The state of American manufacturing: The failure of Trump’s trade and economic policies
Separating fact from fiction is always tough when listening to President Trump, who lives in his own, fact-free fantasy-world. This is particularly so when it comes to trade and manufacturing. Here are a few key points on that topic to keep in mind when listening to his State of the Union address. There’s a lot that can be done to create millions of good manufacturing jobs for working Americans, but not the way this president is going about it.
- The trade deficit is growing more than twice as fast as the overall economy, because of the Trump administration’s trade and economic policies. The total U.S. goods trade deficit has increased 18.1 percent since 2016, and our trade deficit with China has grown even faster, 20.5 percent in the same period (annual estimates, based on year to date trade through October). Growing trade deficits over the past two decades are the single largest cause of the loss of roughly 5 million U.S. manufacturing jobs.
- The Trump administration has failed to end currency manipulation and dollar misalignment, despite Trump’s promise to name China a currency manipulator on day one upon taking office. Currency misalignment is the single largest cause of growing U.S. trade deficits. U.S. trade can be rebalanced, creating millions of good manufacturing jobs, by lowering the value of the dollar by about 25 percent. The failure to end currency misalignment is a major cause of GM’s recent decision to close 5 manufacturing plants and outsource production, eliminating 12,000 jobs, and Ford’s plan to reduce its workforce by 12 percent, eliminating 24,000 jobs.
- Trump’s massive tax cuts (for corporations and the wealthy) and spending increases are expanding the federal budget deficit, pushing up the value of the dollar and the U.S. trade deficit. The dollar has increased 20 percent since 2013, including 5 percent in 2018 alone. As a result, the IMF now predicts that the broadest measure of the U.S. trade deficit will nearly double between 2017 and 2022. Growing trade deficits will decimate manufacturing over the next few years, and could push the United States into a recession.
- Trump’s trade deals with Mexico and Canada and the negotiations with China will not fix our trade problems. The new tax bill encourages firms to outsource more jobs by reducing taxes paid when firms outsource production. The labor and environmental restrictions in the new NAFTA deal must be made strictly enforceable, or it will simply encourage more outsourcing. And the NAFTA deal grants drug-makers new powers to block generic competition and to lock in high medicine prices.
- Negotiations with China also seek to lock down increased protections for the intellectual property and profits of U.S. multinationals, but this will just encourage them to outsource more production to China. And China has already played its ace-in-the-hole in the trade war with the United States, lowering the value of its currency by 10 percent since April of 2018, more than offsetting the impacts of Trump’s tariffs on trade flows. As a result, the U.S. trade deficit with China recently reached an all-time high, despite Trump’s China tariffs.
- The most important cause of growing U.S. trade deficits and manufacturing job losses is not faulty trade deals, but a misaligned dollar. A handful of countries with substantially undervalued currencies have been running large, structural trade surpluses for several decades. This hurts workers in many countries that have persistently large trade deficits, including the United Kingdom, Canada, Mexico as well as the United States. The surplus countries are China, the European Union (especially Germany and the Netherlands), Japan, and Korea, plus a handful of countries that have engaged in persistent currency manipulation including Denmark, Singapore, Switzerland, and Taiwan.
So what should the United States be doing instead?
The single most important step we can take to rebuild manufacturing is to rebalance trade by realigning the U.S. dollar. There are several ways this can be achieved. In 1985, the last time this was done, Congress worked with the administration to encourage our trading partners to negotiate the Plaza Accord, an agreement to realign currencies. If a similar effort were to fail, Congress could authorize the U.S. Treasury and the Federal Reserve to sell dollars in global markets to reduce the currency’s value to a competitive level. Or, we can impose a tax on purchases by foreign governments and investors of dollar-denominated financial assets.
Lastly, Congress should not be pressured into approving trade deals unless they achieve enforceable labor and environmental standards that can be quickly implemented. Likewise, new agreements should not be approved if they increase the incentives to outsource production from the United States. It is time for a new approach to trade, one based on a clear assessment of its implications for jobs and production in the United States.