Abacus: Trump, China, and a Globalized Economy
DIMITAR DILKOFF
Ever since Donald Trump announced his bid for the presidency in June of 2015, one of the most common themes of his campaign and administration has been the onslaught of criticism directed towards China’s government, especially as it concerns trade policy that seemingly puts the United States at a disadvantage. Though some political commentators are tempted to push aside such objections from the 45th president as behavior that is nothing more than par for the course, Trump’s remarks offer an insight into trade legislation with China, especially as it relates to tariffs and other policies that affect foreign and domestic jobs.
In fact, the current relationship between the United States and China as it pertains to trade long transcends the age of Trump. After China joined the World Trade Organization in 2001, a group that promotes trade and enforces international commerce laws, the US saw its trade deficit with the global superpower increase more than 400% in the years leading up to 2018, an outstanding rise that reached a peak deficit of nearly $419 billion.
Trump and many of his supporters view the deficit as something that must be corrected, perceiving it to be a sign of China holding a manufacturing edge over the United States. From one frame of mind, he is correct: China certainly holds a comparative advantage over the US in many industries.
The more important question, however, is whether this edge, and the trade deficit it results in, is necessarily a bad thing.
Based on microeconomic theory, a trade deficit, even one of significant size, is not usually an indication of unfavorable trade laws or substandard trading capabilities. Ultimately, a country’s trade balance with some other nation represents the difference between that country’s exports and imports: a positive trade balance, or a surplus, implies that the value of a nation’s exports is greater than the value of its imports, whereas a negative trade balance, or a deficit, implies that the value of a nation’s imports is greater than the value of its exports.
Of the 15 nations the US traded with during the first half of 2020, the US was in a deficit with all but two (the United Kingdom and the Netherlands were exceptions). But it is hard to contend that these deficits imply that other countries have been getting the better of the United States. After all, the US is voluntarily trading with these countries.
Indeed, while some aspects of a country may suffer as a result of a deficit, and politicians like Trump can try to suggest that these losses are evidence that the US is a victim of trade laws, a country as a whole generally gains from trade.
One of the biggest ways that countries benefit from trade comes in the form of lower prices. Indeed, free trade allows for countries who are best able to produce a given good or service at lower cost compared to other countries to be the ones to specialize in that line of production.
An abundance of vineyards in France has allowed for the French to diversify their wines, technological advancement and an appreciation for practicality has helped make Japan one of the leading exports for automobiles, and ample oil reserves in the Middle East has enabled a select few countries to control the global supply of petroleum.
All of these resource and technological specialties let the citizens of trading countries have access to a variety of high caliber and inexpensive goods and services. Of course, this added benefit must come at a cost, namely in the form of job outsourcing. Above all, in order for any country to export the goods it is best at creating, it must have an adequate supply of labor and capital in order to maintain sufficient production. From this perspective, Trump and others have been heavily condemnatory of the governing reluctance to prohibit US companies from manufacturing their products in China and elsewhere.
China has historically held a comparative advantage over the United States in a number of sectors, including manufacturing, apparel, technology, and machinery. Between 2001 and 2013, about 3.2 million jobs were lost among US workers as result of job outsourcing to China alone, with some of the hardest hit states losing anywhere between 2 to more than 3.5 percent of its total employment.
In order to discourage job outsourcing and incentivize American companies to maintain work in their domestic nation, tariffs can be implemented on foreign products. A tariff is a tax on an imported good, and, just as how a tax operates on any item for sell, it raises the price of goods coming from outside the country, which in turn makes domestically-produced goods and services comparatively cheaper.
Despite the good intentions of tariffs, the duty has its own adverse effects. One of them comes in the manner of retaliation from competing economies: if the United States were to levy tariffs on Chinese goods, it makes sense, from a profit motive, for China to retaliate with their own tariffs to regain a competitive edge. The consultant firm Trade Partnership Worldwide estimated that tariffs levied on Chinese goods between February 2018 and November 2019 cost about $37.3 billion, and the Commerce Department noted that American exports struggled during the time period due to retaliatory tariffs.
When tariffs primarily affect consumption goods rather than intermediate goods (items that are used in the production of other goods), their effects on the livelihoods of citizens, especially those in the lower- and middle-classes, can be quite drastic. J.P. Morgan found that, as a result of a round of tariffs put into effect in 2019 on $112 billion worth of Chinese goods, including certain clothes and sporting goods, the average American would have to account for a price-adjusted loss of about $1,000.
It is a consequence of considering these various costs of attempting to save American jobs, ranging from potentially decreasing the economic wealth of the typical consumer in the form of higher prices, to having to overcome avoidable political tensions that come by means of a trade war, that could lead one to ponder whether such attempts are worthwhile. Many economists have come to the consensus that trade that is subject to only a few necessary regulations and laws benefits most of the people in a given society.
There is no question that a globalized economy features the unfavorable characteristic of eliminating jobs in certain employment sectors. In this regard, a government should be partially responsible for upholding the well-being of workers who lost their jobs, such as by providing training to discharged workers to enter growing fields of work and issuing basic income for a temporary period of time. One interesting idea to improve the lives of laid-off workers, raised by then-San Francisco Board of Supervisor member Jane Kim, could be to tax the use of robots performing ordinary human duties, and distribute the revenue to ousted workers in the form of education and training.
While much research into how to better cope with the inevitable problems and side effects of free trade is yet to be done, it is hard not to acknowledge the many advantages of a globalized workforce: from enhanced innovation, to lower consumer prices, to a greater offering of diverse items, millions of people gain from trade every day without fully realizing it.by
