For the past 150 years — making an exception for the Great Depression — tariffs in the US have trended down. 150 years ago, import duties made up as much as 50 per cent of total imports, they have been less than 3 per cent since 2004.
That course has changed somewhat under the Trump Administration. In March, Trump announced a 25 per cent tariff on steel, and a 10 per cent tariff on Aluminium. The administration then imposed a 25 per cent tariff on an initial $50b worth of Chinese imports. Which was followed by tariffs on another $200b worth of Chinese imports, with the threat of more to come.
Why after such a sustained period of increasingly freer trade, do we now find ourselves in the middle of a trade war that’s threatening to slow global growth? What are the political motivations behind the US trade war, and the MAGA movement more generally?
First, some numbers. The US economy is huge. US GDP is a little over $18 trillion, growing, quite quickly at the moment – 3.7 per cent. It has a labour force of 150 million people, 13 million of which are employed in manufacturing (that’s more than the entire Australian workforce).
America engaged in nearly $3 trillion of two way trade. Exporting $1.5 trillion, mostly capital and industrial goods to the EU, Canada and Mexico. And importing $2.3 trillion, most of which comprised of ICT and consumer products. The US’ major trading partners, in order are China, Canada, Mexico and Japan. Australia comes in at about 25th.
Some historical context
This chart shows manufacturing employment over the last 30 years. In 1987 the sector employed around about 18 million workers. (Manufacturing employment never really got much higher than this, it peaked in 1981 at not quite 20 million.) Accounting for one in five workers.
Manufacturing employment, 1987-2017
Source: Bureau of Labor Statistics
Since then, two things have happened. First, much like in Australia, manufacturing employment fell – hitting a low of 11.5 million in 2010. And second, jobs elsewhere in the economy grew – meaning that manufacturing’s share of jobs was dramatically less. Today it’s about one in 10.
We can see in the chart here that employment is relatively stable from the late 80s until the turn of the Century. Employment starts to fall from about 2001, and then again in 2008.
The first drop comes after the China joins the WTO. China’s accession to the WTO opened the door for Permanent Normal Trading Relations between the US and China. US manufacturers suddenly faced a much heightened level of competition from across the Pacific. And firms had the confidence to open factories offshore.
Some went US manufacturers went under, others relocated abroad, and others looked to technology to automate their processes. The cumulative effect was a decrease in the number of manufacturing jobs.
(A quick aside, the point I’m specifically not making is that China’s accession cost American jobs. In the background, the US economy has created 22 million jobs in non-manufacturing sector, more than compensating for any job losses in American factories. The nation has also become richer and more productive. That’s comparative advantage at work.)
The second drop is the GFC. The economy goes into recession, demand falls, about 10-11 million jobs are lost, 2.8 million of which are in the already struggling manufacturing sector. The pain point here is very acute and very quick. We’re starting to see demand return, but even to the extent that the sector is recovering, it’s typically been with lower wages, in jobs requiring fewer skills.
The post-recession recovery
It’s now 10 years on since the GFC. And across a number of indicators, the US still hasn’t quite recovered. The jobs gap (see Brookings), for example, only just closed last year. That means employment is just back to where it would have been, had the economy not crashed.
The economy though, is different. The labour market in particular.
Last month, 250 thousand new jobs were created. That was 97th month of consecutive jobs growth. Over that stretch, beginning in 2010, the total number of jobs has increased by about 20 million.
This recovery hasn’t been even. Those that have had the quickest and most prosperous recovery have been women; those that live in NE and Midwest states; non-white; and university educated. Or in other words, those that aren’t white men, from rural areas with an education.
Cumulative job growth by educational attainment, ages 25+, 2008-2018
Source: Bureau of Labor Statistics
Also, manufacturing accounted for 26 per cent of the jobs lost during the GFC; but has accounted for only 6 per cent of the jobs gained during the recovery.
I don’t want to simplify the MAGA movement, or the trade war as just an outcome of manufacturing’s decline. But the loss of identity associated, is certainly a contributing factor. It’s fair to say Trump has usefully elevated a long-simmering issue in American political economy: and that is the hardship faced by the families and communities who have lost out as jobs have shifted overseas. David Autor and others have shown that the negative impact on certain regions and certain workers was permanent. Rather than finding new jobs, some workers simply dropped out of the labour market altogether, let alone finding better jobs.
“The greatest theft in the history of the world”
Fast forward to 2015, running for President, Donald Trump in an interview with Good Morning America makes the following remarks about China: “Because it’s an economic enemy, because they have taken advantage of us like nobody in history. They have; it’s the greatest theft in the history of the world what they’ve done to the United States. They’ve taken our jobs.”
And then, in 2016 to a rally in Indiana in 2016: “We can’t continue to allow China to rape our country and that’s what they’re doing. It’s the greatest theft in the history of the world”
Via Twitter in 2018: “The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!”
And again: “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”
It’s true, the US trade deficit has grown considerably over the last 30 years – with the US importing far more than it exports. (This is not a bad thing! A fast-growing economy pulls in more imports as it expands, which pushes a country’s international trade account toward deficit. A trade deficit is good for the economy, allowing the country to consume and invest more than if it maintained balanced trade.)
USA imports from and exports to China, real, 1987-2017
Source: US Census Bureau
China’s contribution to the trade deficit has risen – as you’d probably expect – to almost 50 per cent. For a President wanting to reduce the deficit, that puts a pretty big target on their back.
President Canute
So here we are in 2018. “Tariffs are the greatest.” “Tariffs are working big time.”
Tariffs have been imposed on steel and aluminium imports. There’s an open investigation that may see tariffs imposed on auto imports. Tariffs have been imposed on $250 billion of Chinese imports, with a promise of more to come.
The legal instruments employed rely on mix of claims about national security, and unfair trade practices — and there may well be merit to those claims; but the rhetoric is certainly about returning a certain type of job to the USA.
TALES FROM THE LONG TAIL 
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