Las Vegas Sun

November 17, 2017

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Q+A:

Q+A: Brookings analyst says economic outlook ‘pretty bleak’ under Trump

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Evan Vucci / AP

President Donald Trump signs an executive order Jan. 23, 2017, to withdraw the U.S. from the 12-nation Trans-Pacific Partnership trade pact agreed to under the Obama administration in the Oval Office of the White House in Washington.

At the end of a conversation Tuesday about the potential ramifications of President Donald Trump's decisions on trade agreements and other economic matters, Joshua Meltzer shook his head and smiled sheepishly.

“Pretty bleak,” he said.

It was a gentle end to an interview in which Meltzer, a senior fellow in the Global Economy and Development program at the Brookings Institution, offered little reason for optimism about how the Trump administration would shape the economy long-term.

Meltzer studies international trade law and policy issues with a special focus on the World Trade Organization and agreements such as the Trans-Pacific Partnership. A former negotiator in Australia’s Department of Foreign Affairs and Trade, Meltzer is visiting UNLV this week and took time out for an interview with the Sun. Edited excerpts follow:

In Nevada, we've long been striving to diversify our economy by adding manufacturing jobs. Should we be encouraged by what we’re hearing out of the Trump administration about trade agreements and bringing back manufacturing jobs?

I think there is a lot of reason to, in fact, be concerned about what the federal government and the administration are thinking about in terms of trade policy at the moment and what that could mean for Nevada.

We don't, honestly, have a clear idea of what the administration's trade policy looks like. The renegotiation of the North American Free Trade Agreement will be the best indicator of where we end up. There's serious concern at the moment that the administration is considering pulling out of NAFTA, in part because they've proposed a range of negotiating objectives that are seen as so potentially difficult that they are poison pills in effect.

This would be harmful to the U.S. and certainly, I think, to Nevada from a number of perspectives. There's a number of studies showing that jobs would be lost across agriculture and manufacturing from pulling out of NAFTA, particularly in the automobile sector.

The other implication, I think, of pulling out of NAFTA is it would create a whole lot of uncertainty about the commitment of the U.S. to all the other trade agreements to which it is party to. So it would sort of undermine the certainty and predictability that these trade agreements give businesses when they're making investment decisions and the like. And so, in effect, a lot of the benefits would be negated even if the administration sort of nominally remained in them.

One of the key data points is that 95 percent of the world's population and consumers reside outside of the U.S., and particularly you think about where the fastest growing middle classes are — in Asia, China, South Korea, etc. Getting access to these markets is going to be absolutely critical to growth really across the economy.

At the same time, the world's not standing still, so other countries are frankly just taking advantage of the U.S.'s lack of leadership on trade at the moment.

The decision by President Trump to pull out of the Trans-Pacific Partnership was a really significant win for China, which was deeply opposed to the TPP and saw the TPP as a threat in terms of market access because it wasn't part of it. There were new rules that would have required countries that were participating in the agreement to reform in ways that were in America's interests. For instance, there were strict rules on state-run enterprises, rules that benefited U.S. industries in data sharing and the digital economy, agriculture, manufacturing and the like. So that was a big win for China.

At the same time, the European Union and Canada have completed a comprehensive trade agreement, and the EU and Japan have finalized a comprehensive trade agreement. The U.S. does not have a trade agreement with Japan, and in the context of the TPP is where you would have had that agreement.

Australia has preferential market access into Japan for beef with its trade agreement, much better than what beef farmers in the U.S. have, so they're losing market share there.

So the story continues across markets, as countries negotiate better access for themselves while the U.S. had a great deal in front of it, pulled out of it and is now looking to renegotiate deals and possibly pull out of these.

Trump has promised that there will be several "beautiful" deals to replace the ones he feels are disadvantageous to the U.S., like the TPP. Have any of those deals emerged?

There's no sign of any of that at the moment. And I think that Trump fundamentally does not understand trade or trade negotiations, and instead is approaching them through the lens of a real estate developer. If you're building a property in Manhattan, you're going to be prepared to walk away from it if you don't feel like you've got the best deal possible. The notion of walking away or leaving a trade agreement and thinking that other countries are going to come to the table and provide the U.S. with a better deal under the threat of no deal, it completely ignores, first, the fact that these countries don't negotiate with guns to their head. The politics don't allow it. So for instance in Mexico, there's a very strong populist and anti-American contender for president who is deeply against the policies that Trump has put forward.

So you threaten Mexico with disrespect, you threaten to pull out of NAFTA, you basically strengthen the anti-American candidate in Mexico, and you end up with a Mexico that is more antagonistic, less friendly, less open to trade. And that makes the current Mexican president's job of compromising with the U.S. that much harder, because you look weak.

The only way trade agreements are sustainable over time, one, is that everyone thinks they got a good deal. It's not a matter of just bludgeoning another country into something terrible, because then it's unsustainable.

Another issue is that we always talk about trade agreements as if the only benefit is from getting market access for your exports. But we know the biggest gains are from reducing your own tariffs and your own barriers to create more competition and efficiency in your own economy.

• • •

We’ve talked about the ramifications for manufacturing and agriculture, but will other sectors of the U.S. economy be affected as well — particularly tourism?

As a small observation at the moment, international tourism to the U.S. is down, partly on the fact that Trump has scared people away. People feel uncertain about access to visas, they're concerned that they're going to be turned away at the border for arbitrary reasons. These things have been overstated, but this is how the media portrays it, and the general sentiment toward the U.S. is lower than it has been in a long time, so people are less interested in coming to the U.S.

So there's been a hit to the bottom line already from less international visitors coming into the country.

Certainly, when you take immigration as another example, on the job creation side it has been understood for a long time that 75 percent of, for instance, Silicon Valley startups have been started up by immigrants. Steve Jobs' parents were Lebanese, for example. And it is through startups where job creation happens, and it's only by attracting the best, highly skilled immigrants, having an open system of education and getting jobs, that this happens.

So the dynamism of the U.S. economy has always been heavily predicated on attracting the best and brightest from overseas, and the message the administration is sending to the rest of the world is you are not welcome. And that's going to have a longer-term effect on the U.S. economy, and certainly on places like Nevada that are growing and thriving based on diversity.

Is there any good news coming out of Washington?

The only thing that is positive is the gridlock. Because to some extent the economy is in a fairly good place at the moment. And (one positive factor is) the inability of the Republican Party to do harm, for instance via health care reform, which would have been harmful in terms of kicking tens of millions of people off insurance but also the broad economic costs. (Another is) the capacity of the judicial system to limit what the administration wanted to do on immigration, the risks of it.

So the gridlock around some of that means that the Trump administration's ability to do harm has been limited.

I think the next step in terms of tax policy is potentially very significant. Because if the Republicans are prepared to blow out the federal budget deficit, then it is going to ultimately have an enormous impact on the economy both in terms of the cost of debt servicing and the cost of interest rates, which is well understood to lead to slower economic growth over time.

As you know, the Republicans have been very loud during the Obama administration about the need to rein in the debt. It will be incredible if we see this turn into another budget-busting, debt-increasing administration, which is essentially what happened under George W. Bush. He inherited a surplus from Clinton, but the U.S. went into significant deficit under the Republicans, and they could do it again on the back of corporate tax cuts and particularly income tax cuts that are not needed at the moment.

I mean, what is needed certainly is tax reform. That would be a great thing in the U.S.

It's not clear yet what is being proposed, but it doesn't seem we're going to get so much tax reform as tax cuts and a large budget deficit.

There are estimates from some Trump-friendly analysts that the president’s tax plan will result in $4,000 to $9,000 extra income per year for Americans. What do you think?

I think we need to see exactly what is being proposed. Because at this stage, all we have is a basic breakdown of tax brackets. We don't know which income would fit into which tax brackets, and who would and wouldn't benefit.

The U.S. is one of the lowest-taxed countries in the OECD (Organization for Economic Co-operation and Development). Trump has repeatedly said it's the highest-taxed countries is basically completely and utterly false. Just look at the OECD data; there are only three countries that have lower tax rates than the United States.

And certainly on the income tax side, it is very low. So there is a lot that needs to be done in terms of infrastructure, investing in education skills and research and development, which is going to require government capital and investment. And there's a decision that ultimately has to be made about how resources are best allocated and whether giving a few thousand dollars to families is ultimately going to make them better off if you see deteriorating public services in health, education and transport. Nothing's free, so the more you give away tax cuts the less you're going to get that are important in how to live your life. And understanding that you're always going to make a trade-off is important here.

One industry we’re trying to build up in Nevada is renewable energy, but the Trump administration seems uninterested at best in developing that industry and at worst seems opposed to it. Is the situation as dire as we think it is?

It's pretty dire. You'd have to start with the observation that the Republican Party generally doesn't believe in science and empirical evidence. So to create something as complicated and sophisticated as an energy policy that is not fact-based is going to be problematic.

Businesses are increasingly concerned about the complete lack of direction and certainty that the administration gives, and they understand that climate change is real, it's happening, and they're planning for it irrespective of what the president says. But the lack of any federal direction is harmful to the capacity of businesses to make investments and the like.

The focus on coal jobs is essentially a political gamble. It's got no basis in economics, it's got no basis in what's good for the health of constituents generally. There are 50,000 jobs in coal mining in the U.S. Companies like Walmart have got three or four times more employees than the entire coal industry. The idea that this is sort of the future of America is a narrative from 60 or 70 years ago.

Coal jobs will continue to decline on the fact that they've been replaced by natural gas. And that's not an industry that's come about particularly because of any government support, it's just the innovation and entrepreneurship of the natural gas sector.

Then you've got renewable energy sources that are increasingly competitive and cost-effective. And consumers want clean energy, so it's not only just a good environmental choice, it's a good business decision as well. Fortunately, the states can sort of drive that a little bit with renewable energy targets, but there's energy policy coming out of the administration which is not at all focused on developing something that will benefit the country broadly. It's really looking backward in order to get the support of constituency.

• • •

Yet despite all of this, the GDP reports and stock market numbers look good. What’s going on?

I think the stock market is banking on a tax cut and a windfall for companies, and that's sort of propping up the market. And certainly, Steve Mnuchin, the Treasury secretary, has effectively said that.

But we're only nine months in, so you've got to realize we're facing potential harm coming down the track. There was a lot of headwind in the economy coming into this administration. We've still got ultra-low interest rates, and the economy still has a lot of steam to it.

So the capacity for the administration to really throw sand into those gears and do significant harm has been limited so far, but I think if you look at what's on the table over the next 12 months, you've got some real risks. I think you've got risks around trade policy and the uncertain investment environment that's been created. You'll possibly get some small tax deal, which gives the stock market an additional boost, but then you build up all of these additional costs and imbalances in the economy in terms of debt and deficit, which would then play out over the next bunch of years.