaper, it’s also true that there is lost income on the production side, because people (i) lost jobs or (ii) found new jobs, but these pay lower (on average, 17.5% lower). The benefits to the overall economy aren’t nearly as big as you think.

    Second, the nominal cost of goods is irrelevant—what matters is the cost of goods relative to wages (the real cost). Since 1973, nominal wages and the cost of goods (according to the consumer price index) have increased by the same rate. This means that “free trade” hasn’t yielded cheaper goods in real terms, because the jobs have been undermined to an equal degree.

    Third, you are not including what is called the “Okun Gap” in your analysis. Basically, the OG is the opportunity cost of mothballing capital equipment and skilled labor when an industry is offshored. When you account for this, the gains from “free trade” are basically irrelevant.

    Fourth, goods are made cheaper by improving technology—any gains made by moving production to a nominally cheaper jurisdiction are a one-off. However, they also reduce the incentive to invest in better (more efficient) technology, because the wages are lower. This has the perverse effect of actually closing down highly-efficient American factories, and opening up inefficient (but cheap) factories in China. This is actually bad for the world as a whole (both now, and in the future)—but it is better for the bosses.

    According to your logic, why make anything in America? China can make everything cheaper than we can, after all. Why not? Because then we would have no economy whatsoever, we would simply be consuming until we ran out of assets and debt to sell.

    America must make output in order to acquire foreign output in a sustainable way. The deficit is temporary—at a certain point, we will need to pay for the goods we’re buying.

    Best,

    SPM

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  3. “An Independent intellectual with a focus on applied philosophy, empirical history, and practical economics”

    In other words, you don’t have a recognized degree. This is funny.

    What it’s even funnier is that in your rhetoric you fail to realize that by importing goods with an extra 35% will mean a higher cost of said products. Are you willing to pay 1,500 usd for a Macbook instead of the 999usd it costs right now? You might say “b-but my neighbor will have an employment!” Yeah, but meanwhile you will have to pay a higher price for technology, food and all what China and Mexico sell at low prices.

    The reason companies like Ford move to countries like Mexico, China and Malasia is because they have lower production costs due to lower taxes and a lower investment in paying for their workers. If they move back to USA where all that is more expensive well, guess what, it will also mean a higher cost… and you will be weeping the day you will have to pay twice than you used to for tomates, nails, bricks, computers and iphones.

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