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December 17, 2017

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Trump’s jabs at trade deals show lack of understanding, Brookings scholar says

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Andrew Harnik / AP

President Donald Trump, left, and Chinese President Xi Jinping attend a business event at the Great Hall of the People in Beijing, Thursday, Nov. 9, 2017.

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Dany Bahar

As an expert on trade agreements and the global economy, Dany Bahar can see the value in the Trump administration’s push to renegotiate trade pacts.

But Bahar says President Donald Trump’s rhetoric on those agreements shows that he doesn’t understand international trade. And if Trump’s misunderstanding should lead to a U.S. withdrawal from NAFTA, he says, Americans will feel profound effects.

Bahar, a Brookings Institution fellow who is visiting UNLV this week, sat down with the Sun on Tuesday to discuss Trump, trade and other economic issues. He’ll present a lecture at 6 tonight titled “What Drives Economic Growth” in the first floor auditorium at Greenspun Hall. The event is open to the public.

Edited excerpts of the Sun interview follow:

During his Asia tour, Trump said the rules have changed regarding U.S. involvement in trade agreements, and he suggested the U.S. would implement protectionist policies to ward off trade deficits. How should Americans feel about that?

His comments reflect his lack of understanding of international trade. I think it's up to the public to understand what’s happening, because the economy we live in today is not one in which America can produce everything it's importing.

Countries have a comparative advantage — some are better at doing things than others. The U.S. is good at making some things that it exports to the rest of the world, while other countries are good at making things that it makes American consumers better off to import them than making them here.

So a lot of President Trump's talk has revolved around the American worker, which makes a lot of sense and is important. It's very important to protect the American worker, but it's also important to protect the American consumer — and the worker is also a consumer.

So there's a very important choice there. To some extent, protecting the worker could come at the expense of not protecting the consumer.

If you stop importing things from China, a lot of things are going to be much more expensive. So the workers themselves, in addition to the consumers, are going to be hurt.

President Trump and his administration think a trade deficit is a measure of success or not in terms of a trade relationship. And in turn he also has suggested that because of the trade deficits, America has lost a lot of jobs.

But a bilateral trade deficit is meaningless. Let's imagine that you decide tomorrow that we're stopping trade with China; we're not going to allow any more Chinese goods to come in.

A lot of the things that are being produced in China, you can't make them in America — or you could, but it would be very expensive. So production's going to shift from China to somewhere else. So you might reduce the bilateral trade deficit with China, but you're going to increase it with somebody else.

So the overall trade deficit is not really going to change much.

Two more points on this.

One, this connection between the trade deficit and jobs is not supported by the theory or by the evidence. All of the advanced economies in the world have lost manufacturing jobs regardless of whether they were running a trade deficit or a surplus. What explains the 6 million manufacturing jobs that were lost in the U.S. are technology and productivity.

The American workforce today is 50 percent more productive than it was in the 1990s.

The last point on this is that when you actually look at the theory, the overall trade deficit reflects our relationship between the domestic savings of the country and the investment in the country.

In terms of accounting, the trade deficit equals the savings minus the investment. So an economy that is saving very little is going to have a big trade deficit. If you think about it intuitively, if you keep production unchanged and you start saving less it means you are consuming more. But if production isn't changing, it means you're importing. So if you have a low savings rate, it means you're importing a lot.

Japan, on the other side, has unusually high savings rates, and they're running a trade surplus.

So to finish this very long answer, until America changes its rate of savings, nothing is going to change with the trade deficit — not establishing tariffs, not shifting to trading with another country.

From a negotiating standpoint is there any advantage in this tough talk? Can we get better deals even if we can't completely erase trade deficits?

I do think it makes sense to renegotiate some of these agreements. First, you want to make sure the competition is fair. We don't want to compete with countries where there's child labor. It's morally wrong and there should be ground rules.

So on NAFTA, for instance, with Mexico we can look at their (looser) environmental regulations or improving labor relations and so on. So there's space there to negotiate. But the objective is not about seeing, within that bloc of three countries, how to become the winner — it's how to make those three countries more competitive with the rest of the world.

For the U.S. to be competitive, it relies on Mexico. Fifty percent of the things being imported from Mexico to the U.S. are intermediate goods — things that U.S. manufacturers use to produce exports.

How would the average American worker feel it if the U.S. withdrew from NAFTA?

I think they're going to feel it very strongly. Let's put it in three levels.

First is consumption. A lot of the things we're importing from Mexico are going to get more expensive. So if you eat guacamole, you're going to pay more for the avocados. Same goes for clothing, other produce, anything you import from Mexico or Canada.

The second level is the American worker. I think the notion that a lot of the jobs that went from the U.S. to Mexico are going to come back is very hard to prove. Will they move back to America? I don't know. Maybe they'll move to Guatemala or some other place where there's a somewhat easy path. But they also might stay in Mexico. NAFTA basically implies there are zero tariffs — you don't pay any taxes on anything you import or you export to Mexico. So if the U.S. pulls out, the new law of the land becomes the agreements in the World Trade Organization.

And the way it works in the WTO is that every member country has agreed to a maximum level of tariffs they'll impose on each other. It's called the most favored nation tariff.

But in reality, the actual tariffs they're imposing are much lower. They're called the bound tariffs. Because of how the WTO works, the developed nations committed to much lower bound tariffs than developing countries. So the gap between the maximum tariffs and the bound tariffs in the U.S. is very small. If the U.S. withdraws from NAFTA, there's very little room for protectionist policies. You can't say you're going to impose 20 percent tariffs — it's illegal under the WTO agreement.

Mexico, on the other hand, has much more space to go up. They could go up to 15 or 20 percent. So if the WTO becomes the law of the land and we get into some terrible scenario in which there's retaliation like tariff wars, Mexico has much more ammunition than the U.S. because they can raise their tariff so much more.

Then the other question is will the U.S. stay in the WTO?

And the last point is that for the American worker, 50 percent of the imports from Mexico are intermediate goods, like engines or car doors or seats. This is part of what makes the American auto industry sort of competitive abroad.

So not only is the notion that a lot of these jobs will come back wrong, or at least we don't have any evidence to back it up, but you might lose a lot of jobs, too. Because if these industries that rely on Mexican imports become less competitive and they cannot export, they're also going to lay off a lot of workers.

So it's not a good scenario.

This is also important. Countries acknowledge the fact that trade generates displacement and some inequality, but I think we understated it. So while in general it's true that trade makes everybody better off as an aggregate, there are winners and losers.

That's the history of economic growth. Economies before had 80 percent of their workers in agriculture. But I don't think we're going to go back to that time.

When industries are more exposed to competition through trade, some won't be competitive enough and the workers will have to move to other industries in which you are more competitive.

That transition has been very painful to America. The government has not provided the safety nets that needed to be put in place to be able to claim that trade was positive for everybody. And I think a lot of the discontent in the Midwest is valid in that these factories became less competitive, and a lot of people lost jobs and it was hard for these people to move into other jobs. And there were no adequate safety nets — job retraining programs or better unemployment insurance, health care.

So I think that if President Trump wants to stand out from previous administrations, that's what he should focus on: saying that moving forward and assuming globalization is going to keep expanding, how do we do it in a way that we're going to protect the most vulnerable American workers?

So instead of stopping trade, modernize the trade agreements but also provide safety nets for workers. Because these things are going to keep happening, not only because of trade but because of modernization.

You’ve done extensive research on the relationship between immigrants and the economy, and you’ve concluded that it’s a positive link. You’ve also discredited the idea that immigrants steal jobs from American workers. Please explain that.

Workers are very different — they have very different skills. And research has shown that in most cases, when former workers come into an area they could displace some people's jobs, but those displaced people end up sometimes experiencing an upward mobility. They end up getting more skills or finding a position in which they can utilize their specialized skills — speaking English, for instance.

So I think on average there's very little evidence that jobs of natives get pared when migrants come along.

Remember, migrants also are consumers, so they provide to the economy. And they're willing entrepreneurs, generally. If you look at the numbers, about 15 percent of American workers are entrepreneurs, but it's 25 percent of foreign-born workers. And something like a third of the new firms in the U.S. have a migrant in their initial team. Small firms in general provide the most jobs — they create about 1.5 million jobs per year — so the idea that there's a finite amount of jobs and it's either that you have them or we have them is wrong.

Last question: What will be the thrust of your presentation tonight?

I’m going to talk about my research in general about how countries grow and why they're not growing.

What I want to focus on is that we know technology plays an important role in fostering growth, so the question becomes, is knowledge so hard to transfer from one place to another? If farmers in the U.S. are successfully using fertilizer, for instance, why isn't the same thing happening in Africa?

I'm going to explore why there are barriers to the transfer of knowledge between borders, and how we can overcome them.