Throughout his campaign, President Donald Trump proclaimed that America’s trade deals did not put America first, and we were suffering the consequences.
He cited trade agreements like the North American Free Trade Agreement and the Trans-Pacific Partnership as unfairly hurting the U.S. manufacturing industry and constantly targeted Hillary Clinton for supporting them.
He also claimed that our trade deficits with various countries were causing the U.S. to lose jobs and hurt our economy. He even went far enough to say, “We can’t continue to allow China to rape our country,” which was not much of an anomaly in Trump’s atypical rhetoric.
It would be very difficult to argue that without Trump making the outsourcing of U.S. manufacturing jobs as one of his campaign’s main talking points, he would have won those states in the Rust Belt, namely Wisconsin, Pennsylvania and Michigan. All three were won by less than 80,000 votes, but totaled 46 electoral votes.
The Rust Belt had voted Democrat in the presidential elections since 1988 (1984 for Wisconsin), not to mention Ohio, which had not gone Republican since 2004, which Trump won by 8 percent. Had those states not swung toward him, we would be talking about President Hillary Clinton right now instead of President Donald Trump.
His campaign promise was to bring back those jobs to the Rust Belt that had been lost many years ago. It is very clear that this issue struck a chord with many people in the Northeast.
With the election over, how does Trump plan to deliver on his promise to this demographic? So far, other than declaring he “will be the greatest jobs president God ever created,” Trump has pulled out of TPP, which was a multi-lateral trade agreement among 12 countries that comprise about 38 percent of the world’s gross domestic product.
He has also been talking with Mexico and Canada about renegotiating NAFTA with the idea that it currently disadvantages the U.S. He has also proposed border taxes — tariffs — as high as 35 percent on imported goods in order to deter outsourcing.
Free trade
So, it seems Trump is keeping with the overarching theme of his campaign that free trade hurts Americans. But when you look at every angle of free trade on the national scale, this assertion is simply not true.
Free trade has been an extremely beneficial activity for the American consumer that has led to the technological boom and a higher standard of living for people living in poverty in the U.S., as well as a substantial global decrease in poverty in the last few decades.
Free trade — trade between countries without penalty — ensures through competition that goods are produced at the lowest possible price, and thus sold at a lower price to consumers.
Everyone wants their goods to be cheaper, but in economic terms this means more purchasing power — meaning consumers are able to buy more with each dollar they have.
Naturally, this is good for all consumers, but poor people particularly see an advantage if they are currently struggling to buy essential goods to live, such as food, clothing, hygienic materials, etc.
Countries engage in industries in which they have comparative advantage over other countries in the same way individuals perform jobs they are most efficient at and pay others to do the things they are less efficient at doing. You wouldn’t grow all of your own food, make your own clothes and build your own furniture. You would specialize in making clothes and trade what you produce with someone who specialized in growing food.
In short, trade between countries is just as important and relevant as trade between individuals. Moreover, when a company imports a good from another country, it is because it is more financially viable.
A country can buy more of a good when it can import more than it can produce in-house at the same cost. While this does move jobs away in one area of the economy (5 million manufacturing jobs have left the US since 2000), it opens up new jobs in other areas where the company would not have been able to grow financially (salesmen, maintenance, manufacturing of composite goods, etc.).
If protectionist policies were to be instituted, like a strict tax charged to companies on goods that were imported, prices would inevitably rise. Companies would not simply pay the tax and keep prices at the same level; they would have to charge more or risk going out of business.
Border tax
The other option for companies to avoid paying the border tax would be to relocate factories into (or back into) the United States. But this would also raise prices as it’s currently more expensive to manufacture in America, and if it costs more to produce, it costs more for consumers.
A border tax becomes effectively a subsidy we all pay for higher prices in order for certain people to keep their jobs that can be done more efficiently somewhere else.
Cheap labor
While the basic premise that other countries can produce goods more cheaply than the U.S. is largely true, there are important exceptions and distinctions. Mexico is gaining tremendous amounts of investment in its manufacturing industry for various reasons. The least of these motives, contrary to popular belief, is the cheaper cost of labor.
Take the automotive industry as an example. A car company saves on average $600 per car on labor in Mexico compared to the U.S., but in order to transport to Europe or the U.S., it costs $300 or $900 per car, respectively. So, the high transportation costs due to Mexico’s inferior infrastructure make the savings on labor insignificant.
The real reason for Mexico’s boom in manufacturing is their free trade deals with 45 countries, while the U.S. has similar agreements with just 20 countries.
These trade agreements, which make trade tariff-free, allow auto companies to buy parts more cheaply from other countries and sell cars with greater profit, specifically to the European Union, with which the U.S. has no trade agreement. Savings on parts and tariffs total about $4,000 per car, which is why manufacturing in Mexico appears to be so cheap.
In short, free trade, not cheaper labor, is the main attraction for companies to move to Mexico for manufacturing.
However, there can be problems with free trade that result in job loss in manufacturing industries. One example is when foreign companies are subsidized by their governments and are able to artificially keep prices low to undercut American companies. The devaluation of currency, while it does hurt the country of origin more than the U.S., is something that throws a wrench into free trade.
This, however, is an exception, not the rule, and should be dealt with on a case-by-case basis. Also, as mentioned before, 5 million jobs have been lost in the manufacturing sector since the turn of the century, but in that time manufacturing output has risen over 17 percent — despite the Great Recession.
This is largely due to the increased advancement and prevalence of automation. Automation is not something that can be excluded when looking at the job loss in the manufacturing industry.
President Trump
So, will Trump bring back jobs to his loyal Northeast voters? If he chooses to go the path of protectionism, the effect on the economy will be less output and a higher cost of living, which would have a devastating effect on the working class.
If he goes by the way of reducing the stranglehold of regulations and corporate tax cuts, which he has talked about, this would inevitably give incentive for business to build and invest in America and bring back jobs.
Free trade does lead to job loss in certain areas where the market isn’t efficient and real lives are affected. However, the economy as a whole benefits through a reduced cost of living, higher standard of living and higher employment overall.
It is up to Trump whether he wants to pursue damaging protectionist policies that would not bring jobs back or if he wants to create an environment where businesses have incentive to invest and create jobs.
TK McWhertor is a junior in economics. The views and opinions expressed in this column are those of the author and do not necessarily reflect the official policy or position of the Collegian. Please send comments to opinion@kstatecollegian.com.
