By James H. Nolt
This blog series is titled “Polarizing Political Economy” in part because I emphasize that unity in economic and political policy is often impossible. Opposing interests lead to opposing public policies. There are few public policies that benefit some and don’t harm others. In the travel ban targeting refugees and citizens of seven Muslim-majority countries, one of Donald Trump’s recent policy initiatives, the scope is relatively small and its impact limited in terms of the number of people it directly it affects. Still, it has aroused widespread protest and court action for moral and legal reasons. What will be even more contentious are the much larger initiatives yet to come, including health insurance reform, infrastructure spending, trade policy reform, and the labeling of some countries as currency manipulators. Today I consider trade, and in the coming weeks I will examine the others.
Trade policy is a point of polarization in many countries. On one side, economic nationalism—protecting vulnerable domestic interests—imposes costs on business internationalists, a.k.a. free traders. Businesses that are able to compete at world market prices are internationalist because they do not want laws to restrain their access to global markets. On the other side, industries unable to compete at world market prices cannot export and are vulnerable to imports. Without protection, they will lose.
I prefer not to use the term “free traders” because internationalists, especially nowadays, are often monopolists, not free traders. They want to enforce their monopoly power globally, not open free competition for all. One criticism of contemporary trade treaties, like the recently rejected Trans-Pacific Partnership (TPP), is that they reinforce monopoly powers, which raises prices for consumers rather than reducing them.
Many conservatives advocate free-market solutions without taking into account that markets are always subject to control by private power. Monopolies are a well-known example, though monopoly power is now often discussed euphemistically using misleading labels like “intellectual property rights.” Americans now are suffering escalating medical costs because we have accorded virtually unlimited power to pharmaceutical and insurance companies that raise prices using monopoly powers granted by drug patents and insurance mandates. Trade agreements like TPP aimed to extend and enforce such monopoly privileges internationally. This raises costs for all those who consume monopolized products.
The more traditional way trade policies polarize groups is over tariffs. The different interest groups are uncompetitive nationalists who benefit from tariff protection on their output and internationally competitive internationalists who oppose tariffs at home and abroad on the grounds that they obstruct trade and raise costs. This traditional conflict was a mainstay of American politics from the country’s founding until recent decades. The Federalist Party, then the Whig Party, and then the Republican Party tended to be pro-tariff. The Democratic-Republican Party, which became the Democratic Party, received its support from states that provided most of the U.S. exports. Thus it tended to favor lowering or eliminating tariffs.
This traditional issue had largely disappeared in American (and European) politics in recent decades as internationalists came to dominate both major parties—but Trump has revived it. Throughout his campaign, he advocated high tariffs (35-45 percent) on goods coming from countries like China and Mexico and on products manufactured abroad by American corporations. This is a radically divisive proposal, especially for businesses, many of which have come to rely on global supply chains to minimize costs.
Tariffs as high as Trump has proposed are not revenue tariffs, primarily intended to raise revenue. Rather, they are prohibitive tariffs, meant to block trade. Because of their high level, they might raise little or no revenue and would halt imports. The products subject to the tariff would have to be manufactured domestically and, usually, the prices will rise up to the percentage of the tariff. They will definitely rise to that amount if domestic manufactures are monopolists. A 45 percent tariff, then, could result in a 45 percent price increase.
Increased prices would of course adversely affect consumers. Remember, though, that not all imports are consumer goods. Many imports are inputs that are further processed by domestic manufacturers. For example, automobile companies that assemble cars in the U.S. typically import many of the parts from abroad. If those parts become much more expensive, parts manufacturers might return to the U.S., adding to domestic jobs but also raising prices. The cost of assembling cars in the U.S. would also rise. That would, ironically, make the final car more expensive, less competitive with imports, and less likely to compete in export markets. Cars sales would likely fall. The net effect on jobs depends on the specific details of the tariffs and markets, but there is no guarantee it would be positive.
Net job losses would certainly occur in industries heavily dependent on trade, such as airplane manufacturing. The giant American producer, Boeing, competes globally with Europe’s Airbus. Both companies import many parts for aircraft assembled domestically. If tariffs add significantly to Boeing’s costs, it would lose market share to Airbus all over the globe. Trade-dependent companies like Boeing would be among the most vigorous opponents of protectionism. Today many other American employers are part of global supply chains and sell in global markets.
Another aspect of protectionism likely to undermine support among Trump’s political base is that it will hit farmers hard. Many American agricultural products are globally competitive. For example, the U.S. sells meat, cotton, wheat, rice, soybeans, apples, grapes, and almonds worldwide. Even if other countries did not retaliate for drastic U.S. tariffs, all the rural communities producing these goods would suffer a lower standard of living because tariffs on industrial imports would raise the cost of their inputs and consumer goods without increasing the prices of the farm products they export.
It will be even worse for farmers if foreign consumers of American agriculture products retaliate by raising their own tariffs on American exports, such as farm products. Export sales could collapse, along with farm prices. Rural communities would be devastated, as they were the last time world trade contracted during the Great Depression. Since Trump and the Republicans tend now to dominate rural counties across America, this could destroy their political chances as well.
Whereas many American-based industries have lost competitive advantage to China in recent years, American farmers have a long-run competitive advantage they are unlikely to lose because of America’s relatively abundant farmland. China has over four times the population of the U.S. but roughly the same land area. It is even worse for China, because most of the country is desert and mountains. It would be as if the Great Plains, the breadbasket of the United States, were all desert. As China has become richer, it has come to rely more and more on agricultural imports from the U.S. American farmers would be big losers in any trade war with China, undermining a long-term American trade advantage.
We do not yet know whether Trump will impose high tariffs as he promised. He does have the executive power to do it, even without congressional support. Similar to the case of the recent travel ban, Congress has delegated broad powers to the president on trade. Tariffs may be raised using the excuse of foreign dumping or currency manipulation, a charge Trump frequently hurled at China during the campaign. Yet Trump faces a political dilemma: If he raises tariffs high enough to help Midwestern rust belt industrial workers defend against Chinese exports, he will almost certainly alienate many of his rural supporters in the farming regions of the Great Plains and the South.
James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.
[Photo courtesy of Bill Bradford]