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US Trade Policies Risk Making America’s Problems Worse

Business, China, Company Strategy, Economics, US
By John Richardson on 25-Jan-2017


By John Richardson

YOU start with studying the data. You then double check, triple check and quadruple check the data. Next, once you are satisfied with the data, you ask yourself this question: “What does the data mean?”

All of us must try – and this is incredibly difficult – to keep emotion out of our analysis. We must stick with the facts, as facts are sacred, even if they make us feel very uncomfortable in our own skins. None of us, including me of course, like to be told and then proved that we are wrong.

The alternative is that in a world where hard facts are being increasingly ignored or distorted for political purposes by politicians both on the right and the left, we will end up making today’s economic, social and geopolitical problems a great deal worse.

This approach must of course extend all the way up to the new president of the US. To this end, Mr Trump should provide hard evidence about why he still believes that there was widespread voter fraud in the November presidential election.

The data presented by the White House on alleged voter fraud must be open to peer-review; it must be double, triple and quadruple-checked. If the answer is “Yes, voter fraud happened on a huge scale,” policy remedies are of course needed. If the data fails this test, then Mr Trump has to say, “Look, I got this wrong”, and move on.

The same standard of proof has to obviously apply to Mr Trump’s economic policies. Will they solve the following? :

  • In 1980, Whites/Asians (blue in the chart above) were 81% of the population. They had a median age of 31 and median household income of $50,000. Blacks/Hispanics (green in the chart above) were just 18% of the population, with median age of 23 and income of $33,000.
  • In 2016, Whites/Asian were just 69% of the population, whilst Blacks/Hispanics had risen to 31%. The White/Asian profile was similar to that of Western Europe, with a median age of 42 and incomes of $60,000. By contrast, however, the Black/Hispanic cohort had a median age of just 30 and an income of only $40,000 income.

As Paul Hodges writes in his latest PH report: One issue is that over 90% of population growth since 2000 has occurred in the poorer racial and ethnic minority communities. It will be very hard to significantly increase their spending power in the short-term.

The second issue here, as we have been arguing since 2011, is the fact that the richer, ageing Baby Boomers are now moving into the lower-spending period of their lives as they become older than 55. They already own most of what they need and are set to see their incomes decline as they live on pensions. The Wall Street Journal has reported that 40% of Americans in the 55-64 age group have no retirement accounts, and have average savings of just $14,500.


Mr Trump’s Policy Agenda

The new president’s policy agenda is so big that of course it is impossible for me to challenge all of it in this one blog post. So here I will just focus on international trade policy as I identify four reasons why this policy might fail to deal with these demographic challenges:

  1. His trade policy is about bringing manufacturing jobs back home through imposing heavy new import tariffs on oversea competitors. This could raise the income levels of Blacks and Hispanics, as well as Whites. But economists Lawrence Edwards and Robert Lawrence find that even though the US trade deficit in manufactured goods in 2010 was about two-and-a-half times what it was in 1998, the number of lost manufacturing jobs only rose from 2.5m to 2.7m. They said that the reason for this very slight increase was a rise in productivity. The rise in productivity might will be the result of automation, both in the US and elsewhere, according to a study by Indiana’s Ball State University. It finds that 88% of US job losses are the result of robots replacing people. So let’s assume that Mr Trump succeeds in bringing jobs back home. Most of those jobs could end up being taken by robots.
  2. Edwards and Lawrence also found that by 2008, trade in manufactured goods had made every American $1,000 a year richer because of cheaper imports. More recent work by the Council of Economic Advisers has shown that trade barriers hurt the poorest the hardest – i.e. again Blacks and Hispanics, and many of the poorer people in general who voted for Mr Trump. The reason is that because they have low disposable incomes, cheap shoes, shirts and blouses etc. from China are much more important to them than the rich who have the alternative option of designer shopping. His policies could thus fail to create sufficient new jobs for the hard-pressed American middle class, whilst also raising their living costs through more expensive imports.
  3.  Mr Trump has mainly laid the blame for lost US manufacturing jobs on the doorstep of China. But China is in a very difficult place right now. If Mr Trump follows-through on his pledge to levy heavy new import tariffs on China and pushes China into an economic corner, we could well end up in a global trade war. As each day passes, my base case for 2017 becomes more and more likely. A global trade war would lead to a global recession which would, of course, further damage the earnings and employment prospects of middle class Americans.
  4.  The new US president doesn’t seem to be a fan of multi-lateral trade deals, especially the Trans-Pacific Partnership (TPP): On Monday, he signed an executive order withdrawing the US from the TPP. I don’t want to get into the rights and wrongs of the TPP itself. That’s a separate topic. But this withdrawal is a sign of the US’s general lack of enthusiasm about free trade. Mr Trump’s questioning of the value of NATO also suggests that the US will play a much-reduced geopolitical role. In to breach will therefore step China through its own free-trade deals, its growing global military presence, and its enormous On Belt, One Road Initiative. China sees this internationalism as a way of escaping its middle income trap and lifting millions more of its people out of poverty as it addresses its own demographic challenges. It is hard o see how the US can do the same through isolationism, given the interdependent nature of today’s global economy.  

All of the above is open to challenge based on the facts, facts and more facts. I look forward to the debate.