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For most of the US presidential campaign, the candidates have focused on the harm free trade agreements have done, especially to American manufacturing. One widely cited study by three leading trade economists found that the growth of China’s manufacturing sector cost the US about a million jobs between 2000 and 2007.
US trade policy has wreaked “devastation [on] millions of working class people and their communities from the flood of imports of manufactured goods in the last decade,” Dean Baker, the co-director of the Center for Economic and Policy Research, writes.
It’s important to have a real conversation about these things, especially after years of elites blithely assuring Americans that trade was nothing but good for them. But there’s a serious danger in taking trade skepticism too far — as, according to a new report, Donald Trump has.
The study, from the Peterson Institute for International Economics, attempted to quantify the impact of Trump’s proposed trade policies. Its conclusion: If a President Trump did what Candidate Trump promised, the US economy would lose more than 4 million jobs and fall into a recession.
Now, Peterson is a pro-trade outfit; advocating for open markets is a large part of the reason it exists. Moreover, economic modeling is notoriously difficult, so the precise numbers are very far from gospel. But the problems it identifies with Trump’s proposal are widely shared by economists, including those who share his skepticism of free trade.
So it’s worth looking at the Peterson study in detail, if only to understand the complicated role that trade actually plays in the US economy — and American politics.
What Peterson found
The Peterson estimate looked at Trump’s fairly consistent positions on trade, like withdrawing from NAFTA and slapping a 35 percent tariff on Mexican goods and a 45 percent tariff on Chinese ones. Trump would be able to do these things without Congress: US law gives the president wide discretion over tariff rates, empowering the executive to declare an economic “emergency” and raise duties basically at will.
The Peterson analysts assumed that China and Mexico would retaliate by raising tariffs on American goods and imposing other trade barriers. The team then used a model developed by Moody’s Analytics, an economic research firm, to estimate the effects.
In the worst case, which they call the “full trade war” scenario, the US collapses into recession by 2019, with growth at -0.1 percent. The unemployment rate would shoot up to 8.7 percent, with the economy shedding upward of 4 million jobs.
“Together China and Mexico account for a quarter of US international trade in goods and services,” Peterson’s Marcus Noland, Sherman Robinson, and Tyler Moran write. “The trade war [Trump’s] policies is likely to spark would send the US economy into a recession and cost millions of Americans their jobs.”
Here’s what the hit to employment would look like, in Peterson’s model, in each state:
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Why would this hurt so much, in Peterson’s analysis? Because the US economy is, for better or worse, deeply linked with the Chinese and Mexican ones.
US airplane manufacturers, like Boeing, which are based domestically, export a lot of planes to China. US electronics companies, like Apple, depend on China for access to rare earth metals (a key product in your iPhone). These companies just don’t employ people in factories that have been outsourced; lots of Americans work in their American plants or at their domestic offices.
So when you hurt these companies’ access to the Chinese and Mexican markets, you hurt their ability to employ Americans. And the effect here isn’t just on people who work for said companies: Every person Boeing employs, for example, goes out and spends money at local restaurants and shops.
The worst effects, according to the Peterson study, would be these knock-on consequences for Americans who aren’t directly involved in trade:
A trade shock could force the closure of a local factory serving the export market or a local plant that relies on imported inputs (the price of which is now much higher). The fall in employment and income ripples through the community, depressing demand for cars, home improvements, restaurant meals, and purchases of nonessential goods at the local mall. Establishments providing those goods and services cut hours or lay off employees, causing millions of people whose jobs are not associated with international trade to lose their jobs.
The devastating effect on nonbusiness services sectors would inflict disproportionate hardship on low-skill, low-income workers.
Note that this scenario only looks at policies whose effects could be quantified. If Trump followed through on his threat to quit the World Trade Organization, which is the backbone of global free trade, then things could be much, much worse.
“The results presented in this analysis are a conservative assessment of the damage that the trade policies advocated by candidate Trump could wreak on the US economy,” the Peterson researchers write. “If, however, the United States withdrew from the WTO, it could quickly find itself back in the Smoot-Hawley world of the Great Depression.”
Why trade promoters and skeptics alike oppose Trump’s trade policies
These are worst-case scenarios. But Peterson’s findings echo something you hear from economists across the political spectrum — Trump’s policies for trade are poorly thought-out and dangerous.
For example, look at a July policy paper by Robert E. Scott, the director of trade and manufacturing research at the Economic Policy Institute. EPI is sort of the anti-Peterson: Washington’s premier pro-labor and trade-skeptical think tank.
But Scott’s writing about Trump’s proposed tariffs sounds like it could have been taken from the pages of the Peterson report. Scott argues that Trump’s proposed tariffs on Chinese and Mexican goods wouldn’t improve the lot of US workers, and would end up having a net negative effect on the US economy.
“Imposing tariffs on Chinese goods … would not work,” Scott writes. He continues:
We can’t just wave a wand and undo NAFTA, and slapping tariffs on Mexican imports (for no particularly good reason) will not solve any problems for American workers. Our economy is tightly integrated with that of Mexico and Canada. Any job-creating force from increased domestic production following the imposition of tariffs on Mexican imports would be strongly muffled by job-displacing effects of higher-priced US goods — including parts used to produce other U.S. goods for export (thereby hurting US exports).
Dani Rodrik, a Harvard economist and perhaps the world’s most famous trade-skeptical economist, told me something similar in an interview earlier this year.
"Manufacturing employment has been declining in the United States, as a share of total employment, for decades," Rodrik argues. "The reality is that the manufacturing jobs are not going to come back. Altering [past] trade agreements or even abolishing them I don't think would make a big difference."
This is the key thing to understand about trade and globalization: It can’t just be undone by closing US markets. A lot of American companies have built their business models around being able to trade relatively freely with China and Mexico. Forcing them to move away from this would be virtually certain to cause massive disruptions and serious harm to the US economy.
Pro- and anti-trade economists disagree about new trade agreements, like the Trans-Pacific Partnership (TPP), and about the benefits of old ones, like NAFTA. But they agree, broadly, that the tariffs Trump proposes are far too blunt an instrument. That speaks more to Trump’s lack of any sophisticated knowledge about trade policy than anything else.
“Solutions Trump himself has put forward reflect no understanding of what a smart trade regime would look like,” Scott writes. “His calls for negotiating our way to better policy reflect so little understanding about [trade’s] history and process.”
So while Trump’s rhetoric on trade may sound appealing in the abstract, it’s important to keep in mind that it’s not backed up by anything substantive. Trump’s approach to trade isn’t legitimate skepticism of globalization. It’s a recipe for an economic crisis.
