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Donald Trump’s trade policy would screw the world’s poorest people

trump, north korea meeting, announcement (Jabin Botsford/The Washington Post/Getty Images)

Tuesday afternoon, Donald Trump gave a speech that amounted to a full-throated denunciation of economic globalization and trade deals. Trade, according to Trump, is making America lose. To win, we need to embrace protectionism.

"Our politicians have aggressively pursued a policy of globalization — moving our jobs, our wealth and our factories to Mexico and overseas," he said. "Globalization has made the financial elite who donate to politicians very wealthy. But it has left millions of our workers with nothing but poverty and heartache."

There is real evidence that globalization has hurt America’s working class, particularly trade with China. That being said, polls show that most leading economists believe that globalization has been net-good for the United States.

What’s beyond debate, however, is that globalization has been good for the global poor. Free trade is one of the best tools we have for fighting extreme poverty.

Trump’s proposals — which include potentially withdrawing from the North American Free Trade Agreement and slapping a major new tariff on China — would be devastating for poor people in those countries, and perhaps in other countries too. Limiting trade with low-wage countries as severely as Trump wants to would hurt the very poorest people on Earth.

A lot.

Trump wants to reverse decades of US trade liberalization

(Jeff Swensen/Getty Images)

Trump’s opposition to trade goes beyond opposing new trade deals, like the Trans-Pacific Partnership. He’s threatening to tear up old ones, too.

In Trump’s Tuesday speech, he blamed China for the bulk of the loss of US jobs. Trump promised to label China a currency manipulator and pursue trade cases on those grounds at the WTO. If that doesn’t get China to do what he wants, he said, he would slap a big ‘ol tariff on Chinese goods.

"If China does not stop its illegal activities, including its theft of American trade secrets, I will use every lawful presidential power to remedy trade disputes, including the application of tariffs," Trump said.

Trump didn’t say exactly what those tariffs would be. But in the past, he’s threatened to impose up to a 45 percent fee on Chinese goods, which would be above and beyond what we have now, and very likely would be in violation of WTO rules.

But the thing is, it would likely be legal under domestic laws, which means it could happen.

"There is power within the White House to increase duties on imported goods," Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics and an expert on trade law, told me earlier this year. "That's especially true with so-called safeguard laws, where [the president alleges] an injury to a domestic industry."

Trump also promised to renegotiate the North American Free Trade Agreement (NAFTA), and withdraw from it if Mexico and Canada didn’t meet his terms. This, too, would be legal, according to Hufbauer.

"I'm going tell our NAFTA partners that I intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. And I don't mean just a little bit better, I mean a lot better," Trump said. "If they do not agree to a renegotiation, then I will submit notice under Article 2205 of the NAFTA agreement that America intends to withdraw from the deal."

So unless key American trading partners agree to give the United States some kind of privileged trading status it doesn’t currently enjoy — which China, Mexico, and Canada would likely all reject — Trump wants to start rolling back with trade with them big time.

This would be catastrophic for the world’s poor

To understand why these policies trouble development economists, you need to understand a little bit about who the world's poorest people really are.

Extreme poverty — defined by the World Bank as living on less than $1.90 a day — is crushing. It's the kind of grinding poverty where you don't get access to running water, adequate food, proper toilets, or basic health care. Wealthy countries like the US have (nearly) eradicated this kind of poverty. Thankfully, extreme poverty is in decline globally, with the biggest declines (roughly 800 million people's worth since 1981) coming in China:

un poverty chart
Note: Prior to late 2015, the international definition of extreme poverty was $1.25 a day. Since it's been moved up to $1.90 a day, the numbers in this chart likely understate the scale of the decline (even though the trend remains true).
(Javier Zarracina/Vox)

The global decline in extreme poverty is tough to separate from the global trading regime. When poor countries can sell cheap goods to rich countries, or bring in a lot of foreign direct investment, growth skyrockets. This means more jobs, better government services, and thus less poverty.

"The free trade, or freer trade, that we've had since the end of the Second World War has been the great engine which has lifted up literally hundreds of millions of people out of poverty — far more than any aid programs," Hufbauer says. "The econometrics is indisputable."

See, for example, this 2008 study by UCLA economist Romain Wacziarg and Karen Horn Welch. Wacziarg and Welch looked at 50 years of trade data to figure out the effects of trade liberalization on economic growth. They found that, on average, economic growth increased by 1.5 points after a country passed laws opening up to foreign trade:

Year T marks the year where trade is liberalized.
(Romain Wacziarg and Karen Horn Welch)

China is, of course, the most dramatic example of this effect. Much of China’s early poverty reduction came from agricultural reforms, but its incredible sustained economic growth since 1981 came principally from exports. While the Chinese economy has since shifted away from exports somewhat, the sector still makes up 22.6 percent of Chinese GDP. The scale of poverty reduction we saw in China would not have happened without access to global markets.

"There's broad consensus that sustained economic growth is ultimately what drives poverty reduction in developing economies, and China could only get that kind of sustained growth by industrializing rapidly and creating a manufacturing sector," Damien Ma, an expert on the Chinese economy at the Paulson Institute, writes via email.

"You create manufacturing, which necessitates setting up export hubs, which then necessitates labor to urbanize and move off farms, which then allows that labor to earn a higher income, which then of course dramatically reduces poverty."

Trade with the US — the world's largest economy — is a key part of that story of uplift. Any serious attempt by a Trump administration to impede trade with China would put a serious crimp in Chinese economic growth, which is already slowing down. This would make it harder for the roughly 54 million Chinese people still living in extreme poverty to escape — and it could potentially could throw even more Chinese people into poverty.

"If [Trump] were to impose significant trade barriers with China," Dan Drezner, a professor at Tufts University’s Fletcher School of Law in Diplomacy, said, "the marginal middle class, or the ones who had just gotten out of poverty, would likely wind up falling back into poverty."

"China's economy is already not doing as well as it was," Charles Kenny, a senior fellow at the Center for Global Development, told me earlier this year. "Anything that slows down the growth of exports … is going to be bad for future reductions in Chinese poverty."

Canceling NAFTA would also be quite bad. While there's not a lot of extreme poverty in Mexico, it’s still much poorer than the US. Impeding free trade with Mexico would prevent US dollars from flowing in, thus further impoverishing their poorest.

"Research that I and others have done suggests that Mexico has had a nice little income boost overall from NAFTA," Gordon Hanson, a trade economist at UCLA, told me. "The wage gains that I was able to estimate were around the order of 10 percent."

Even Dani Rodrik — a Harvard economist who called NAFTA a "huge disappointment" for Mexico in our conversation earlier this year — thinks rolling it would be a bad idea.

"It would make a big difference to how America's partners in the world look at it, in terms of its credibility to be a leader," he told me in a February interview. Asked about a major tariff on Chinese goods, he waxed apocalyptic.

"The example of the 1930s — with the US Smoot-Hawley tariff increases, and the kind of trade war that seriously exacerbated the Great Depression in the world economy, and the downward spiral of global trade — I think that should stand as a very serious warning," he says.

The global consequences could be even worse

china stock market (ChinaFotoPress/ChinaFotoPress/Getty Images)

These decisions don't happen in a vacuum. The global trade system, generally speaking, depends on leadership by example. When the United States opens up its own markets, other countries tend to do the same. If the US were to embrace protectionism, other countries would follow suit.

The logic here is fairly ironclad. If the world's largest economy feels the need to protect its own industries from foreign competition, why shouldn't other, less economically powerful countries do the same?

"Without the United States, you can't have global trade deals, you can't have progress in this area," Kenny said. "If the United States does start backsliding towards protectionism, that is quite likely to set off a spiral toward greater protectionism worldwide."

American tariffs "are legally capped at 2, 3, 4 percent" under international trade law, said Kim Elliott, also at the Center for Global Development. Violating that restriction "risks setting off the kind of trade war that we saw in the early years of the Great Depression. Other countries are not just going to sit around and not respond to that."

How bad this gets, of course, depends on how committed Trump is to throwing up barriers to foreign trade. The more he uses executive authority to enact new tariffs, the more retaliation from other countries you're likely to see.

"What would President Donald Trump do? He almost certainly couldn't succeed in truly creating a Fortress America. It would be just raising barriers," Hanson says. "[That] absolutely would have a negative effect on the global economy."

The people who would be screwed over the most by a global backlash to free trade would, clearly, be the roughly 900 million people still living in extreme poverty. These people, clustered in South Asia and sub-Saharan Africa, could still reap tremendous benefits from exporting goods to foreign markets — essentially replicating a major part of China's growth strategy.

But if richer countries like China and the US get into a serious trade war, the world’s two largest economies might slap broader tariffs on imports in general and not just each other’s, limiting poorer countries’ access to their markets. No more exports means much less growth, which in turn dooms millions — maybe hundreds of millions — of people to extreme poverty.

Smaller, poorer countries "are just going to be bystanders who have to take what comes at them from the global economy," Elliott says. "The poor countries don't have anything in the way of fiscal or financial sources to cushion the blow, especially for the poorest people."

Trump’s war on trade might be aimed at helping the American working class. But if he were really serious about it, the damage to the world's very poorest would be astronomical.

Where Trump kind of has a point

Detroit Assembly Plant Manufactures Flagship Dodge Viper
Car manufacturers in Detroit.
(Bill Pugliano/Getty Images)

Here’s the tough part: It’s easy to see where Trump is coming from.

A 2016 study by Hanson, along with fellow economists David H. Autor and David Dorn, took a look at the effect of trade with China on the availability of jobs inside the United States. They found that opening trade to China decimated the US manufacturing industry, as China just made cheaper stuff. What's more, no jobs emerged to support the workers displaced by Chinese competition.

"Exposed workers experience greater job churning and reduced lifetime income," Hanson et al. found. "At the national level, employment has fallen in US industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize."

The study is powerful evidence in favor of Trump's core argument: Liberalizing trade has hurt the American working class. While most of the trade and development experts I spoke to insisted that benefits American consumers reap from cheaper goods probably outweighed the costs Autor et al. document, they all conceded there's a plausible case going the other way.

"The way we have done trade in the United States has been of some benefit to most people, a lot of benefit to a few people, and of real harm to a million-plus people who've lost manufacturing jobs," Kenny said. "From a purely US-centric view, I see where this opposition is coming from."

The key phrase there is "purely US-centric." The other thing the experts generally agreed on is that whatever the harm to American manufacturing workers, the benefits of trade for the world's most vulnerable far outweighed the costs. Justifying Trump’s policy requires only counting the benefits to Americans and ignoring the costs to the world. "It's economic nationalism from the left," Drezner said.

It also requires assuming that the US could actually restore jobs already lost to China, which according to Hanson himself is unlikely.

"Once China became part of the global economy, what was going to happen was the US getting out of the really labor-intensive stuff as China moved into that, and that's specializing, and more skill- and technology- and capital-intensive industries," Hanson explained. "It was inevitable."

There's a solution for the damage trade has done to the American working class, one embraced by Nordic countries like Norway.

These countries tend to be extremely open to free trade. But they also have expansive welfare states that take money from globalization's winners and use it to compensate the workers who lose out. Everyone in these countries benefits from cheaper goods, the domestic lower middle class doesn't suffer, and the global poor benefit from selling their goods to rich consumers.

According to the experts, something like this is the ideal solution to the dilemma of American trade policy. "I hope the next president would look for policies that help the poor both here and in poor countries, and don't pit them against one another," Elliott says.

But Donald Trump, seems to have no interest in that: His tax plan would cost about $11.2 trillion, mostly in cuts for wealthy. This is not compatible with, to say the least, with a historically massive expansion of the welfare state.

Electing Donald Trump, then, probably wouldn’t help Americans who have been hurt by globalization. But it would screw over millions of the world’s poorest people.