What Donald Trump Doesn’t Know about U.S. Trade

By Kevin D. Williamson

Wednesday, August 19, 2015

A great deal of Donald Trump’s silly and illiterate trade talk presupposes the gutting or repeal of NAFTA, the trade accord between the United States, Canada, and Mexico that went into effect in 1994, with his dreams of punitive sanctions and blockades. Indeed, NAFTA is a favorite whipping boy for populists Left and Right, a reminder that populist conservatives have much more in common with populist progressives such as Senator Bernie Sanders than they do with the political tendency that connects Adam Smith to F. A. Hayek and Ronald Reagan.

Trump fancies himself an ace negotiator, a skill that he has had some chance to hone in an embarrassing series of corporate bankruptcies, and he proposes to employ those skills to ensure trade that is “fair” by whatever ethical standards occur to this particular serial adulterer/crony capitalist/pathological liar/reality-television grotesque. While Trump himself is fundamentally unserious, the Right has witnessed a destructive reemergence of the old anti-trade populism articulated by Pat Buchanan and Ross Perot.

Perot was the Trump of the 1990s, a billionaire businessman with an absurdly high estimate of his own importance, though Perot at least had the distinction of having made his own fortune. It was Perot who famously warned of the “giant sucking sound” that would accompany U.S. capital shifting south if NAFTA were to pass. And as many election scholars figure it, it was also Perot who ensured the election of Bill Clinton, a previously obscure political figure if a gifted campaigner. Another billionaire megalomaniac ensuring the election of another Clinton would be almost pleasing in its symmetry if it weren’t for the fact that it would do tremendous damage to the country and the world.

Trade is one of those issues about which the strength of people’s opinions tends to be the converse of their level of knowledge. With that in mind, it is worth revisiting a few facts.

U.S. manufacturing has not been undermined by NAFTA. In real (inflation-adjusted) terms, U.S. manufacturing output today is about 68 percent higher than it was before NAFTA came into effect. Real manufacturing output today is nearly twice what it was in 1987, when NAFTA’s predecessor, the Canada–U.S. Free Trade Agreement, was negotiated. Manufacturing output per man-hour has skyrocketed as investments in information technology and automation pay off, which is the main reason a smaller share of the work force is employed in manufacturing even as output continues its steady climb. Fewer people work in our factories today because we’ve gotten better at running them.

The United States does run large trade deficits, though the cause and consequence of these is generally misunderstood. (Daniel Griswold’s 1998 analysis, though inevitably dated, remains an excellent primer.) For many years, nearly half of our trade deficit came from imports of a single product: oil, not Hondas or cheap flip-flops from China. Oil accounted for 40.5 percent of the trade deficit from 2000 to 2012. Thanks to fracking, the United States is today a very substantial petroleum producer, but federal law prohibits most crude-oil exports. A recently negotiated swap of U.S. light crude for Mexican heavy crude required presidential dispensation, which gives an indication of how unfree that market is. What that means is that one-way trade in the commodity that has been an important driver of our trade deficit is not the result of protectionist policies abroad but of protectionist policies at home, a federal ban on oil exports enacted in 1975 to keep our precious fluids out of the hands of wily foreigners.

In fact, there isn’t a great deal of evidence that trade restrictions enacted by foreign countries have a great deal of long-term effect on American producers. Annual U.S. exports have been setting new records for years, and did so again in 2014. The largest share of U.S. exports go to Canada and Mexico, respectively, with the third-largest market for U.S. exports being China. China consumes about twice as much in U.S. exports as does our next-largest overseas market, Japan, and far more than any other country down the list. The United States runs trade surpluses with relatively protectionist countries such as Brazil.

What drives bilateral trade deficits between the United States and other countries is not, for the most part, trade policy, but simple supply and demand. The United States exports a lot of farm commodities and industrial products, along with a great deal of very high-end goods. The effects of that are mainly psychological: We see a lot of goods on the shelves marked “Made in China” but few overseas goods marked “Made in the USA,” because what the United States exports isn’t consumer goods, for the most part. But you’ll find American robotics in German automobile factories and American cotton in Vietnamese textile plants.

Because of our size (we sometimes forget that we’re the third-most-populous country on Earth and account for 22 percent of the planet’s economy), we tend to run relatively large trade deficits or surpluses as a share of trade with smaller countries, big deficits with Saudi Arabia, and big surpluses with the Netherlands. And we tend to do lots of business with our immediate neighbors and with other large and diverse economies. Among that group, we generally send more exports to richer countries and fewer exports to poorer countries, for the obvious reason that poor people are “undercapitalized” when it comes to buying $50,000 Ford pickup trucks or Boeing jets. The poorer countries do buy a lot of U.S.-produced food: At $152 billion a year, our annual farm exports slightly exceed our automobile imports. And about $30 billion of those farm exports go to China; Beijing may try to game trading terms, but hungry people are hungry people.

For the same reason that the United States tends to excel in high-value exports, foreign companies have often found it amenable to make some high-end goods for the American market, and other markets, in the United States. That is not because we have protectionist policies encouraging that, but because it saves on shipping costs and because we have a highly skilled work force. There aren’t any Chinese companies making $1 plastic water-guns to sell at Wal-Mart in the United States, but Mercedes-Benz makes automobiles here and Leica makes high-end optics here (not the famous cameras, but rifle scopes — know your market!), and not because American labor is cheap. Indeed, the race-to-the-bottom analysis is deeply flawed; with the notable exception of China, where wages have steadily climbed but are relatively low, global investment tends to be concentrated on high-wage countries such as the United States, the United Kingdom, Canada, and the countries of Western Europe. The next time somebody tries to sell you a race-to-the-bottom story, ask why they don’t make the BMW 7-Series in Haiti.

Conversely, because Ford sells the Focus all over the world (it sells twice as many in China as it does in the United States), it has made them in places as different as Michigan, Portugal, Germany, and the Philippines.

Mexico has made great strides in automobile manufacturing — but not because it has pursued a protectionist agenda. The opposite is the case: While the United States pursues the occasional free-trade deal in its sluggish and desultory fashion, Mexico has closed some 45 free-trade accords over the past few decades, which means that builders in Mexico can export duty-free to virtually any significant market in the world except China. Meanwhile, the United States languishes: By most estimates, the United States has a trade environment inferior to Sweden’s, and it has a higher corporate tax rate than Sweden does, too.

NAFTA has had a modest positive impact on the United States economy: positive in that it has increased both output and employment in the United States, modest because there already was a great deal of North American trade absent NAFTA. The treaty is not without its defects. My colleague Jonah Goldberg has written that an ideal free-trade treaty would be one sentence long: “There shall be free trade between . . . ” But NAFTA, like our other trade accords, is more Rube Goldberg than Jonah Goldberg, an overly complex piece of political machinery. But it has, despite its defects, lowered trade barriers, to the benefit of all three parties.

It is very likely that the Trans-Pacific Partnership, which gives so many of our talk-radio friends the willies, will do the same. Some conservatives despise TPP because of the fast-track trade-negotiation authority that has accompanied it — any delegation to the president is tantamount to treason in their view — while others, mainly on the left but some on the right, abominate its intellectual-property standards and other provisions. The analysis that sees TPP as giving the president leverage against Congress is so narrow as to be blind. The real advantage of negotiating a trade deal that requires consensus among such countries as Singapore and Australia is that these countries generally have economic policies that are superior to our own and better suited to the realities of 21st-century markets and economic conditions. Which is to say, it’s an opportunity to leverage Tony Abbott and the ghost of Lee Kuan Yew against Barack Obama on the matter of free markets — a desirable situation for conservatives.

Don’t expect to hear any of that from Donald Trump, who imagines that the global economy is a poker game and is transfixed by the phantasm of the inscrutable Oriental dealing from the bottom of the deck while the sneaky Latin sharpens his machete.