Come next Friday, the US will impose tariffs on steel and aluminium imports heading into the USA. Some countries, including Australia, will be exempt.
One of the justifications for imposing these tariffs is the persistence, size and nature the US’ trade deficit (its exports minus imports).
From Bush 1 to present, our Country has lost more than 55,000 factories, 6,000,000 manufacturing jobs and accumulated Trade Deficits of more than 12 Trillion Dollars. Last year we had a Trade Deficit of almost 800 Billion Dollars. Bad Policies & Leadership. Must WIN again! #MAGA
Spoke to Prime Minister Abe of Japan, who is very enthusiastic about talks with North Korea. Also discussing opening up Japan to much better trade with the U.S. Currently have a massive $100 Billion Trade Deficit. Not fair or sustainable. It will all work out!
— @realDonaldTrump
The last time the US had a trade surplus was 1975. In every one of the 40+ years since, the US has imported more than it has exported. Last year, imports exceeded exports by more than half a trillion dollars.
The hope is that the tariffs will make domestic industries more competitive, such that domestic production can substitute for imports. This of course will boost local employment.
This logic, while somewhat unfounded, resonates with large swathes of the community. Here are some relevant YouGov poll numbers — note that in all cases, the numbers rise for older white males living in the rust belt.
· 33 per cent are in favour of the US Government replacing free trade agreements with a 35 per cent tariff on goods imported from Mexico and China (27 in favour and 39 unsure).
· 31 per cent think that tariffs on foreign made goods protect American jobs (26 don’t, and 42 per cent unsure).
· 45 per cent think that free trade agreements have been a bad thing for American workers (19 think good and 36 unsure).
The decline in manufacturing’s contribution to US employment however, stared well before America started running trade deficits. The rate of decline has largely held constant for 70 years.
US manufacturing employment and trade deficit
Source: FRED and US Census BureauDriving the decline has been a combination of productivity improvements and shifting consumer preferences.
Ordinarily, productivity increases lead to lowers prices. This leads to increased consumption, and under the right circumstances will result in increased demand, production and employment. This is what’s happened in industries like health care.
Rising incomes and demographic changes, however have seen consumers shift away from consuming goods, and towards services. Despite falling prices, demand has not grown rapidly enough to prevent manufacturing job losses. It’s the same story for agriculture and media, and will probably soon be the same story for retail and transport.
Lawrence and Edwards actually looked at how many jobs would be saved if imported manufactures were replaced with domestic production. They found that while sure, manufacturing employment levels would be higher, the sectors trajectory would have basically been the same, with the same number of job losses year on year.
Regardless, the point of economic activity, is not to produce, but to consume. It doesn’t matter who is producing steel and who is producing blue jeans. What matters is how much steel and how many pairs of blue jeans you can buy. The US’ long run of trade deficits have enabled it to consume a lot more than it would have been able to otherwise. Moreover, the sale of government bonds abroad has provided a cheap line of credit which could have been used to build infrastructure, undertake R&D and invest other productivity enhancing activities. If those opportunities have been squandered, that’s not the fault of global trade.
Post script: The new look Industry Insights will be available on Tuesday! Check out www.industry.gov.au/industryinsights from Tuesday!
TALES FROM THE LONG TAIL 