Just in case you weren’t there yet, President Trump’s recent threats to impose tariffs on Mexican imports into the US confirm that his trade policy is erratic, chaotic, and reckless.
But there’s a core principle beneath it all: the desire for import substitution — meaning that instead of buying goods from abroad, we produce and sell those goods here at home. The idea is that instead of importing, say, mobile phones made in China or car parts from Mexico, we shift production of these and other current imports here to the US, with the goal of increasing domestic production, employment, and output.
“Bringing back jobs” has, of course, been a Trumpian theme since even before his campaign. Pronouncements like “I’ll bring back our jobs from China, from Mexico, from Japan, from so many places” have been a standard part of the pitch. And his tool of choice for accomplishing this goal has been tariffs, with the idea that by making it more expensive for US companies to import, they’ll be motivated to make such products themselves.
The idea sounds reasonable: buy American instead of buying from other countries, and thus employ more Americans. And there are times when it makes sense.
But in most cases, it would be far too costly and disruptive to try to replace deep and mature global supply chains with Trump’s vision of trade. The global economy has simply become too interconnected for a blunt policy of replacing most of our imports with American-made goods to be desirable, much less easily doable. There’s just no unscrambling the globalization omelet.
An 18th-century trade policy in a 21st-century world
Under certain conditions, it may be possible and even advisable to implement a policy of import substitution. For instance, if the government stands up an infrastructure project in a recession, we would want to use taxpayer dollars to buy American inputs. And in early America, the protectionism of Alexander Hamilton provided an opportunity for nascent industries in our newborn country to take seed and replace imports with domestic goods.
But we are no longer in Hamilton’s America. At this much later stage of our development, import substitution is neither easily achievable nor smart. That certainly doesn’t mean all is well with our current position in global trade. The persistence of large trade deficits and, except when their votes are needed, the neglect of the people and places hurt by globalization are two especially serious issues with which we must contend. But consistent with Trump’s atavistic tendencies around globalization, import substitution looks backward when we need to move forward.
There are many examples of why building our trade policy around import substitution is so impractical. One of my favorites comes from Alcoa, America’s largest aluminum producer. When Trump imposed 10 percent tariffs on aluminum, Alcoa asked for an exemption.
Why would it make such an ask given that the tariff’s stated purpose was to protect American producers of aluminum and steel from foreign competition? Because Alcoa’s production process is tightly integrated with Canada, from which it imports both finished products and “intermediate goods” (imports into its own production process).
In a similar, more recent case reported by the Washington Post, the sneaker company New Balance, which prides itself on domestic production, complained to the White House about the negative impact of the potential next round of tariffs on Chinese imports. Yes, New Balance builds its final product here, but it sources parts from China, which is why one of its VPs wrote that the new tariffs would “not just translate into higher costs, but jeopardize our ability to maintain production levels and continue investing in our domestic factories.”
Such interconnectedness was why the threatened Mexican tariffs generated such an outcry from American businesses. The Wall Street Journal reported that “about two-thirds of U.S.-Mexico trade is between factories owned by the same company.”
The more than $90 billion in cars and auto parts we import from Mexico amounts to four times China’s share of such imports. The China story is more about mobile phones and laptops: More than 80 percent of our imports of the former and more than 90 percent of the latter come from China. Another recent WSJ article was replete with anecdotes about the inability of American producers to find domestic replacements for parts they now import.
One could argue that import substitution might be unrealistic in the near term, but if tariffs bite long enough and hard enough, American producers will eventually respond. But there are two reasons for skepticism. First, Trump’s erraticism works against such an outcome. No business wants to sink costs into a domestic investment that might be worthless based on the chance that the next tweet contradicts the previous tweet. Plus, our trade policy will almost surely flip if Trump loses in 2020.
Second, as we’ve seen, globalization means that US importers will seek new sources of exports well before they’ll seek domestic substitutes. In other words, Trump may slap tariffs on the import of certain products from China, but that won’t stop a US company from then buying those products from, say, Vietnam. Indeed, this seems to be exactly what’s been happening in the wake of Trump’s tariffs against China; the increase in imports from the rest of the world almost perfectly mirrors the decline in imports from China.
A Pyrrhic victory
Moreover, in many cases, an import substitution victory would be a Pyrrhic one. It is absolutely true that expanded and poorly managed trade has meted out incalculable harm to people and places affected by decades of trade imbalances. But disrupting and trying to replace existing supply chains is likely to do more harm than good. For one, some of the jobs we’d get back — like assembling consumer electronics, a market now cornered by China — are low-value-added and thus low wage.
For another, certain consumer costs would rise, as was the case with Trump’s recent tariffs on washing machines. Because of the large price differential, each of the 1,800 jobs created by the tariff ended up costing more than $800,000 per job. That is not a sustainable trade strategy.
The fundamental problem with import substitution is that it’s backward-looking. It argues “let’s take back something we lost” versus “let’s win where we have comparative advantage.”
China can keep the assembly of consumer electronics, but what we don’t want to cede to them or anyone else is global market share in the kinds of high-value-added investments proposed in the Green New Deal, such as battery storage, wind energy technology, greener transportation options, and a smarter grid. No country has captured these shares yet, but the ones that do will do so because their trade policy was not oriented around protectionism and sweeping tariffs, but around discovering new sources of global demand and building the production platforms to meet those demands.
Forward-looking countries, including China, are already making such plays, but the US government resists doing so because of its supposed antipathy for “picking winners.” However, progressive politicians like Rep. Alexandria Ocasio-Cortez and Sen. Elizabeth Warren (her “economic patriotism” platform is essentially the industrial policy referenced above) recognize the foolishness of this position, especially given that our tax code picks winners all the time based not on forward thinking but on which sector has the best-connected lobbyists.
In other words, the trade policy that helps American workers and businesses is not one that tries to roll back the clock and substitute domestic production for imports. It’s one that looks around the next corner and captures a share of the export market in the next big thing, whatever that may be.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities and was the chief economic adviser to Vice President Joe Biden from 2009 to 2011.