What a hero Trump is. If you were an American would you not feel the rush of nationalistic pride through your veins as Trump champions for making America great again? I know I trembled, even as a Singaporean, when Trump declared that he would bring jobs back from China. In the second and final part of this series, let us analyze what exactly made me tremble.
1. Tariffs on China (45%) & Mexico (35%)
Any student of economics would know based on a tariff diagram (probably wanna practice drawing on of these if you can't visualize!) that tariffs on imports from China and Mexico does increase domestic output. As consumers switch from the now pricier imports to domestic products, domestic production and employment will rise and ta-dah! Trump magically brings jobs back to America!
But no it does not stop there. Even without retaliation from Mexico and China, the impact of a large decline in U.S. consumption of Mexican and China exports would lead to a fall in AD for these two countries since their (X-M) will fall. The consequent contraction would naturally mean lesser income to buy U.S. exports. Like what you say? Well less iPhones, less Chevys, less tourism to U.S. perhaps? Trump's brilliant policy goes full circle and smacks the U.S. right where it hurts - worsening their already ginormous trade deficit.
Adding to that is the fact that pricier imports due to tariffs does not mean the import expenditure (M) necessarily falls, especially if the PED for these imports are price inelastic. It is worth remembering that iPhones are manufactured in China and GM/Chrysler make their vehicles in Mexico. With an inelastic PED, the rise in M due to the rise in tariffs would translate into a worsening AD in the U.S. Not exactly a brilliant move.
2. Not Supporting the Trans-Pacific Partnership (TPP) Agreement
There are winners and losers in trade. Countries gain and lose comparative advantages, industries rise and fall, economies grow and contract and some pockets of the population find themselves structurally unemployed or face depressed wages. Trump has justified his resistance to the TPP by emphasizing the unfairness behind the agreement and how China might again benefit at the expense of the U.S, playing on the fears that more job losses and lower wages might materialize.
The promise of free trade predicates on growing the global economic pie. While in the short term, one trade country's deficit might mean the surplus of another, the long term game is that eventually everyone evens out to a balanced BOP over time with a larger X and M in dollar terms. The promise is that having X=$50m and M=$25m is not as great as having X= $5bn and M= $4bn despite the former having twice as much X as M. But this promise cannot materialize if everyone shrinks into their protectionist shells. Backing out of the TPP does not mean that the rest of the world do not continue moving towards greater and greater trade integration. It just means as more FTAs are getting signed, U.S. runs the risk of getting left out of the free trade party, which could only mean a decline in (X-M) over time and lesser growth and jobs are created.
International trade and globalization is an international movement, one spearheaded by the developed nations, including the U.S., in the decades post world war II. The gains are obvious, with the G7 nations reaping enormous gains in economic output and per capita income. America's trade woes have surfaced in recent years as they are facing the challenge of repositioning their economy in a world where countries like China, India and Mexico are becoming manufacturing super powers, displacing the American factories. While protectionism serve as a short-term band-aid, the longer term solution would be reinventing the economy to create new comparative advantages. The good news is that America remains at the forefront of the tech revolution with companies like Facebook, Apple, SpaceX, Uber, Airbnb and Amazon. What is more critical is that this has to continue, and there is no guarantee this positive movement can continue under Trump if he takes office.
If Trump gets the opportunity to put in place these regressive policies, we should all tremble, most of all America.