In recent decades Americans have seen a huge increase in trade (flows of exports and imports). This influx in global trade has posed significant challenges to U.S. workers. The trade flows (and policy responses to them) have contributed to anemic wage growth for workers without a college degree, caused severe damage to manufacturing communities throughout the country, and represent an increasingly unsustainable organization of global production and consumption.1 People in the U.S. have good reason to be conflicted about the challenges that globalization and the rise in trade pose to their working lives and communities, and the potential benefits trade can create.

U.S. workers have also watched as too many policymakers enthusiastically push a proliferation of trade agreements. These agreements have accelerated trade flows and carved out corporate-driven “rules of the game” for a globalization that puts almost no priority on the well-being of regular people in the United States or the resilience and sustainability of the overall economy. Most of the Washington, D.C., establishment has supported these trade agreements, promising a supposed influx of good jobs and increased standards of living that would come because of increased trade.

Given this history, it is no surprise that many of these workers want something different from policymakers regarding our nation’s approach to globalization. And the Trump administration’s current approach is certainly different—it is even worse than what came before. This approach is motivated by ever-changing and contradictory goals and is built entirely on threats of historically high and broad-based tariffs that change by the day (or even hour) rather than opportunities for mutual benefit from cooperation.

Ratcheting up tariffs across the board is not a serious response to, nor will it solve, the larger challenge of lackluster wage and job growth for noncollege workers. Lower tariffs were not a significant driver of the larger trade flows that pressured wages for these workers in recent decades. This is not to say that there are not real problems with the U.S.-led global trading system nor useful changes to be made to policies regarding globalization. But historically high and broad tariffs are not among them, and domestic policy choices have had much more to do with the wage suppression most U.S. workers have experienced in recent decades (Mishel and Bivens 2021).

In this paper, we provide a rough outline for how those concerned about the economic plight of working-class Americans should approach issues concerning globalization and trade. Often the best approach to issues intersecting with international trade does not directly implicate traditional trade policy tools (like tariffs). For that reason, we say that these recommendations constitute a progressive approach to globalization in the 21st century.

Key challenges that globalization poses to U.S. workers:

• Growing import flows from lower-wage nations and threats to offshore jobs put modest, but steady, downward pressure on wages of workers without a college degree.
• Chronic trade deficits have reduced employment in U.S. manufacturing and raised our foreign debt.
• The inflation stemming from pandemic and war shocks between 2020 and 2024 highlighted the fragility of global supply chains. These supply chains should be strengthened to prepare for a future prone to larger and more frequent shocks.
• Competition from foreign trading partners that permit unfair and abusive labor practices has made labor artificially cheap.
• A failure to harmonize climate regulations internationally threatens to see greenhouse-gas polluting production simply migrate away from the United States to low-standard locales rather than being reduced globally, undermining U.S. industry and forcing the burden of adjustment onto workers in greenhouse gas-intensive sectors.
• A failure to harmonize corporate tax treatment internationally allows corporations to play countries off each other and ensures that some countries will almost always have incentives to act as tax havens, making it harder for all countries to impose reasonable taxes on corporate profits.

Although policymakers from both parties have too often been reluctant to admit to the problems created by a U.S.-led, corporate-friendly global trading system, none of these problems presents insurmountable challenges. Our key recommendations to solve the central problems of globalization are the following:

• While trade flows have put downward pressure on wage growth for large portions of the U.S. workforce in recent decades, trade policy would have only weak and unreliable effects in reversing this. Instead, policymakers should strengthen key domestic policy bulwarks that underpin workers’ leverage and bargaining power to boost wage growth. These domestic policies include a substantial increase in the minimum wage, protections for workers to freely associate and bargain collectively in unions, and full employment macroeconomic policy management, which will have larger and more reliable effects on wage growth.
• Reducing damaging trade deficits cannot be solely achieved through trade policy unless it is so restrictive that it functionally returns the country to an isolated regime with no trade at all. Instead, more balanced trade will only result from macroeconomic policies consistent with lower trade deficits, including exchange rate management and a reasonable mix of fiscal and monetary policies.
• Supply chain resilience is important, yet individual businesses will underinvest in it without public support. Collapsing supply chains initially sparked the post-COVID-19 inflationary spike across the globe. Supply chains remain vulnerable to disruptions from natural disasters, geopolitical events, and even human and computer errors. Unless one is entirely confident that these events will never happen again, the costs of supply chain fragility are potentially large enough that it’s worth using policy measures to build up supply chain resilience. Trade policy tools like tariffs and subsidies are potentially useful measures here.
• The U.S. should reward countries that respect labor rights with preferential access for their imports and should incentivize other countries to enforce labor standards. This can be done by imposing tariffs that shrink as countries improve in upholding labor rights. These tariffs cannot fully protect U.S. workers from competition from countries where exploitation makes labor cheap, but tariffs can provide some buffer from this, and imposing them provides a valuable political signal that simple fairness matters for trade policy (as it does for all other types of policy).
• Effective climate policy must be global, if not universal. In terms of driving destructive climate change, it does not matter where greenhouse gas pollution originates. National policies that raise the price of pollution locally but simply push emitting factories offshore fail to deal with the overall problem while putting domestic industries at unfair disadvantage. Until there is a more coordinated global approach to greenhouse gases (a global carbon tax or something similar), national governments should be willing to leverage trade policy tools (like tariffs tied to the intensity of greenhouse gas emissions involved in producing imports) to promote lower-pollution industries while avoiding “carbon leakage,” reduce global emissions, and incentivize industry investments in carbon-reducing technologies.
• International coordination of tax policy that ensures large multinational corporations pay their fair share in taxes would help U.S. workers far more than either higher tariffs or more trade agreements. The global tax system currently provides easy access to tax havens for corporations and encourages the offshoring of both paper profits and real factories away from the United States. Much of this problem can be solved unilaterally, but even the remaining problems constitute a far more important and pressing target for useful international coordination than further trade agreements do.

Policy recommendations to address these challenges

In this section, we provide some high-level recommendations about how policies should address globalization’s challenges.

Trade policy can do little to spur wage growth, but domestic policies would be much more effective

The production of imports from lower-wage nations tends to intensively use noncollege labor relative to U.S. exports. This means that the pattern of trade flows between these nations and the U.S. reduces the demand for noncollege labor in the United States, as imports displace more noncollege labor than exports support. Hence, trade flows put steady, albeit modest, downward pressure on wage growth for noncollege workers, a group comprising over 60% of the workforce (EPI 2025). The downward pressure on wage growth is nontrivial. Between 1979 and the mid-2010s, these trade flows likely depressed wages of noncollege workers by between 5%–6% (Bivens 2013; Autor, Dorn, and Hanson 2011). For workers who have seen extremely slow growth in wages over this entire period, another 5%–6% of wage growth would have been most welcome.

Crucially, this downward wage pressure stemming from trade flows does not just affect workers in tradeable industries. It spills over and puts downward pressure on wages for noncollege workers throughout the economy. Further, the wage suppression that trade flows imposed on noncollege workers allowed income gains for college-educated workers and business owners. 2 Yet policymakers never offered compensation to noncollege workers at anything close to the scale of this redistribution of income away from them. Instead, policymakers offered vague promises of retraining and empty assurances that trade was always “win-win.” This policy neglect added a deep insult to the injury of trade-induced wage suppression for these workers.

Yet it is important to remember that this policy neglect was not confined to globalization. In fact, nontrade forces supported by intentional policy decisions were putting far more intense downward pressure on wages than trade flows did.3 One aspirational benchmark for wage growth is economywide productivity growth. In the 30 years after World War II, broadly equal wage growth among all workers was clearly a target for policymakers who supported strong institutions (from unionization to fast-growing minimum wages to the maintenance of full employment) to meet this target. But over the 1979–2019 period, wage growth for noncollege educated workers decoupled from overall productivity growth, and as productivity growth continued, worker wages lagged behind—cumulatively by close to 50 percentage points over this period.

Trade competition certainly contributed to this decoupling and stagnation of wages. But analysis shows that nontrade sources explain three-quarters or more of the entire wage suppression these workers experienced in this time (Mishel and Bivens 2021). Reversing the nontrade forces that have contributed to wage suppression would do far more to help noncollege workers than any policy that could influence trade flows. Further, besides these nontrade forces having more force in boosting wage growth, they are also far more reliable in their effect. The policy levers available to influence trade flows are generally weak and unreliable unless taken to utterly extreme levels.

Finally, while growing trade flows with lower-wage nations reduced wage growth for noncollege labor in recent decades, they also boosted business profits and wages for workers with a college degree. Using tariffs to reverse these trade flows might, after long periods of time, lead to a reorientation of production in the United States that boosts demand for noncollege labor and raises their wages (though it might not). If tariffs did lead to this production reorientation, however, it would also lead to reduced wages for college-educated labor and lower profits, and the decline in college wages and profits would be larger than the increase in noncollege wages.

To be clear, this distributional shift toward noncollege labor and away from college-educated labor and profits would be a progressive outcome, and if it was the only option available to policymakers to make noncollege wages rise faster, we would be in favor of it. But it would be an extremely inefficient way to boost noncollege workers’ wages. Other wage-boosting policies like increased unionization or maintenance of full employment would not clearly lead to overall growth declines and might even boost growth. In short, while rising trade flows have put downward pressure on noncollege wages in recent decades, using the tool of tariffs to reverse this would be an extremely inefficient way to raise noncollege wages relative to other available tools.

Macroeconomic policies supporting a ‘strong’ dollar are the real causes of damaging trade deficits

Trade deficits are driven near entirely by the value of the U.S. dollar being too high to balance imports and exports—an outcome that can be traced to macroeconomic policy choices.4 A high value of the dollar makes imports cheap to U.S. consumers and makes U.S. exports expensive on global markets. This, in turn, leads to an excess of imports over exports. It is often taken as given that the United States should pursue a “strong dollar” policy, and that has often been the implicit (sometimes even explicit) goal of Treasury departments during both Republican and Democratic administrations. This bias toward dollar strength has led directly to toleration of excess trade deficits.

A rule of thumb for thinking about policies to reduce trade deficits and boost manufacturing is simply that if a given policy does not lead to a reduction in the value of the U.S. dollar, it will not have any traction in reducing trade deficits. The value of the U.S. dollar is driven by the demand and supply of dollar-denominated assets in global markets—traditionally called the capital account of the United States’ international balance of payments and now sometimes referred to as the financial account. When the demand for dollar-denominated assets is high relative to supply, the dollar rises in value and vice versa (Blecker 2009).

This rule of thumb is why tariffs are highly unlikely to be effective in reducing U.S. trade deficits unless raised to prohibitive levels. Tariffs actually raise the value of the U.S. dollar, which causes exports to fall roughly in proportion to the import declines following imposition of tariffs. This effect is compounded by the fact that many U.S. exports today contain substantial imported content, which causes export prices to rise directly in response to tariffs.5

Currency interventions from foreign governments

The demand for and supply of these dollar-denominated assets is set by macroeconomic policy decisions. One such decision is to allow the capital account to be influenced by intentional decisions of foreign governments. Often, for example, the Chinese and Japanese governments have intervened in global financial markets to purchase dollar-denominated assets to keep the demand for dollars high and to subsequently allow their own exports to gain a cost advantage in U.S. consumer markets. U.S. policy encouraged such policy actions through trade agreements that incentivized offshoring manufacturing production and strong support for financial liberalization that exposed countries to excessive risks of currency, banking, and financial crises.

The role of private capital flows

Another decision is to allow the capital account to be influenced by speculative private capital flows, even if they lead to an uncompetitive value of the dollar. In the late 1990s, for example, capital flowed from European countries to the United States largely due to European investors looking to buy rapidly appreciating U.S. corporate equities. When the U.S. stock market bubble eventually popped, the flow of capital from Europe largely dried up, and the dollar lost considerable value relative to the euro. This reversal led to a welcome decline in the U.S.–euro area trade deficit in the early 2000s. Until the end of 2024, a similar trend seemed to be occurring as the U.S. stock market had seen very large gains relative to those in Europe. This was associated with a large increase in the dollar’s value in recent years. The recent sharp decline of U.S. stock markets has not been mirrored in Europe, so some welcome relief from chronic upward pressure on the dollar stemming from these capital flows may well arrive over the next year.

The safe haven of the U.S. dollar during financial crises

As liberalized global financial markets have grown more volatile and prone to crisis (Reinhart and Rogoff 2011; Claessens and Kose 2013), nation states and financial institutions have sought to insulate themselves by accumulating ever-greater reserves of U.S. dollar financial assets. This demand to acquire dollar-denominated assets led directly to upward pressure on the dollar, which, in turn, led directly to these countries running large trade surpluses (that is, selling more exports to the United States than the imports they buy from the United States). This practice of self-insuring against systemic financial risks caused by liberalized global markets accelerated following the 1997–1998 Asian Financial Crisis, when countries learned it was too costly to depend on external institutions like the International Monetary Fund to help manage these risks.

When instability threatens international capital markets, investors and financial institutions “flee to safety,” meaning they sell off relatively risky assets and buy relatively safe U.S. dollar assets. The worsening of the dollar’s overvaluation occurs at a time when U.S. exporters are under the highest stress. The upshot of all of this is that a more effective international regime to aid countries facing currency and financial crises could reduce the need for countries to “self-insure” by trying to build up dollar reserves. This would be good for both the self-insuring countries who could now use precious financial resources on other social goals and for U.S. trade deficits.

Fiscal and monetary policy choices

Fiscal and monetary policy decisions are other macroeconomic policy choices affecting the U.S. trade balance. In regard to fiscal policy, when the U.S. economy is near full employment, federal budget deficits can push up trade deficits. If budget deficits run at full employment lead to higher interest rates (as they often do), this will lead foreign investors to demand more dollar-denominated assets to earn these now-higher rates. Increased demand for U.S. assets, in turn, causes the dollar to appreciate and the trade deficit to expand.

In regard to monetary policy, the same dynamic holds when the Federal Reserve raises interest rates. Whatever the source, a widening spread between U.S. and foreign interest rates attracts more capital to dollar-denominated assets, and this causes a rise in the value of the dollar, which, in turn, harms U.S. net exports.

Strategies to manage the value of the dollar

Keeping the value of the dollar at a level that more closely balances imports and exports, hence, requires a range of macroeconomic strategies. The most controversial would see the U.S. engage in more active currency management to ensure that foreign influences—either intentional government policy decisions or destabilizing private capital flows—are not allowed to push the demand and supply of dollar-denominated assets out of balance. Currently, Congress requires the U.S. Treasury to monitor currency management by foreign countries and make biannual reports naming countries that undertake active currency management for competitive gain. In practice, Treasury has more often than not demurred on naming clear instances of currency management. (Treasury 2024).

The U.S. government has much stronger options than mere surveillance and naming to countervail trade-distorting currency practices of other countries. If, for example, a foreign government began buying dollar-denominated assets, the U.S. could simply begin buying assets denominated in the currency of the foreign government, thereby neutralizing the effect of the foreign governments’ intervention in the U.S. capital account.6 Another possible option is for U.S. policymakers to institute a “market access charge” such as the one proposed in the 2019 bill, Competitive Dollar for Jobs and Prosperity Act (2019) that would levy a small tax on the foreign purchase of U.S. dollar assets for countries maintaining sustained trade surpluses with the United States (Hansen 2017).

Running fiscal and monetary policies that are consistent with lower levels of interest rates would also relieve upward pressure on the dollar’s value and help close trade deficits. On the fiscal side, this simply means that when the economy is at full employment, deficits should not be increased or should even be reduced. The how of this deficit reduction at full employment is every bit as important as the how much in terms of its effect on the welfare of U.S. residents, but it is the how much that determines the degree to which deficit reduction can help pull down the trade deficit.7 On the monetary side, the Federal Reserve should set interest rates at the lowest level consistent with stable inflation and avoid periods when unnecessarily high interest rates put upward pressure on the value of the dollar.

The advantages of a stronger dollar

Among policymakers, the reflexive privileging of a “strong dollar” policy has contributed to chronic trade deficits in the United States. However, any change in the value of the dollar creates both winners and losers. A strong dollar, for example, makes imports cheap to U.S. consumers and foreign travel more affordable for U.S. residents. It also makes it easier for U.S. businesses both domestically and abroad to attract foreign capital for investment projects. It allows retailers like Walmart and Amazon to source goods more cheaply for resale. These are not trivial benefits.

The advantages of a weaker dollar

But a lower value of the dollar would bring its own significant benefits. Most importantly, U.S. exports would be on a much more level playing field in global markets. Export-oriented production in the United States would expand. Domestic businesses competing with imports would gain competitive breathing room and expand their production. The manufacturing sector in the United States would expand. The reduction in trade deficits would lead to less future income leaking out of the U.S. to foreign investors.

Globalized supply chains are fragile. Industrial policy and trade protection can support their resilience

In recent decades, multinational corporations have prioritized maximizing short-term profits, even at the expense of investing in the resilience of their supply chains. For example, a company that focuses on maximizing current profits might source all inputs from the single lowest-cost producer. They might also minimize the size of their inventories of key inputs to production since inventories, by definition, are inputs not being sold in the current period and generating profits.

This short-term focus both ignores risks to the company’s own operations from supply chain disruption and creates a negative spillover cost for other businesses and consumers that rely on their products. In the jargon of economists, underinvestment in supply chain resilience creates a negative externality, a cost of business that is absorbed by others besides the actor undertaking it.

Underinvestment in supply chain resilience is a valid target of industrial policy interventions, sometimes including trade protection. For example, businesses focused on resilience should spread production of key inputs among different producers to hedge against the risk of disruption at a key link in their production chain, even if this modestly boosted the current cost of producing these inputs.8 This could also include “reshoring” of key inputs if policymakers were worried about threats to resilience stemming from international conflicts that would stop the ability to source imports. One way to ensure this greater regional diversity (including a larger role for U.S. production) of key inputs could include trade policy measures like tariffs.

This logic lies behind the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act passed in the Biden administration. It offers subsidies for chipmakers to set up manufacturing facilities within the U.S., largely in hopes of avoiding the extreme shortage of chips that drove the first wave of inflation in the post-pandemic recovery. There are also undeniable geostrategic issues driving the CHIPS Act (for good or for ill), but even these geostrategic concerns largely center on the basic question of how to make the U.S. economy more resilient to economic shocks.

Further, a resilience-minded business could maintain buffer stocks of key inputs (such as semiconductor chips or fuel oil), so they can keep production flowing in the event of supply delays or disruptions. Failure to do so can create large costs for the firm and the broader economy, as evidenced by the inflation stemming from pandemic- and war-related supply shocks between 2020 and 2024. One obvious long-running example of this is the Strategic Petroleum Reserve, which the federal government can run down or build up to help smooth out fluctuations in energy costs.

Because individual companies are unable to ensure systemic supply-chain robustness, the rational incentive for them is not to incur costs trying to do this. This market failure defines a key role for policymakers in creating incentives for investments to make supply chains more resilient. Besides creating incentives for more private investment, there are also explicitly public roles for policymakers in bolstering resilience. One key example is having federal agencies monitor supply chains for areas of weakness. Providing subsidies or other public supports for investments in resiliency is a worthy priority for policymakers concerned with the challenges of globalization.

The U.S. should buffer its workers against abusive foreign labor practices and incentivize trading partners to strengthen labor standards

The U.S. should reward countries that respect labor rights with preferential access for their imports and incentivize other countries to enforce higher labor standards. Laws and regulations protect workers and businesses against having to compete with producers willing to exploit vulnerable workers within the domestic economy. Given that, there is good reason to be concerned when this kind of unfair competition is embodied in imported goods as well.9

Much of the wage differential between U.S. workers and workers in lower-income countries like Mexico and China is driven by productivity differentials. The U.S. economy is the most productive in the world, while productivity (defined as average output generated in an hour of work) is much lower in our lower-income trading partners. But some of the wage differential between the U.S. and other countries reflects not just productivity differentials, but the state of labor standards and enforcement.

Econometric analysis by Rodrik (1999), for example, shows that the level of democratic institutions has large and significant impacts on national wages. Rodrik finds that moving from a level of democratic quality that characterized Mexico in 1999 to a level characterizing the United States in that year could see wages in Mexico increased by up to 40% even with no change in productivity. Palley (2005) further finds that this effect runs entirely through greater degrees of democracy leading to higher levels of labor standards, measured by the number of International Labour Organization (ILO) “core labor standards” ratified in a given country. In short, even after accounting for productivity differences, labor can be made significantly cheaper through nondemocratic, exploitative labor regimes.

Widespread violation of labor rights and democratic norms is problematic for fairness and for the competitive position of U.S. workers. In countries like China, substantial investments in production technologies and human capital development (health and education) are narrowing the productivity gap with the United States, which should, in theory, lead to less wage pressure. But if the degree of labor exploitation intensifies, this can undo some of the useful lessening of wage pressure that should have accompanied Chinese productivity growth.10 Even when low-income countries might wish to boost labor standards, the destructive race-to-the-bottom logic of global competition among open economies can lead them to hold back for fear of losing export competitiveness and foreign investment attractiveness.

There are many potential benefits for both U.S. workers and for workers throughout the world to engage in economic competition along many margins. But the scope of useful competition should be focused on who can make their exports more efficiently, not who can more effectively serve up their own nation’s workers for exploitation—whether by local or multinational firms. When trade competes on low labor standards, few of the potential benefits from trade flow to workers.

Two different groups have resisted efforts to incorporate enforceable labor standards within the structure of existing international trade rules. On one side, there are developing country interests concerned about losing the comparative advantage of exploitation who see labor standards as a kind of neoprotectionism. In theory and reality, strong labor protections favor, rather than hinder, growth in late-developing economies (Storm and Capaldo 2018). On the other side are advanced economy corporate interests profiting from this exploitation by substituting workers in their own countries for oppressed workers offshore.

The linkage between trade policy and labor standards has a long intellectual history, yet very few workable proposals have been made during that time. For most of this debate, the primary focus was on whether enforceable labor standards should be part of the main treaties governing the global economy, whether it be trade agreements between countries or multilateral agreements like the World Trade Organization (WTO). But these efforts largely aimed to put the onus for enforcing labor standards on national governments that may not have the capacity, resources, or interest in upholding worker rights instead of on the companies profiting from the exploitation. Further, the efforts were hampered by the need to achieve unanimity among parties to an agreement.

A different model was instituted with the so-called Rapid Response Mechanism (RRM) in the U.S.-Mexico-Canada Agreement (USMCA) that entered into force in 2020. In addition to implementing new and improved labor laws in Mexico, USMCA’s RRM allows enforcement of labor standards at the factory level by an independent panel investigation (rather than a government inspector for whom incentives may be conflicted) when freedom of association and collective bargaining labor rights are violated. While the RRM represents a substantial policy innovation, it is not a match for the challenge of lifting labor standards at a systemic level. To date, only slightly more than two dozen cases have been alleged (ILAB 2025). Meanwhile, wages in Mexican manufacturing today are below their level in 2002 in inflation-adjusted terms and now stand at just 10% of U.S. manufacturing wages, or a mere $2.76 per hour.11

A ranking system for countries based on respect for labor rights

There is, however, no real reason why the U.S. must wait until new trade agreements are signed to begin the process of incentivizing better labor standards in trading partners and buffering U.S. workers from destructive competition. Rodrik (2019), for example, urged the U.S. to institute unilateral domestic safeguards.

The broad brush of our proposal is simple. The United States (perhaps led by the International Labor Affairs Bureau (ILAB) in the Department of Labor) should work with other international bodies and experts to develop a five-tiered ranking of countries around the world based on their respect for labor rights.12 Tier one would be countries that have legislated and successfully enforce the highest degree of labor protections around the world. Tier five would be countries whose labor regime is so odious that the U.S. should simply refuse to accept their imports until it is improved. In between, tier two countries should face a 5% tariff on all exports to the U.S., tier three countries a 10% tariff, and tier four countries a 15% tariff.

Are we positive these are the exact right number of tiers and tariff levels? Of course not, but that’s something that could be researched and assessed by the institutional staff assigned to this task. Further, this proposal is not meant to be calibrated to precisely solve the entire problem of differing labor standard regimes around the world. Instead, it is meant to show that the U.S. government takes seriously how labor is treated around the world and how that spills over onto workers in the United States. It is also meant to provide a competitive buffer against unfair competition that is a bit more than purely symbolic. The highest tariff level here (15%) would cut roughly in half the wage penalty imposed by being in the bottom tiers of democracy or labor standards enforcements identified by Rodrik (1999) and Palley (2005).

One difference between this broad proposal and some others that try to address the “social dumping” of exploitative labor practices is that it is country-based, not product-based. Often proposals aimed at integrating labor standards and trade policy require a finding that abusive labor practices provide a competitive advantage in a particular export good. We think a country-based approach makes more sense for two reasons.

First, it requires much less granular information to sort countries into tiers based on their general approach to labor rights than it does to investigate the cost structure of every possible export to the United States and how it might be impacted by labor practices at particular plants. Second, poor countrywide labor practices have powerful externalities that will pull down wages paid in exporting plants, even if the plants themselves have decent labor standards. Export plant owners only have to pay wages above those in the surrounding labor market to attract the workforce they need. If the surrounding labor market has wages suppressed by substandard national labor policy practices, then the exporting plant can have decent labor practices within its walls yet benefit strongly from the substandard national labor environment. Given these considerations, a commitment to provide better market access to entire nations based on their labor practices is a more workable policy.

The highest tariff level in this broad proposal would not be trivial, and it certainly might apply to large and important trading partners like China unless they make some welcome changes to their labor rights regime. In this sense it might sit uneasily with our skepticism about the use of tariffs in the previous section on trade deficits. We argue that it doesn’t. This labor standards-based tariff would be in effect regardless of the state of trade balance between countries. It does not aim to reduce trade deficits (and it cannot). Further, unlike the second Trump administration’s tariffs, it has a clear goal and specifies a clear road map for how trading partners could change their behavior to have it removed.

Harmonizing climate policies will help reduce greenhouse gas emissions and strengthen U.S. industry

Without harmonized climate regulations, individual countries risk the migration of greenhouse gas-intensive production to low-standard locales and the replacement of domestic production with carbon-intensive imports. This dynamic means that national climate policies and emissions regulations might simply push production to lower-standard locales rather than reducing global emissions overall. If, for example, the U.S. instituted a carbon tax and China did not, instead of reducing carbon emissions globally, some of the effect of this U.S.-based tax could be to push production that emitted carbon offshore to China. This “carbon leakage” would undermine the environmental goals of the carbon tax, and it would see U.S. producers of these emitting industries having to find new economic activity to engage in for no particularly useful reason.13

All of this is highly theoretical so far. The U.S. does not have robust regulations against carbon emissions (in part because of rollbacks to key greenhouse gas regulations during the first Trump administration), and no such regulations seem to be on the horizon. But if the day comes when some countries want to move ahead with stricter emissions controls, these countries should have the freedom to use trade tools like tariffs based on the carbon content of goods to ensure that production is not just moved offshore.

But until there are internationally harmonized climate policies, the progressive approach to globalization for the United States would be to leverage trade policies to herd the global economy toward reduced greenhouse gas pollution and other economic practices that threaten planetary boundaries critical for sustained life on Earth (Richardson et al. 2023). As with labor standards, U.S. trade policy could be designed to reward countries pursuing climate change-mitigating policies that incentivize foreign producers to reduce polluting emissions and clean up their manufacturing industries. The latter could be accomplished by forcing the internalization of costs of greenhouse gas emissions embodied in imports. By preventing “leakage” of emissions to foreign pollution havens, U.S. climate policy would also ensure that domestic, emissions-intensive industries would not be put at a cost disadvantage while shouldering the burden of adjusting to low-carbon production on their own.

The European Union is already putting such a policy regime in place with the Carbon Border Adjustment Mechanism (CBAM). This mechanism, in essence, levies a tariff on goods equivalent to the cost of greenhouse gas emitted during production in the country of origin. Beginning in 2026, EU importers will be required to purchase CBAM certificates covering the embodied emissions they import, consistent with EU pricing for equivalent emissions. Foreign producers that pay for emissions costs domestically will receive credits against fees due under the CBAM. Initially, the EU’s CBAM will apply to imports of iron, steel, and aluminum products; cement; fertilizer; hydrogen and electricity goods; with the mechanism expanding to cover imports from additional emissions-intensive industries, such as chemicals and polymers, down the road.

A policy to level the playing field in terms of emissions pollution is critical both to addressing the imminent climate crisis and to ensuring fair competition for U.S. industries. These industries are among the world’s cleanest producers but are up against other countries whose rapidly expanding production capacities are among the world’s dirtiest (Hersh and Scott 2021). During the Biden administration, the United States and European Union made strides toward a cooperative regime to limit unfair global competition from polluting imports with the Global Arrangement on Sustainable Steel and Aluminum. The agreement would provide a platform for onboarding like-minded countries intent on greening the most pressing industrial emissions (Mullholland and Meyer 2024; Malhotra and Tucker 2023). Legislators have already introduced a number of proposals for U.S. versions of a CBAM (JEC 2024).

This approach to limiting global greenhouse gas emissions and the competitive advantage for polluting countries also may conform to World Trade Organization (WTO) rules. The WTO carves out explicit rights for national regulation of “process and production methods,” recognizing that traded goods can be distinguished by how they are made, although WTO case law has yet to define clear boundaries for how such distinctions can be regulated (Benson et al. 2023; Porterfield 2023).

New international agreements should focus much more on taxes than on trade

Most of the benefits of freer trade can be secured by countries unilaterally and do not require international agreements. If a country decides that it is in their economic interest to allow imports to enter without tariffs, they do not need to strike an agreement with a trading partner to allow this. These unilateral tariff reductions are usually the largest source of estimated gains from trade by far.

Taxing capital income (profits from corporations and returns to wealth), however, is different. Here, effective policy requires some degree of international coordination. Without this, some countries will seek to become tax havens and carve out benefits for themselves at the expense of other countries’ ability to tax the richest entities in society. 14

The levers of international reform that would end tax havens and profit-shifting by rich corporations are well known and require political will to enact. One obvious lever would be for countries to agree upon and adopt a global minimum tax on corporate profits, regardless of where profits are booked. Proposals to adopt such a global minimum tax could, by themselves, raise roughly $500 billion over the next decade (Clausing 2021). The Biden administration made some promising first steps in cobbling together an international coalition to adopt and enforce such a tax—but future policymakers need to build on this progress, not tear it down.

Other reforms would build on Senator Sheldon Whitehouse and Congressman Lloyd Doggett’s No Tax Breaks for Outsourcing Act (2025), which would, among other things, fully tax the foreign income of U.S. multinational corporations, eliminate the tax-free return on foreign tangible assets, and eliminate a subsidy for excess profits from exporting that exists in current law. The overarching principle is that taxes owed should depend on the level of income, not the type of income (or one’s accountant’s creativity in claiming what type of income is being earned).

The current method of taxing capital incomes, and especially the corporate income tax, provides an incentive for corporations to shift both accounting profits and tangible production abroad.15 The current tax method essentially subsidizes firms to generate income outside of the United States. This is a perverse and inefficient setup, one aiming to serve the interests of rich corporations rather than the broad U.S. economy. It can be stopped with some straightforward policy changes.

Conclusion

Donald Trump’s approach to trade policy is bad for the United States and the rest of the world. But this does not imply that the pre-Trump global trade regime was working well. As usual, Dani Rodrik (2019) has put it best, arguing about Trump’s first term: “In a way, one of the worst consequences of Trump [emphasis added] is that he is reinforcing the views of the architects of the existing system as to why there shouldn’t be a change.”

The flawed approach inherited by Trump’s first administration perpetually sought to extend a set of international agreements and norms that privileged corporate interests over workers. From a progressive perspective, the bad part of this system was that it privileged corporate interests. From Trump’s perspective, however, the bad part was that it was a set of international agreements.

The Biden administration made some useful breaks with past practice on globalization. While the administration did not go far enough on many margins, it set off in a useful direction. The administration prioritized the effect of trade on workers, not just consumers, and didn’t prioritize corporate-led trade agreements. Key industrial policy targets aiming to solve market failures were put ahead of ideological fealty to free trade. In short, the Biden administration was not simply a return to the pre-Trump globalization regime that was so bad for American workers—instead they had tentatively begun charting a new path.

The second Trump administration has completely spurned this new path and doubled down on xenophobia and dominance displays as the center of trade policy. If this policy approach continues, it will lead to a poorer United States and a poorer global economy. It will not lead to a renaissance of good jobs in manufacturing.

At some point, a serious approach to the challenges of globalization will need to be reestablished. We hope this paper can help spark and inform that more serious debate.

Notes

1. See Bivens 2017 for an overview of the effect of globalization on American wages and how policy has amplified the harms of globalization. U.S. Bureau of Labor Statistics (BLS), “Table A-4. Employment Status of the Civilian Population 25 Years and over by Educational Attainment: Monthly, Seasonally Adjusted” retrieved from FRED, Federal Reserve Bank of St. Louis, February 12, 2025. David H. Autor, David Dorn, and Gordon H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review 103, no. 6 (2013): 2121–2168.

2. The theory here (supported by evidence) is called the Stolper-Samuelson theorem. Its broad outlines are explained in Bivens 2017. The summary is that it predicts that trade with labor-abundant countries will lower wages in the United States and raise returns to other factors of production (like human capital).

3. See Mishel and Bivens 2021 for a decomposition of all the policy changes that led to wage suppression and wage inequality.

4. For a broad overview of trade deficits and their economic effects, see Blecker 2009.

5. See Steil and Della Rocca 2021 for an assessment of the economic effect of tariffs introduced in the first Trump administration. Another obvious issue in regard to tariff effects on the balance of trade is the retaliation that may occur.

6. See Gagnon 2020 for a discussion of countervailing currency intervention and its role in keeping trade deficits manageable for the U.S.

7. See Bivens 2019 on how different routes to deficit reduction imply very different outcomes for the welfare of most Americans. In a nutshell, deficit reduction achieved through higher levels of revenue raised progressively (mostly from rich households and corporations) can see deficit reduction go hand in hand with improved welfare for most, but deficit reduction achieved through cuts to income support, social insurance and public investment programs will harm welfare for the majority.

8. See Acemoglu 2021 for a broad discussion of how private investment decisions can lead to supply chain fragility.

9. See Rodrik 2019 for a good overview of these types of fairness concerns when domestic regulation and the rules of the global economy seem to conflict.

10. From 2010 to 2025, Chinese output per hour of work increased from 11% to 24% of the U.S. productivity level (ILO 2025a, 2025b). A recent ILO report (2025a) confirms China’s expanding use of mass detention and forced labor in export industries. Friedman 2014 shows how labor regulation in China has evolved to increase repression as wages and development have increased—a model that is being exported to other developing economy countries with increasing Chinese foreign direct investment.

11. EPI analysis of ILO (2025b) and BLS (2025a, 2025b) data.

12. There are numerous bodies around the world that collect detailed information on the state of labor rights in countries around the world. Freedom House periodically publishes a report on the global state of workers’ rights, the International Labour Organization and the International Trade Union Confederation annually track countries’ progress in protecting key labor freedoms, and the WageIndicator Foundation and the Centre for Labour Research collaborate to produce a tiered ranking of countries’ labor protections called the Labour Rights Index. In short, much of the raw material to provide a ranking of the type called for in this report already exists.

13. See Sato and Burke 2021 for an explanation of “carbon leakage.”

14. See Zucman 2015 for an overview of the problem of tax havens.

15. For evidence on this, see Kimberly Clausing, “Profit Shifting and Offshoring, Then and Now,” and Rebecca Kysar, “Profit Shifting and Offshoring in the New International Regime,” presentations for “Will the Trump Tax Cuts Accelerate Offshoring by U.S. Multinational Corporations?,” a conference hosted by the Economic Policy Institute, May 7, 2018.

References

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The rapid growth of U.S. trade deficits reflects the combined effects of the COVID-19 crisis, which caused U.S. exports to fall by more ($217.7 billion) than imports ($166.2 billion), and by the persistent failure of U.S. trade and exchange rate policies over the past two decades. The single most important cause of large and growing trade deficits is persistent overvaluation of the U.S. dollar, which makes imports artificially cheap and U.S. exports less competitive.

The U.S. goods trade deficit is increasingly dominated by trade in manufactured products, as shown in the figure below. The manufacturing trade deficit reached record highs of $897.7 billion—98% of the total U.S. goods trade deficit—and 4.3% of U.S. GDP in 2020. Primarily due to these rapidly growing manufacturing trade deficits, the U.S. lost nearly 5 million manufacturing jobs and 91,000 manufacturing plants between 1997 and 2018 alone, and an additional 582,000 manufacturing jobs in 2020.

Figure A

Growing trade deficits with China are the largest single cause of growing manufacturing trade deficits and jobs losses. Between 2001, when China entered the World Trade Organization (WTO), and 2018, growing U.S.–China trade deficits eliminated 3.7 million total U.S. jobs, including 2.8 million jobs lost in manufacturing alone. Although the U.S. trade deficit with China fell by $34.4 million (10.0%) in 2020, China’s total trade surplus with the world increased 27% in 2020 to $535 billion, driven by surging exports of medical supplies and electronic goods. U.S. trade deficits with Hong Kong, Korea, Malaysia, Indonesia, Singapore, Taiwan, and Australia, as well as Mexico and Switzerland all increased significantly in 2020. There is growing evidence that China is evading U.S. trade restrictions by shipping products through other countries (e.g. tariff circumvention).

Growing U.S. trade deficits over the past two decades, which reached record levels in 2020, have decimated U.S. manufacturing. The United States can rebuild domestic manufacturing by rebalancing U.S. trade, and by implementing the Biden administration proposal for a $2 trillion, 4-year program for rebuilding U.S. infrastructure and investing in clean energy and energy efficiency improvements.

From: Robert E. Scott (Economic Policy Institute)

Submitted via email to transition team

For the U.S. economy to “Build Back Better” after the COVID-19 pandemic, the Biden-Harris administration must emphasize job creation in America’s manufacturing and construction sectors. Rebuilding U.S. manufacturing industries, and upgrading domestic infrastructure, can generate millions of high-wage jobs and reduce income inequality while also addressing racial injustice.

There are three key efforts needed to rebuild manufacturing and the U.S. economy:

1. Realign the U.S. dollar and address overseas currency manipulation.
2. Invest in infrastructure and renewable energy.
3. Rebalance U.S. trade.

PRIORITY ONE: Realign the dollar through a competitive currency policy

The single most effective tool for rebalancing trade is the adoption of a competitive dollar policy. The real value of the U.S. dollar—which has gained nearly 21% since mid-2014 alone—needs to fall by 25% to 30% in order to rebalance trade, according recent research.1 Dollar realignment would stimulate rapid export growth, resulting in surging domestic investment and job creation even as it also reduced import growth.

However, there are two reasons the dollar is currently overvalued.

The first is currency manipulation, which is the result of years of foreign central bank purchases of U.S. dollar assets. This has driven up demand for the dollar and helped to keep it overvalued. This currency manipulation can be addressed through government sanctions and intervention.

More recently, however, the extent of currency manipulation has decreased. Instead, during the last five years, excess private demand for U.S. assets from overseas investors has caused the dollar’s value to soar. This second reason, currency misalignment, can be addressed through market interventions.

Implementing a competitive dollar policy will stimulate rapid export growth, resulting in surging domestic investment and job creation, while limiting import growth. Eliminating America’s $864 billion annual goods trade deficit could create between 3.5 million and 6.6 million jobs over the next four years, including at least 1.4 million good manufacturing jobs.

Immediate steps for the new administration

• The next Treasury report on Foreign Exchange Policies of major trading partners (due April 2021) should label all countries meeting the criteria identified by Christopher Collins and Joseph Gagnon of the Peterson Institute for International Economics (PIIE) as currency manipulators. In addition, countries maintaining very large stocks of foreign exchange reserves—which also have a depressive effect on the values of their respective currencies—should also be labeled as currency manipulators (as explained by Dean Baker, senior economist with the Center for Economic and Policy Research). This includes China and Japan.
• In January, the president should immediately announce the suspension of tax waivers on foreign government holdings of U.S. financial assets in the United States, as proposed regarding China by PIIE’s Joseph Gagnon and Gary Hufbauer in 2011. This will also discourage foreign government holdings of U.S. assets and put downward pressure on the dollar. The U.S. should also deliver notice of canceling tax treaties with selected foreign governments. Taxes should then be withheld on income earned on Treasurys and other government assets, at an initial tax rate of roughly 30%. Significantly, other countries that should be subject to this taxation continue to hold huge foreign exchange reserves, most in dollar assets. These countries include China ($3.1 trillion), Japan ($1.4 trillion), Singapore ($500 billion), and South Korea, ($400 billion).
• The president should use his executive authority under the International Emergency Economic Powers Act (IEEPA) to impose a tax on foreign government owned or controlled holdings of U.S. financial assets as soon as possible. Announcing his intent to do so when canceling tax treaties would put currency manipulators on notice that the United States is serious about stopping such practices. The net of these taxes could be widened as needed, since many currency manipulators have stashed large amounts of their reserves in additional Sovereign Wealth Funds, including China ($1.4 trillion), and Singapore ($900 billion).2
• Taxation of foreign government holdings of U.S. assets would discourage currency manipulation. However, government demand for these assets may not be influenced by taxes on the income the assets earned. Therefore, the Commerce Department and the U.S. trade representative should continue to pursue currency countervailing duty (CVD) cases against individual products and countries. Such cases send a “shot across the bow” to currency manipulators in the absence of more comprehensive measures.
• The Biden administration should initiate offsetting purchases of the foreign assets of those countries found to be engaging in currency manipulation, purchases known as countervailing currency intervention (CCI). Overall, such purchases are the most effective tool available to remedy currency manipulation. The use of Exchange Stabilization Fund (ESF) assets by the Treasury and the Federal Reserve to engage in CCI was proposed by Bergsten and Gagnon in 2017. Substantial increases in ESF assets are required to engage in significant CCI intervention, and will require congressional authorization.
• The Biden administration must also address market-driven currency misalignment. It should do so by empowering the Federal Reserve to establish an exchange rate management policy designed to achieve and maintain balanced trade. This can be done by working with Congress to implement the bipartisan legislation proposed by Senators Tammy Baldwin and Josh Hawley in their “Competitive Dollar for Jobs and Prosperity Act” (S. 2357). The measure would impose a “Market Access Charge” on new foreign investor purchases of U.S. assets. It would also authorize a substantial increase in resources for the Treasury Exchange Stabilization Fund, needed to fight government-backed currency manipulation.
• Along these lines, the administration should also impose an initial emergency access charge, exactly as defined in S. 2357, under the IEEPA.

PRIORITY TWO: Rebuild U.S. infrastructure and begin the clean energy transition

The Biden-Harris plan for investments in infrastructure and climate programs, with a full “Buy America” commitment, can supercharge recovery for the U.S. economy. A $2 trillion, four-year plan of investments in these sectors, along the lines of that announced by President-elect Biden in July, would support between 3.4 million and 6.3 million total jobs. Nearly half (45.7%) of the 3.4 million direct and indirect jobs supported would be in good-paying manufacturing and construction sectors.

Immediate steps for the new administration and Congress

• Immediately revive and expand plans for the Moving Forward Act (MFA), an infrastructure bill that was developed by the House Transportation and Infrastructure Committee, and passed by the House on July 1, 2020.
• Develop an expanded plan for renewal of transportation infrastructure legislation, which can attract bipartisan support. To the extent possible, extensions to the MFA should incorporate Biden-plan goals for expanded U.S. auto production, investments in zero-emission public transit, building and housing investments, and research and development.
• Maximize employment and economic impacts as part of the recovery plan by ensuring that the MFA is entirely debt-financed until the economy has fully recovered (with the exception of current revenues in the transportation trust fund).
• Do not raise additional revenues to fund infrastructure investments until and unless we meet two criteria: estimates of total nonfarm employment exceed 152.5 million (the level reached in February 2020) and interest rates on short-term treasury securities exceed 3.5% on a sustained basis. Where possible, user fees should be relied on to fund public investments in infrastructure, as growing reliance on efficient and clean transportation sources will erode transport fuel tax receipts over time.
• To the extent possible, use the infrastructure bill to fund climate-friendly public investment (e.g., electrical grid upgrades, battery development/capacity, R&D for smart grids, etc.).
• Develop separate legislation to support popular incentives:, such as incentives for hybrid cars, e-cars, wind turbines, and solar power to help utilities meet state renewable guidelines; residential and commercial incentives for weatherization; incentives for appliance efficiency upgrades; consumer solar; renewable conversions for schools and public buildings; and, investments in innovation, agriculture, and conservation.

PRIORITY 3: Pursue trade and industrial policies that will rebalance U.S. trade

More than three decades of globalization have devastated U.S. manufacturing and the American working class. Trade-related job losses are just the tip of the iceberg. Globalization has also reduced median wages by roughly $2,000 per year for roughly 100 million working-class Americans. Joe Biden recognized these problems when he promised the United Steelworkers in May that he would not consider any new trade agreements “until we’ve made major investments here at home, in our workers and our communities.”

Immediate steps for the next administration and Congress

• Establish a freeze on negotiating new trade agreements until the dollar is realigned and the U.S. goods trade deficit has been erased.
• Ensure that trade policy does not privilege corporate interests over workers. The proliferation of Investor State Dispute Settlement (ISDS) clauses inserted into international trade and investment agreements has created a global system of special courts exempt from any judicial appeal or review. These courts allow multinational companies to sue governments for any potential infringement on future profits, as documented by Todd Tucker in his book Judge Knot. These agreements have cast a pall over the ability of governments to regulate in their own legal and national interest. The U.S. must negotiate the elimination of ISDS clauses from most or all trade deals.
• Promote welfare-enhancing multilateral agreements negotiated by the USTR in areas such as labor rights and environmental standards while also rejoining the Paris Climate Accord.
• Pursue multilateral rules to address major international challenges, such as greenhouse gas (GHG) emissions. The U.S. should pursue binding agreements to reduce GHG emissions, especially with China—the world’s largest and most rapidly growing GHG emitter—earlier than called for in the current Paris Climate Accord.
• Ensure that the USTR works with the Commerce Department to aggressively combat overcapacity in steel, glass, paper, solar panels, and a host of other industries distorted by massive state subsidies and other illegal trade and industrial policies.
• Maintain Section 232 steel and aluminum tariffs until tariffs can be replaced by more comprehensive, global limits on unfair trade in these products. One model is to negotiate global tariff agreements to “wall off” products from countries with excess capacity. At present, overcapacity is widespread in many exporting countries, including Japan, Korea, Brazil, Turkey, and China.
• Eliminate tax evasion, corporate inversions, and tax havens that allow multinational enterprises to avoid corporate taxation. The Tax Cuts and Jobs Act of 2017 (TCJA) established new, lower tax rates for foreign investment by multinational corporations; this encouraged further offshoring. Consider adopting sales factor apportionment (SFA) to fully tax profits on all corporate sales in the United States, regardless of where production takes place or where corporations are domiciled. SFA techniques have been used for many years by states to fairly allocate taxation of corporate profits.
• Don’t tax U.S. consumers to protect the intellectual property rights of U.S. multinationals in China. This simply encourages more offshoring of U.S. jobs and factories. As Dean Baker has explained, stronger patent and copyright protections have transferred roughly $1 trillion annually from workers and consumers to corporations and the richest 10 percent.
• Strengthen “Buy America” requirements for all federal, state, and local purchases, as supported by the Alliance for American Manufacturing’s industrial policy proposals. Buy America requirements can greatly enhance the job creation and domestic output of public investments. Historically, Buy America preferences have been loosely enforced.
• Develop new standards and methods to maximize domestic job creation associated with any recovery act, clean energy, or infrastructure expenditures. One simple step would be to require bidders for large government contracts to submit job impact assessments, and to document these outcomes in post-project assessments.
• Establish a strong, whole-of-government program to reshore critical materials production. This includes bringing back to the United States the production of everything from pharmaceuticals to medical equipment to rare earth metals.
• Expand job training and workforce development programs, and consider adopting “flexicurity”-style programs—modeled after those developed in Denmark and other European countries—to support growth and renewal of America’s aging industrial workforce.
• Revamp America’s unemployment insurance (UI) system. Effective UI systems are industrial policies. Jobs not destroyed are much cheaper to restart than those that have been entirely eliminated through short-sighted labor policies. The COVID-19 crisis has demonstrated that America’s UI system is broken and in desperate need of repair. In contrast, many European governments have paid firms to keep workers on the payroll, so that when employers emerge from a downturn, they would be intact.
• Greatly expand R&D and Cooperative Extension Services. Fund the proposal by Simon Johnson and Jonathan Gruber in their book Jump Starting America to identify metropolitan areas that could be hubs of science and technology. Designate them to receive large-scale science and tech spending using the tripartite federal/state and local/private sector investment model to create dozens of national centers of manufacturing research and excellence. In addition, the Hollings Manufacturing Extension Partnerships, which have been targeted for extinction in the Trump administration, should be substantially expanded.
• Substantially increase domestic content requirements and require jobs impact statements by the US Export-Import Bank in its Buy America policies, which have been watered down beyond all recognition. These standards must be tightened and reformed.
• Reevaluate the costs and benefits of foreign direct investment in the United States. So-called “insourcing” (foreign investment in the United States) is dominated by foreign acquisition of U.S. companies, such as Lenovo’s purchase of IBM’s PC division in 2005. Such purchases have eliminated millions of U.S. jobs over the past three decades through layoffs, plant closures, and sell-offs. Furthermore, foreign multinational companies (MNCs) often buy domestic firms simply to distribute their own exported products. As a result, foreign MNCs are responsible for a large and growing share of U.S. trade deficits. Adding insult to injury, state and local governments are often involved in a race to the bottom for such investments, competing to offer tax abatements and infrastructure subsidies to attract foreign investors. The United States should consider banning tax abatements and infrastructure and other subsidies to foreign investors unless entities seeking subsidies can prove that they are effectively creating jobs.

Endnotes

1. Fred Bergsten, “Time for a Plaza-II?” in International Monetary Cooperation: Lessons from the Plaza Accord after Thirty Years, eds. (Washington, D.C.: Peterson Institute for International Economics, 2016), Table 14-5. Bergsten estimated that in order to rebalance U.S. trade, the real value of the U.S. dollar must fall by 26.5% on a trade-weighted basis against the currencies of major surplus countries, including the Euro Area countries, China, and Japan. In their 2020 working paper for the Coalition for a Prosperous America (“Modeling the Effect of the Market Access Charge on Exchange Rates, Interest Rates and the U.S. Economy”), Steven Byers and Jeff Ferry, using a macroeconomic model from the Federal Reserve, estimated that the dollar needs to fall by 27% to rebalance U.S. trade.

2. These funds include China Investment Corporation ($1.046 trillion) and the National Council Social Security Fund ($324 billion), and from Singapore, GIC Private Limited ($453 billion) and Temasek Holdings ($417 billion) according to the Sovereign Wealth Fund Institute (data downloaded from SWFI November 22, 2020).

President Trump’s erratic, ego-driven, and inconsistent trade policies have not achieved any measurable progress, despite the newly combative rhetoric. On top of that, COVID-19—and the administration’s mismanagement of the crisis—has wiped out much of the last decade’s job gains in U.S. manufacturing.

Unless steps are taken now—to reform our trade policy, to curb dollar overvaluation, to eliminate tax incentives for offshoring, and to rebuild the domestic economy—there won’t be a comeback.

As this policy report makes clear:

• Offshoring and the loss of manufacturing plants have continued under Trump, notwithstanding U.S. Trade Representative Robert Lighthizer’s claim that the administration’s trade policy is helping U.S. workers (Lighthizer 2020a).
• The strong and rising U.S. dollar is a major cause of the continuing growth of U.S. trade deficits.
• While manufacturing employment rose steadily between 2010 and 2019, the COVID-19 shutdown has wiped out more than half of the jobs gained in the past decade.
• The U.S. economy is in the midst of a historic collapse due to the uncontrolled coronavirus pandemic and recession.
• Restructuring and rebuilding the economy will require a coordinated and comprehensive strategic policy response that includes rebalancing of U.S. trade, as well as massive public investments in infrastructure, clean energy, training, R&D, and other industrial policies. These investments can create millions of skilled, high-wage jobs for non-college-educated workers in the U.S., who have been hard hit by the coronavirus downturn—especially Black, Latinx, and women workers—who have been left behind as manufacturing employment shrinks.
• Under current government procurement policies and trade rules, much of the public spending for infrastructure and clean energy systems would leak away to foreign providers, in the form of increased imports. Thus, new public investments should all include strong “Buy America” clauses.
• Joe Biden has recently proposed major investments in infrastructure, climate, and rebuilding manufacturing. These proposals could make a substantial contribution to meeting U.S. investment needs and generating a strong, sustainable, broadly shared recovery.

The Trump administration has not succeeded in reshoring manufacturing

In recent congressional testimony, U.S. Trade Representative Robert Lighthizer praised several companies that have scrapped offshoring efforts or have announced plans to move production to the United States, and he has further claimed that the “era of reflexive offshoring is over” (Lighthizer 2020b, 2020c). He also praised both the U.S.-Mexico-Canada Trade Agreement (USMCA)—which took effect July 1—and the current “Phase One” China trade deal. These are supposed to be signature accomplishments for the administration, contributing to a purported “blue-collar boom.”

It is important to note that the Trump administration has a habit of issuing press releases citing plans for major foreign investments in the U.S. that never materialize. In July 2017 Foxconn announced—to great fanfare from the White House–plans to invest $10 billion and bring “thousands of new American jobs” to Wisconsin and elsewhere in the United States (White House 2017). News reports indicate that Foxconn’s buildings in Wisconsin were still empty as of April 2020 (Dzieza and Patel 2020).1

But offshoring has in fact continued throughout this time, as reflected in changes in the total number of U.S. manufacturing plants, shown in Figure A. Overall, the U.S. has suffered a net loss of more than 91,000 manufacturing plants and nearly 5 million manufacturing jobs since 1997. Nearly 1,800 factories have disappeared during the Trump administration between 2016 and 2018 (BLS 2020; U.S. Census Bureau 2020a, 2020b). The U.S. has experienced a net loss of manufacturing plants (establishments) in every year from 1998 through 2018 (the most recent year for which data are available).

Figure A

Employment per plant has ebbed and flowed, increasing during recoveries and dropping much more sharply in downturns, as shown in Figure A. Massive job losses in just six years—during the 2001 recession and the China import surge of 2002–2004, and during the Great Recession of 2008–2009—account for more than all of the net loss of nearly 5 million manufacturing jobs in this period.

The loss of these jobs was particularly costly for women, Black, and Latinx workers, who were left behind as employment collapsed and many of the remaining manufacturing plants shifted to rural locations in right-to-work states in the West and South (Madland, Walter, and Eisenbrey 2012).

Here’s what the data actually show about the purported “blue-collar boom” under the Trump administration: The U.S. gained roughly 500,000 U.S. manufacturing jobs from 2016 to 2019. But these gains are exactly on par with gains across the entire economic recovery period from 2010 to 2019, during which 166,000 manufacturing jobs were gained each year, on average. The 2016–2019 gains did not represent an improvement over prior years in that decade, and even the decade’s overall gains had managed to restore only a fraction of the jobs lost in the prior decade.

And recent years’ manufacturing gains were abruptly wiped out by the COVID-19 crisis—with a staggering 740,000 manufacturing jobs lost this year, as shown in Figure B (BLS 2020). If President Trump wants to take credit for the job growth at the tail end of a decade of recovery from the Great Recession, then he must also own this collapse, thanks to his administration’s mismanagement of the pandemic—including a refusal to organize an effective national response (Scott 2020b). And while the June 2020 data show an upswing in manufacturing jobs, more recent jobs data indicate that the nascent and partial recovery in manufacturing is at risk due to recurrence of COVID-19 in states that have reopened, including many in the South and Western United States (Hannon and Kiernan 2020; WSJ Pro 2020; Bartash 2020).

Figure B

Contrary to popular myth, growing trade deficits, and not automation, are responsible for the vast bulk of manufacturing job and plant losses in the past two decades (Guilford 2018). Growing trade deficits with China between 2001 and 2018 (2.8 million manufacturing jobs lost) and the U.S. trade deficit with the Trans-Pacific Partnership countries in 2015 alone (1.1 million manufacturing jobs lost) account for more than three-fourths of the U.S. manufacturing jobs lost in the past 20 years (Scott and Mokhiber 2020; Scott and Glass 2016). This is confirmed by Susan Houseman’s extensive review of the research literature, “which finds that trade significantly contributed to the collapse of manufacturing employment in the 2000s, but finds little evidence of a causal link to automation” (Houseman 2018).

The rising dollar is responsible for growing trade deficits

U.S. manufacturing was struggling long before COVID-19. Starting in 2014, the U.S. dollar has appreciated in fits and starts, climbing nearly 23%, as shown in Figure C (Fed 2020b). More than half of that rise has come since the Trump tariffs were first imposed in March 2018. This stronger dollar keeps making U.S. exports more expensive and imports cheaper. Equally problematic, the 2017 Trump tax cuts on corporate profits incentivized offshoring for certain types of production while also raising after-tax profits. This has attracted more foreign capital to U.S. stock markets, spurring the dollar even higher. The dollar has also been driven higher during the coronavirus recession by “safe haven” effects, with foreign capital surging into the U.S.—as it does during most global downturns.

Figure C

Unfortunately, the Trump administration has simply ignored the linkage between these policies and a rising U.S. trade deficit, despite the fact that as a candidate, Donald Trump promised to declare China a “currency manipulator” on “day one” of his administration (Talley 2016). While the Treasury did, finally, name China a currency manipulator last year, it was too little, too late (Scott 2019). China’s currency, the yuan (or RMB), has continued to fall relative to the U.S. dollar since March 2018, despite the inclusion of a “currency clause” in the Phase One U.S.–China trade deal (Fed 2020a). Notably, the agreement was neither a binding constraint on Chinese monetary policy nor a real commitment to action on the part of the U.S. Treasury.

Overvaluation of the dollar is one of the most important structural causes of growing U.S. trade deficits. In order to help rebalance U.S. trade flows, the dollar needs to fall 25–30% overall on a real trade-weighted basis, and more against the currencies of surplus countries and areas such as China, the European Union, Japan, and Korea (Scott 2019). The strength of the dollar was sustained by massive currency manipulation between 2000 and 2014 (Bergsten and Gagnon 2017), but since then large private capital inflows to U.S. financial markets have continued the trend.

There are several tools that can be used to address dollar overvaluation.2 Perhaps the most effective proposal to reduce and manage excessive private capital flows on a sustained basis is a bipartisan bill, the “Competitive Dollar for Jobs and Prosperity Act,” introduced last year by Senators Baldwin (D-Wis.) and Hawley (R-Mo.) (S.2357).3 Their legislation would impose a small tax, or “market access charge” (MAC), on all foreign capital inflows (Hansen 2017). Their proposal would direct the U.S. Federal Reserve Board of Governors to set this tax at a level needed to rebalance trade and capital flows, giving the Fed both a new mandate—to achieve balanced trade—and a new tool to achieve that goal. Millions of good, high-wage manufacturing jobs can be created by rebalancing trade flows, something that would contribute to recovery from the COVID-19 recession.

If Trump’s trade policy really encouraged reshoring, America’s trade balance would have improved in the past three years. But the U.S. trade deficit in manufactured goods rose significantly between 2016 and 2019, as shown in Figure D. In fact, the real U.S. trade deficit has increased in every year since 2016, reducing GDP growth by roughly one-quarter of one percent annually over the past three years (USITC 2020; BEA 2020).

Figure D

Furthermore, the strong dollar has also decimated farmers, and it is a much more significant driver of the decline in farm incomes than Trump’s China trade war. There is a single world price for commodity products like wheat and soybeans, as Dean Baker has noted (Baker 2018, 2019). If the dollar rises relative to those of our competitors, then the dollar price of U.S. farm products must fall. Thus, there is a strong, negative correlation between soybean prices, for example, and exchange rates, as shown in Figure E.

Figure E

When the real (price-adjusted) dollar declines, as it did between 2002 and 2012, soybean prices increase. Grain and soybean prices started falling as soon as the dollar began to rise in 2014. Movements in the dollar alone explain nearly 80% of the change in soybean prices, with the rest having to do with changes in weather conditions, incomes, farm decisions (e.g., crop allocations), and other factors.

We need to realign the dollar to rebalance trade. Manufacturing and the farm sector will both benefit directly from dollar realignment. President Trump has utterly failed to address this core issue, despite his baseless and self-serving promises to address currency manipulation and rebuild manufacturing by getting “tough on trade.”

Trump’s trade deals have not helped U.S. workers

The USMCA—which was touted as a replacement for NAFTA—is unlikely to resolve longstanding U.S.–Mexico trade issues. America’s trade deficit with Mexico increased by more than 29% in 2019 alone (U.S. Census Bureau 2020c). And when it comes to important sectors like autos and auto parts, General Motors has been closing assembly plants in Ohio, Michigan, and Maryland while increasing its reliance on imports from Mexico (AP 2019; Samilton 2019; Mirabella 2019). In fact, GM has been ceding market share to foreign producers for decades, and has grown increasingly reliant on imports from Mexico and other countries. Meanwhile, market share has been captured by foreign producers. Recently, BMW, Mercedes/Infiniti, and Kia opened plants in Mexico—a missed opportunity to reshore production to the United States (Szczesny 2019; Mexico Now 2018a, 2018b). And the supplier networks for these plants will be built in Mexico, not the U.S.—further eroding America’s auto industry.

Offshoring to Mexico is also taking place in aerospace and other sectors, with aerospace exports from Mexico increasing 10% in 2019 (Krause 2020). While the USMCA significantly improves domestic labor protections in Mexico compared with the earlier version of NAFTA, its overall provisions are inadequate to stem these offshoring trends.

The Phase One China trade deal is a bust, too. China promised to increase purchases of U.S. goods and services by $200 billion over 2017 imports. But Beijing is unlikely to meet these targets (Craymer and DeBarros 2020). And the deal doesn’t even address China’s egregious, systematic labor rights violations.

Beijing has also strategically adjusted to the Trump tariffs. China is simply exporting more goods elsewhere, and the U.S. trade deficit with China’s trading partners rose rapidly in 2019. In fact, China’s overall trade surplus with the world climbed significantly in 2019 (Setser 2020a). China also reduced the value of its currency by 10.0% against the U.S. dollar since March 2018, helping to offset the tariffs (Fed 2020a).

The tariffs remain a “signature” element of the Trump trade agenda. And they’ve helped sectors like steel and aluminum (Scott 2018a, 2018b). But the president misses a key point: If you increase tariffs without taking steps to prevent the dollar’s appreciation, the overall benefits can be simply neutralized.

Trump’s tax policies have encouraged outsourcing

America’s trade problems have been exacerbated by mistakes and/or malfeasance in Trump’s tax policymaking. U.S. multinational corporations continually engage in massive, international tax avoidance—with some paying no U.S. income tax at all. The 2017 tax cut exacerbated this problem by creating a new, lower corporate tax rate for “global intangibles income.”4 The pharmaceuticals industry has since reaped major rewards and has moved plants to countries with the lowest possible corporate tax rate (Setser 2020b). As a result, the U.S. now has a massive trade deficit in pharmaceuticals, which exceeds the trade surplus in aerospace products, the strongest U.S. export industry. Leading suppliers of pharmaceutical imports—many produced by U.S. firms, such as Pfizer, which had no taxable U.S. income over the entire decade from 2007 to 2016 (Rice, Kitson, and Clemente 2017)—include Ireland, Germany, Switzerland, India, and China.

The U.S. trade deficit is likely to shrink during COVID-19 simply because of the decline in consumer income and spending. But unless steps are taken to address dollar overvaluation and the tax incentives that encourage offshoring, these deficits will simply reemerge when recovery occurs (Scott 2020a).

Manufacturing job loss was a key issue for voters in the 2016 election

Voters from manufacturing states have been hardest hit by growing trade deficits and failed trade and investment deals. In 2016, Donald Trump ran on a nationalist campaign platform, based in part on a critique of globalization that cited EPI research (Trump 2016). Hillary Clinton and Bernie Sanders have also cited EPI research on, for example, jobs lost due to growing trade deficits with China (Clinton 2007; Sanders 2020). Globalization is clearly an issue of bipartisan concern.

In 2016, voters from the top 25 manufacturing states, ranked by share of total employment in manufacturing, gave nearly 80% of their electoral votes to Donald Trump, as shown in Figure F, the manufacturing electoral heat map. Hillary Clinton prevailed in the bottom 25 manufacturing states, by a margin of 61% to 39%, but it was not enough to offset Trump’s advantage in the manufacturing states. However, Trump’s policies have failed to stop offshoring or the erosion of the U.S. manufacturing base.

Figure F

The restoration of manufacturing in the United States will be essential to the COVID-19 economic recovery. It is time to consider a progressive alternative for rebuilding manufacturing. The components of such a plan are described in the following section.

The COVID-19 recovery will require major investments in infrastructure and clean energy

The coronavirus crisis has devastated the U.S. and global economies. Black, Latinx, and women workers have been hardest hit, and without special efforts made for low-income communities, they will be the last to recover (Gould 2020b). With the economy in freefall, the U.S. needs to engage in massive and widespread relief.

America also needs a plan for economic reconstruction in the wake of the COVID-19 pandemic, one that is specifically designed to address the needs of those hardest hit in the economy. Millions of jobs and small businesses have been lost in sectors such as retail trade, travel, tourism, and restaurants, and many will never come back. The economy must be restructured—new and better jobs are needed for displaced workers. Properly done, the required investments can create good jobs with excellent wages and benefits for Black, Latinx, and women workers who have suffered from racism or discrimination and economic inequality (Gould 2020a; Gould and Wilson 2020). Thus, any relief and rebuilding plan must address the following core issues.

The U.S. must continue to provide massive and widespread relief

Relief spending must be continued and expanded. The U.S. has recently encountered a Wile E. Coyote moment—it just ran off the edge of a cliff—with the expiration of an expanded unemployment compensation program that was giving 33 million workers a $600 weekly unemployment insurance boost (Shierholz 2020). The failure to renew this and other relief programs will cause a collapse in consumer spending and business investment, resulting in an economic tsunami that threatens to deepen the coronavirus recession into a depression in the fall, while potentially exacerbating the health crisis by pushing people to go back to work before it’s safe to do so (Bivens 2020b).

We need expanded relief for all workers in the next coronavirus bill, and we also need to add at least $1 trillion in federal aid for state and local governments, support for public health measures (testing, tracing, and isolation, with paid leave), unemployment, and continuing income supports for the tens of millions who are furloughed or unemployed and for businesses that are shuttered (Bivens 2020a). Without aid for state and local governments, in particular, 5.3 million jobs are at risk by the end of 2021, which threatens to further deepen the coronavirus recession (Bivens and Cooper 2020).

The U.S. must rebuild a sustainable, resilient, manufacturing-based economy

Even if the coronavirus pandemic is successfully controlled, we are likely to experience recurrent infections and hot spots (as has already occurred in the South and West) until vaccines and more effective treatments arrive. Meanwhile, massive effort is needed, starting today, to rebuild and restructure the economy in ways that will address the needs of Black, Latinx, and women workers.

Millions of low-wage service jobs are unlikely to return. As we rebuild our economy, these jobs can and should be replaced with higher-wage jobs in manufacturing and construction that provide excellent benefits and afford workers the right to organize and bargain collectively. Planning and organizing these rebuilding efforts—including design, permitting, and purchase of materials and rights-of-way—should begin now, so that funding, projects, and employment can flow in earnest once the pandemic has been brought under control.

There are three essential components of a sustainable U.S. economy

Looking forward, the three pillars of building a sustainable, resilient, manufacturing-based economy are: (1) rebalancing trade flows; (2) rebuilding U.S. infrastructure; and (3) supporting the transition to efficient and clean energy systems.5

In 2017, the American Society of Civil Engineers estimated in its Infrastructure Report Card that the United States needs $4.6 trillion in infrastructure spending over 10 years for sorely needed repairs and modernization (ASCE 2017). This exceeds planned spending by $2 trillion. Similarly, Robert Pollin at the University of Massachusetts-Amherst suggests that the U.S. needs to devote roughly two percent of GDP annually to increased energy efficiency and clean energy conversion, or roughly $400–$500 billion per year (Drollette 2019). Thus, for infrastructure and clean energy transition, the U.S. needs additional investments of $650–$750 billion per year in rebuilding the economy.

The U.S. goods trade deficit exceeded $860 billion in 2019. By rebalancing trade and expanding U.S. public investment as described above, we can increase overall demand for U.S. production by up to $1.5 trillion per year, directly stimulating the manufacturing and construction industries while rebuilding the economy. This could generate massive increases in overall demand for goods and services produced in the United States that would support and create more than 17 million good jobs.6 These steps alone would absorb more than half of the 33 million workers who were drawing unemployment benefits or have applied and are waiting for benefits as of August 1 (Shierholz 2020).

Joe Biden has recently proposed a $2 trillion initiative for clean energy and infrastructure (Glueck and Friedman 2020; Erickson 2020). He has also proposed investing $300 billion in manufacturing R&D and implementing policies designed to maximize the domestic content of infrastructure investments through “Buy America” policies (Goldmacher and Tankersley 2020). These proposals could make a substantial contribution to meeting U.S. investment needs and generating a strong, sustainable, broadly shared recovery.

The U.S. must rebalance trade flows

Realigning the dollar, as described above, could help to eliminate U.S. trade deficits and prevent the reemergence of larger trade gaps in the future. Rebalancing trade can also generate millions of good manufacturing jobs and prevent the offshoring of more manufacturing plants in the future.

We must revise government procurement policies and trade rules to ensure that public infrastructure investments actually benefit U.S. workers and the U.S. economy

Steps must be taken to ensure that public investments maximize domestic bang-for-the-buck—in terms of job creation and GDP support—in the states and cities where they are needed most, providing good jobs for those who have been excluded from the economy of the past. Under current trade rules, much of the public spending for infrastructure and clean energy systems would leak away to foreign providers, in the form of increased imports. Thus, these proposals should all include strong “Buy America” clauses in state and federal procurement policies. Doing so will require modification of or withdrawal from the World Trade Organization government procurement agreement (Miller & Chevalier 2020).

We must also implement supply-side policies to ensure jobs go to those U.S. workers who were left behind by the decline in manufacturing

An array of supply-side policies are also needed to ensure that these investments generate jobs where they are needed most, for women, Black, and Latinx workers here in the United States. These workers have been hurt by the decline of these industries, which generate good jobs with excellent benefits, especially for non-college-educated workers. Supply-side policies include:

• An end to tax policies that encourage firms to offshore production, including all tax preferences for foreign investment and production. The U.S. should consider implementing a system of sales factor apportionment to fairly tax the global profits of all foreign and domestic companies, based on their total sales in the United States, and to further discourage offshoring (Stumo 2016).
• Substantial investments in R&D, training, school-to-work transition, job creation programs, expanded extension,7 and other industrial policies, including expanded financing of small and medium-sized manufacturing firms. The U.S. should also support improvements in labor rights in all 50 states (Madland, Walter, and Eisenbrey 2012) and measures to include workers, banks, and other community stakeholders on corporate boards, to improve their performance in local economies.
• Aggressive but strategic use of anti-dumping and enhanced safeguard measures to prevent surges of primary commodity imports, especially in sectors subject to chronic excess capacity (but with no across-the-board tariffs). The coronavirus has worsened a global metals glut, in part because China, the top producer of aluminum and steel, has kept up production as demand fell (Tita 2020). Aggressive enforcement of trade laws will be needed to limit damage to domestic producers during the coronavirus recession.

Investments should be financed with public debt until the economic crisis has subsided

Last, infrastructure and clean energy transition investments should be financed, at least during the COVID-19 recovery, by increasing public debt—including heavy borrowing until long-term interest rates begin to rise well in excess of a 2% inflation target (Bivens 2019). Then, and only then, can these needed investments be paid for by taxing capital, starting with the wealthy and those who can afford to pay, and with user fees as necessary and appropriate (offset by income transfers to low-income families). It is important to note that rebalancing trade will generate new federal revenues (through increased incomes), along with new revenues from the taxes imposed on foreign capital inflows, as referenced above. These revenues could also be used to pay off public debt.

Conclusion: Progressives must reshape their approach to trade

The coronavirus crisis is causing unprecedented damage to the U.S. economy and to the lives of tens of millions of Americans. This crisis will change the national economy in untold ways. Life in America will never be the same. But “in the midst of every crisis, lies great opportunity.”8 The need to rebuild America has never been greater, and the time to rebuild is now.

For the past three decades, mainstream Democrats have tied their fates to the twin mantras of free trade and globalization, which have cost millions of jobs and many thousands of factories. Bill Clinton campaigned for and signed NAFTA in 1993. He also negotiated and signed the agreement that created the World Trade Organization in 1994. And he negotiated the agreement that resulted in China’s entry into the World Trade Organization in 2001. Barack Obama negotiated and campaigned for the failed Trans-Pacific Partnership agreement. It is time for progressives to own and reject these failed policies, and to build and campaign on a plan to develop a 21st-century New Deal for the domestic economy.

In 2016, Donald Trump campaigned against globalization and these failed trade deals—which have clearly hurt U.S. manufacturing. It worked. He captured nearly 80% of the electoral votes in the top 25 manufacturing states, as shown above. But he has since failed to deliver for working Americans. Now the wheels are coming off. It’s time for a meaningful rewrite of failed U.S. trade and economic policies—all urgently needed to revive the U.S. economy at a critical time.

Acknowledgments

The author thanks Thea Lee for comments, Krista Faries for editorial guidance, and Daniel Perez for research assistance.

Endnotes

1. For more on Foxconn’s history of announced intentions to invest in the U.S., see Frankel 2017.

2. See the “Fair Globalization and Balanced Trade” section of EPI’s Policy Agenda (EPI 2018).

3. Competitive Dollar for Jobs and Prosperity Act, S. 2357, 116th Cong. (2019).

4. Global intangibles income is “income earned by foreign affiliates of U.S. companies from assets such as patents, trademarks and copyrights” (TPC 2020).

5. See the “Climate Change” section of EPI’s Policy Agenda (EPI 2018).

6. Author’s calculations based on model in Scott and Glass 2016.

7. For example, through the U.S. Manufacturing Extension Partnership Program (Shapira 2001; NIST 2020).

8. This quote is frequently attributed to Albert Einstein, but the actual source cannot be verified.

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U.S. International Trade Commission (USITC). 2020. USITC Interactive Tariff and Trade DataWeb [database]. Accessed June 2020.

White House. 2017. “President Trump Welcomes Foxconn to the White House for a Major Jobs Announcement” (press release). July 26, 2017.

WSJ Pro. 2020. “Fed’s Bostic Less Optimistic as Virus Spreads; Rosengren Says Main Street Program Could Step Up If Economy Slumps.” WSJ Pro Central Banking (Wall Street Journal newsletter), July 9, 2020.

While U.S. Trade Representative Robert Lighthizer’s recent op-ed heralding an end to “the era of reflexive offshoring” highlights some positive steps forward by the USTR, much more needs to be done to bring supply chains home. It is not enough to—as the administration has done—set tariff policy by tweet, negotiate trade agreements that do not directly take on outsourcing across manufacturing and service sectors, and hope that corporations finally “see the light” and bring jobs home. Rather, returning jobs to America requires a robust, comprehensive strategy that coordinates policies in trade, currency valuation, investment, financing, energy, technology, tax, education, training, government procurement, and labor.

To start, this strategy would include the following:

• Insist that the Defense Department and other U.S. agencies cease their reflexive support for continued use of outside supply chains in Mexico and elsewhere and instead push for bringing work home.
• Ensure that “Made in the U.S.” in government procurement programs actually means that a product is manufactured by U.S. workers with U.S. supplies and materials.
• Require employment impact statements in government contract and award determinations in order to maximize U.S. job creation.
• Create a U.S. Manufacturing Investment Bank.
• Address currency misalignment.
• Eliminate tax incentives that encourage corporations to outsource production.

Insist that the Defense Department and other U.S. agencies push for bringing work home

The Trump administration could start to bring work home by scrutinizing its own departments, starting with the Pentagon. Several days ago, Pentagon officials acknowledged the dangers of relying on supply chains in other countries for defense products, especially in aviation and shipbuilding. But their response to that danger missed the point. Citing how the COVID-19 crisis has led to the closures of factories in Mexico that are critical to the defense industry, Undersecretary of Defense for Acquisition and Sustainment Ellen Lord said she would be asking the Mexican Foreign Affairs Minister to help reopen international suppliers there that provide parts for U.S. airframe production.

What is wrong with this picture? Instead of demanding that Mexico open its factories in the midst of COVID-19 to produce items for the United States, Pentagon officials should be demanding that U.S. companies move work back home. How can some officials reinforce the use of supply chains outside of the U.S. when over 36 million U.S. workers, many of them in manufacturing, are unemployed?

Also extremely troubling is the simple fact that many factories in Mexico cannot provide proper personal protective equipment for workers and forcing them back to work without needed safety measures jeopardizes lives. It’s bad enough that U.S. workers in certain industries are being asked to return to work without proper personal protective equipment, reliable testing and strict adherence to the Centers for Disease Control guidelines. U.S. government officials’ demands that Mexico reopen factories and subject unprotected workers to the dangers of COVID-19 are unconscionable.

It is no secret that U.S. companies have flocked to Mexico over the past 30 years. As I have previously written, Mexico now employs between 30,000 and 40,000 workers in just one industry alone, aerospace. Aerospace manufacturers promote Mexico’s low wages to draw business across the border. Analysts have commented that “Mexico’s proximity to the U.S. and its lower labor cost structure have drawn approximately 300 foreign manufacturers to areas in five Mexican states.” As one review of the aerospace industry noted, “The downside of this is that the country may be used increasingly for its cheap labor by profit-hungry companies from more established markets.” Mexico’s aerospace industry is now a major exporter to the U.S., as highlighted by the Pentagon’s announcement.

And it is not just aerospace manufacturing that has shifted supply chains to Mexico. In addition to medical supplies, other essential sectors are greatly impacted by supply chains in Mexico, including all sorts of manufacturing, electronics, communications (especially call centers), and food products.

Now is the time for all federal departments—starting with Defense—to insist that U.S. companies bring work home, especially work that is essential to our economy and national defense. The administration can start by using the Defense Production Act to ensure that the U.S. immediately step up production of essential items like desperately needed personal protection equipment and ventilators. There are hundreds of factories that have closed across the country that could be used for this important mission.

Ensure that “Made in the U.S.” in government procurement programs actually means that a product is manufactured by U.S. workers with U.S. supplies and materials

For most consumers, a U.S. product is one that is domestically manufactured at home with U.S. materials and supplies. They would be shocked to learn that our federal government considers a product to be domestically made even when a significant number of parts and components were produced in other countries. Although the government has adopted domestic content requirements in certain procurement programs, these content requirements can be as low as 51%. Moreover, methods for calculating domestic content are a mess. What factors do agencies include in determining content? Is the calculation limited to raw materials, production, assembly, and maintenance? Or can the calculation include intangible items that can be used to inflate domestic content—like the value of marketing, research, development, and intellectual property rights? How is the origin of components and subcomponents considered?

The administration should move quickly to make domestic content calculations effective and transparent. Domestic sourcing requirements for all government procurement programs (e.g., “Buy American” laws) and programs that support U.S. exports (e.g., the U.S. Export-Import Bank) should also be reviewed to ensure that the requirements are strong, taken seriously, and effectively implemented.

Further, waivers that allow exemptions from domestic procurement requirements should be greatly narrowed, including when exemptions are granted for the use of foreign-sourced goods that are in the “public interest,” not reasonably available in sufficient commercial quantities, or not available at a reasonable cost.

The Buy American requirements should also be equally rigorous with sectors like food products. Government commissaries and cafeterias should be using products made here at home. This includes items from sugar and flour to baked goods.

Require employment impact statements in government contract and award determinations in order to maximize U.S. job creation

The administration should adopt a simple, common-sense policy that directly links domestic employment with certain government activities. One way to accomplish this is to require detailed employment impact statements (EIS) as part of the decision-making process for government procurement contracts, assistance, grants, and awards. The results reflected by the EIS would be a significant factor in the final determination concerning the project or transaction under consideration. The EIS would contain information pertaining to employment that would be maintained, created, or lost if the program in question were approved.

To assure that employment impact statements and reliance upon them are fully and effectively implemented, federal agencies would need to submit annual reports summarizing the procedures used and the results. The reports would furnish the administration and Congress with valuable information about how government programs are supporting the creation and maintenance of jobs.

Create a U.S. Manufacturing Investment Bank

Similar to the concept of the U.S. Export-Import Bank (Ex-Im Bank), a new U.S. Manufacturing Investment Bank would provide financial support for the revitalization of the U.S. manufacturing sector. The U.S. Manufacturing Investment Bank would target large, medium, and small manufacturers that cannot obtain affordable credit on commercial terms. Financing would be in the form of loans at or below commercial rates or of a federal guarantee of a commercial loan. These loans would be paid back directly to the U.S. Treasury, similar to the procedures implemented by the Ex-Im Bank.

In order to receive financing, eligible companies would need to demonstrate a reasonable assurance of repayment within the terms of the agreement and agree to the following requirements:

• Loans will be used to domestically manufacture, assemble, and/or service goods, equipment, parts, and components.
• Materials used for manufacturing will be domestically produced or mined.
• Work will not be outsourced to other countries.

Also, companies that receive loans must not be found in violation of any federal labor and employment laws for one year prior to the inception of the loan and through its term.

Address currency misalignment

As detailed in EPI’s Policy Agenda, policymakers must focus their attention on making the dollar competitive. Cheap imports achieved through [foreign] currency undervaluation continue to make production in China and elsewhere attractive. Combined with addressing the effects of the strong dollar on trade imbalances, bringing supply chains home will require that policymakers take actions outlined in the EPI Policy Agenda:

• Engage in international negotiation to lead to a competitive dollar, as the U.S. did with the 1985 Plaza Accord.
• If negotiations fail, rely on the U.S. Treasury and the Federal Reserve to sell dollars in global markets to realign the dollar’s value against other currencies.
• Impose a tax on the purchases of dollar-denominated assets by foreign governments and investors.

Eliminate tax incentives that encourage corporations to outsource production

If the administration is serious about bringing jobs back home, it should support legislation that would remove tax incentives for corporations to create and maintain production overseas. Introduced last year by Sen. Sheldon Whitehouse and Rep. Lloyd Doggett, The No Tax Breaks for Outsourcing Act would go a long way toward removing these incentives. According to Whitehouse’s office, the measure would, among other things:

• Tax income from overseas subsidiaries at the same rate that applies to domestic income.
• Treat “foreign” corporations that are managed and controlled in the U.S. as domestic companies.
• Crack down on so called “inversions” by maintaining the U.S. tax treatment of merged companies that retain a majority of U.S. ownership.

While strong statements from some administration officials, like the USTR, about bringing jobs home are laudable, current policies will not achieve these much-needed results. With over 36 million people out of work and an unemployment rate which has reached Depression-era levels, Americans are in desperate need of a well-coordinated, comprehensive policy to stop the erosion of our nation’s industrial base.

Of course, changing the flow of supply chains back to the U.S. will not occur overnight. But we need to start somewhere and we need to start now. Never again should our highest officials in the Defense Department have to plead for help from another country to produce the essential equipment that should be produced here at home. Nor should our officials demand that another country force its workers to produce goods for the U.S. under unsafe conditions.

I am pleased to enter my comments in support of the proposed modification of CVD regulations to allow Commerce to treat currency undervaluation as a countervailable subsidy subject to CVD regulations, subject to the comments and issues noted below.1

The Economic Policy Institute (EPI) is a nonprofit, nonpartisan think tank located in Washington, D.C. I am a Senior Economist with EPI, and am the Director of Trade and Manufacturing Policy Research. There are a number of issues that arise with respect to the measurement of equilibrium currency values and how they should be assessed that I wish to note, based on my review of the draft regulations.

Currency manipulation and currency misalignment are distinct, but closely related, problems

Currency manipulation consists of government purchases and sales of foreign exchange reserves that are designed to persistently depress the value of the domestic currency for commercial advantage. Currency manipulation by about 20 countries—including China, Japan, and a number of other countries in Asia and Europe—resulted in large, persistent trade and current account surpluses for those countries, especially during the “Decade of Manipulation” from 2003–2013.2 Currency manipulation has distorted global trade and capital flows, to a greater or lesser degree, for much of the past two decades.

Since 2014, the central governments of China and other currency manipulators have begun to reduce their purchases of United States and other foreign exchange reserve securities. But the dollar is still rising, thanks to overseas investors now pouring huge amounts of private capital into bonds, stocks, and controlling interests in American companies, as well as real estate, bank loans, bank deposits, and currency.3 It is important to note that some of these recent, “private” purchases come from quasi-state actors or state-influenced institutions (such as social security trust funds in Japan and Korea, and private insurance funds in Taiwan).

These private purchases have driven up the real value of the dollar by more than 20 percent since mid-2014, continuing the trend of making American-made goods less competitive globally. As a result, the Congressional Budget Office predicts that America’s trade deficit is on track to exceed $700 billion by 2021, a full 3 percent of gross domestic product.4

Thus, the dollar is currently “overvalued” relative to the trade-balancing, equilibrium exchange rate. I assume here that the equilibrium exchange rate is the set of exchange rates that would produce balanced trade for the United States and some or all of its major trading partners.

The trade-balancing, equilibrium exchange rate concept is completely distinct from that of “currency manipulation,” as defined by Treasury, the IMF, and other agencies. Currency manipulation refers to government intervention in foreign exchange markets for the purpose of gaining commercial advantage. The CVD regulations as published, and under discussion here, refer only to the concept of a “subsidy in the form of currency undervaluation,” without direct reference to currency manipulation as a cause of that undervaluation. Thus, my remarks will focus only on the concept and estimation of equilibrium exchange rates.

Currency undervaluation can result from currency manipulation, from excess private capital inflows, or both. These comments are concerned only with addressing the consequences of undervaluation.

The definition and determination of equilibrium exchange rates should be reconsidered

The draft regulations refer to various definitions of the equilibrium “real effective exchange rate” (REER), including estimates from the IMF and from the Peterson Institute. The particular Peterson paper—referred to in footnote 28 of the Commerce Department notice of proceeding5—is a 2017 estimate of “fundamental equilibrium exchange rates” by William R. Cline.6 In these comments, I will distinguish between the particular results that Cline obtained in his 2017 paper using the model that he developed, in a series of related papers, with his Peterson Institute colleague John Williamson.7 That model (hereinafter referred to as the “Cline model”) has been used to estimate equilibrium exchange rates under a number of different assumptions about data inputs and parameter values.

None of the methods cited in the draft regulations will generate reliable estimates of trade-balancing exchange rates. The Cline estimate cited in the draft regulations, in particular, allows for current account deficits and surpluses equal to plus or minus 3 percent of GDP, which are far from trade-balancing exchange rates.

The Cline model has been used by Bergsten to estimate a set of true trade-balancing exchange rates, based on generating zero current account balances for Japan, China, and the European Union, which are responsible for the vast majority of global current account imbalances at the present time.8 These three countries/unions are responsible for the development of large and persistent global trade imbalances over the past 10 to 20 years.9

For purposes of illustration, Bergsten estimates (using 2016 data, and projected to 2019) that the euro, the Chinese yuan, and the Japanese yen must rise by 40.9 percent, 37.1 percent, and 50.2 percent, respectively, in order to eliminate the persistent current account surpluses of these countries. In this scenario, the real dollar would depreciate by 26.5 percent, while the real (price-adjusted, trade-weighted) value of the euro, yuan, and yen would rise by 15.0 percent, 9.9 percent, and 22.6 percent, respectively. The U.S. current account deficit would be eliminated as well, as a product of these realignments.10

Data quality issues must be considered in the estimation of equilibrium exchange rates

The results of the Bergsten model illustrate the fact that estimates of trade-balancing equilibrium exchange rates (which should be used to determine the extent to which a currency is “undervalued” in the proposed CVD proceedings) depend critically on model parameter values used in the Cline model, or any other, alternative model used to estimate equilibrium exchange rates.11

The quality of data used to estimate equilibrium exchange rates is also critical to the determination of the degree of undervaluation of any particular bilateral exchange rate. The Cline and Bergsten models are both based on estimates of each country’s total current account balance as a share of GDP. The current account is the broadest measure of the total flows of trade in goods, services, and income. Having accurate estimates of each country’s trade and income flows is thus essential to the development of reliable estimates of equilibrium exchange rates.

There are substantial problems with the quality of data used to compute equilibrium exchange rates. Such calculations typically depend on estimates of current account flows as reported by the International Monetary Fund.12 The IMF typically relies on self-reported trade data in its reports. There are substantial and well-known problems with self-reported trade data. For example, recent research by the Federal Reserve has shown that China is overstating its tourism trade deficit by roughly 1 percent of GDP (roughly $145 billion in 2018).13 Thus, current Chinese self-reported trade data understate that country’s current account surplus by at least that amount. Use of underestimated parameter values for China’s current account balance will lead to underestimates of the equilibrium dollar–yuan exchange rates needed to achieve current account realignment.

Likewise, it is well known that U.S. estimates of the bilateral U.S.–China goods trade deficit are substantially larger than those reported by China. Since China’s own self-reported current account estimates are based on China’s own self-reported goods trade flows, the goods trade account is also likewise underestimated. Further research is needed on this issue.

Who should be responsible for estimating equilibrium exchange rates?

These questions lead naturally to the issue of which agency or agencies should be responsible for estimating the equilibrium exchange rates that are used to determine the “benefit resulting from a subsidy in the form of currency undervaluation” in the proposed modifications to CVD regulations. The proposed regulations state that Commerce “intend[s] to seek and defer to the Department of Treasury’s (Treasury’s) evaluation and conclusion as to whether government action on the exchange rate has resulted in currency undervaluation.”14

It would be a mistake to assign the job of determining trade-balancing equilibrium exchange rates to Treasury. Although that agency has legislative responsibility for producing the semi-annual reports on the macroeconomic and foreign exchange policies of major trading partners of the United States,15 it has failed miserably in carrying out this responsibility for the past two decades.16 In particular, during the “Decade of Manipulation,”17 China and about 20 other countries engaged in massive, unprecedented currency manipulation that decimated U.S. manufacturing, resulting in the loss of roughly 5 million manufacturing jobs and 90,000 manufacturing plants.18 Yet Treasury did not once find any of these countries guilty of currency manipulation. This despite widespread agreement among professional economists that China and these other countries were acting in clear violation of IMF and WTO norms regarding prohibitions against currency actions taken “to gain unfair competitive advantage over other members.”19

In plain English, there are clear reasons why Treasury has refused to call out currency manipulators or intervene in currency markets. Simply put, Wall Street loves a strong dollar, and Treasury has historically been run by and for U.S. financial markets.20 The strong dollar has made imports artificially cheap (and U.S. exports less competitive on world markets), resulting in large and growing trade deficits. The resulting flood of cheap imports has driven huge profits for the companies that sell them, especially firms like Walmart, Amazon, Nike, and Apple. It has also led to reductions in wages for 80 million American workers competing with millions of workers in countries where labor has been cheapened by these undervalued currencies.21 All of this has filled the coffers of multinationals who outsource production, as well as the pockets of financiers on Wall Street who brokered these investments and the hedge fund managers who presided over the dismemberment of domestic manufacturing firms. It is no mistake that the current Secretary of the Treasury came from Wall Street, just as it is no mistake that most of his predecessors over the past three decades also came from Wall Street—and returned there when their time in government “service” was done.

The Federal Reserve should be charged with estimating equilibrium exchange rates for the purposes of determining the effects of currency undervaluation in CVD proceedings

As these comments have illustrated, there are serious technical issues involved both in modeling equilibrium exchange rates and in identifying the most accurate trade data and underlying parameter values. In addition, there are serious conflicts of interest that would arise if Treasury were tasked with making these assessments, for reasons outlined above. Furthermore, the Federal Reserve Board of Governors retains perhaps the most extensive team of economists and statisticians familiar with international data and modeling issues: These economists are intimately familiar with the functioning of international trade and financial markets, and they are best qualified to perform the objective analysis called for by these regulations.

I am well aware of the historic role played by Treasury as the lead agency for the U.S. government for international financial issues. However, those are policy issues largely having to do with the United States’ relationships with the International Monetary Fund, the World Bank, and other international financial institutions. The question at issue with respect to the determination of equilibrium exchange rates is a technical matter better suited to the expertise of the professional staff of the Federal Reserve.

Furthermore, historic roles and tradition must be subject to periodic evaluation and reconsideration as goals and policy environments change. For the past 46 years, since the end of the gold standard and the Bretton Woods Agreement in 1973, the United States has both adhered to and advocated for a system of market-determined, flexible exchange rates. This slavish adherence to financial market forces, come what may, has come at tremendous cost to communities across the United States. It is time to consider new ways to manage exchange rates, and these new approaches to managing currencies may require new institutional arrangements as well.

The Commerce Department’s proposed regulations to consider currency undervaluation as a part of countervailing duty determinations are an important step in this direction, and they should proceed in implementing these regulations, after due consideration of the issues raised here.

Endnotes

1. Modification of Regulations Regarding Benefit and Specificity in Countervailing Duty Proceedings, 84 Fed. Reg. 24406 (May 28, 2019).

2. C. Fred Bergsten and Joseph. E. Gagnon, Currency Conflict and Trade Policy: A New Strategy for the United States. (Washington, D.C.: Peterson Institute for International Economics, June 2017). See especially chapter 4, “The ‘Decade of Manipulation’ (2003–13).”

3. Robert E. Scott, “Elizabeth Warren’s Radical Plan to Fix the Dollar,” New York Times, June 16, 2019.

4. Congressional Budget Office, The Budget and Economic Outlook: 2019 to 2029, January 2019. Excel spreadsheet (data underlying figures in the report) downloaded February 2019.

5. Modification of Regulations Regarding Benefit and Specificity in Countervailing Duty Proceedings, 84 Fed. Reg. 24406 (May 28, 2019).

6. William R. Cline, “Estimates of Fundamental Equilibrium Exchange Rates, November 2017,” Peterson Institute for International Economics, November 2017.

7. William R. Cline and John Williamson, “New Estimates of Fundamental Equilibrium Exchange Rates,” Peterson Institute for International Economics, July 2008.

8. C. Fred Bergsten, “Time for a Plaza II?,” in International Monetary Cooperation: Lessons from the Plaza Accord After Thirty Years, ed. C. Fred Bergsten and Russel Green (Washington, D.C.: Peterson Institute for International Economics, 2016).

9. Brad Setser, The Return of the East Asian Savings Glut, Council on Foreign Relations, October 2016.

10. C. Fred Bergsten, “Time for a Plaza II?,” in International Monetary Cooperation: Lessons from the Plaza Accord After Thirty Years, ed. C. Fred Bergsten and Russel Green (Washington, D.C.: Peterson Institute for International Economics, 2016), Table 14-5.

11. C. Fred Bergsten, “Time for a Plaza II?,” in International Monetary Cooperation: Lessons from the Plaza Accord After Thirty Years, ed. C. Fred Bergsten and Russel Green (Washington, D.C.: Peterson Institute for International Economics, 2016).

12. International Monetary Fund, World Economic Outlook Database, April 2019: By Countries (Country-Level Data).

13. Ana Wong, “China’s Current Account: External Rebalancing or Capital Flight?,” Federal Reserve Board of Governors, International Finance Discussion Papers no. 1208, June 2017.

14. Modification of Regulations Regarding Benefit and Specificity in Countervailing Duty Proceedings, 84 Fed. Reg. 24406 (May 28, 2019).

15. U.S. Department of the Treasury, Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, May 2019.

16. U.S. Department of the Treasury, Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, May 2019.

17. C. Fred Bergsten and Joseph. E. Gagnon, “The ‘Decade of Manipulation’ (2003–13),” in Currency Conflict and Trade Policy: A New Strategy for the United States (Washington, D.C.: Peterson Institute for International Economics, June 2017).

18. Robert E. Scott, “What’s Good for Wall Street is Often Bad for American Workers and Manufacturing: The Overvalued Dollar,” Working Economics Blog (Economic Policy Institute), June 27, 2019.

19. Jonathan E. Sanford, Currency Manipulation: The IMF and WTO, Congressional Research Service, January 2011.

20. Robert E. Scott, “What’s Good for Wall Street Is Often Bad for American Workers and Manufacturing: The Overvalued Dollar,” Working Economics Blog (Economic Policy Institute), June 27, 2019.

21. Robert E. Scott, “Elizabeth Warren’s Radical Plan to Fix the Dollar,” New York Times, June 16, 2019.

In order to rebalance U.S. trade, the dollar needs to fall 25–30 percent, especially against the currencies of countries with large, persistent trade surpluses such as China, Japan, and the European Union. This would help to address the trade deficits that have eliminated nearly 5 million good-paying American manufacturing jobs over the past two decades and some 90,000 factories. In fact, trade with low-wage countries has pulled down the incomes of 100 million non-college educated workers by roughly $2,000 per year.

This week, Ruchir Sharma of Morgan Stanley trotted out a bunch of very shaggy dogs in defense of a strong currency. But he never mentioned the real reason Wall Street loves a strong dollar. An overvalued greenback has enabled the cheap imports that fuel the massive profits of American giants ranging from Apple and Amazon to Costco and Walmart. And multinational corporations have used offshoring, and the threat of moving more plants abroad, to drive down U.S. wages and benefits, and to weaken domestic labor unions.

Sharma claims growing trade deficits bring great benefits to the United States. And he praises the financing of our budget deficits through the sale of Treasury securities to foolish foreigners who are willing to hold them—with Wall Street bond traders brokering all of those sales for hefty fees. However, there are vast amounts of excess savings available in the United States and around the world, and there are no signs of a capital shortage, as evidenced by short- and long-term interest rates that are at historic lows across developed countries. The real issue, therefore, isn’t attracting capital, but rather the loss of American jobs and productive capacity that comes from growing trade deficits.

Sharma also claims that America’s ability to sell Treasury bills abroad depends, in part, on the dollar’s status as a “reserve currency …a perk of imperial might,” as though America were some powerful kingdom, with a throne in New York. In fact, as Dean Baker points out, the “dollar is not ‘the’ reserve currency,” it is simply one among many. Baker notes that central banks also hold euros, yen, British pounds, and Swiss francs, and can easily switch from one to another. And in today’s modern global economy, there is very little need to hold costly currency reserves. For example, in January 2019, the United States held only $115 billion in total foreign exchange reserves, which was equal to less than two weeks worth of total goods and services imports.

Sharma admits that dollar realignment would boost exports and jobs, but claims that it would provide only a temporary benefit for “fading manufacturing industries.” This is a particularly troubling argument. First, as noted above manufacturing jobs (along with construction) provide excellent wages and benefits, especially for U.S. workers without a bachelor’s degree (as demonstrated in the chart below). Unfortunately, there are still 900,000 fewer jobs in these sectors than at the start of the Great Recession.

“Growing industries” such as hospitality, health care, and temporary help services—which have gained jobs since the beginning of the recession—pay substantially less than construction and manufacturing industries. Hourly pay in these job-gaining industries was $26.19 on average, versus $28.88 in in manufacturing and $31.29 construction, as shown in the figure below. Total compensation (which includes both wages and benefits) in job-gaining industries is 33.39, while compensation in manufacturing and construction is $39.53 and 39.55 respectively, 18.4 percent more than in job-gaining industries.

Economic snapshot

Prolonged stagnation in manufacturing and construction employment have contributed to the slow growth of wages for non-college educated workers over the past decade. Rebalancing the dollar could lead to strong growth in these sectors. And that would provide a much-needed boost to wages for working Americans.

The second flaw in Sharma’s “fading” manufacturing industries argument is that this is not an inevitable—or desirable—trend. The steady loss of U.S. manufacturing jobs is the result of a policy choice. Germany, for example has held onto manufacturing jobs over the past 20 years, despite having higher wages for comparable workers than in the United States, as shown in the chart below. Manufacturing’s share of total employment has been stable in Germany, at about 17 percent of total employment (versus less than 10 percent in the United States), as shown in the second figure below.

China, which has been running massive trade surpluses for two decades has seen its manufacturing employment share rise. Germany held onto manufacturing jobs, in part by devaluing within the euro and the EU, via the Hartz reforms, which lowered wages relative to the rest of the EU. China manipulated its currency for more than a decade, and continues to maintain an undervalued yuan by carefully managing private capital outflows. Maintaining a strong manufacturing sector and stable manufacturing employment are policy choices. And contrary to Sharma’s dismissal, it is a key driver for income generation in advanced economies.

While Germany and China have managed their economies to maintain and expand manufacturing employment, the United States has favored a strong dollar policy that has decimated U.S. manufacturing. But that path has also generated massive profits for Wall Street, along with rising incomes only for those at the top, including finance executives. Germany and China have invested in building up strong manufacturing sectors. In contrast, the U.S. poured massive subsidies into Wall Street (with nearly a decade of unlimited access to discount-window borrowing from the Federal Reserve at near-zero percent interest rates), with no payback or quid pro quo. Meanwhile, not a single banker went to jail in the wake of a financial crisis that rocked the global economy.

Sharma has the temerity to conclude that dollar realignment will “damage the economy.” But who benefits from this type of economy?

He has it exactly backwards. A lower dollar stimulates exports, job creation, and the growth of a strong economy with high and rising wages. The dollar was realigned by President Nixon in December 1971, and again in 1985, during the Reagan administration, following the Plaza Accord. There is no evidence that the economy slowed after either one of those events, as shown in the chart below, which tracks U.S. quarterly GDP growth since 1969 (each currency realignment is marked with dotted lines).

The time has come for a serious discussion of permanent currency realignment to rebalance global trade and capital flows. And it is time to put an end to sacrificing the national interest simply for the narrow benefit of Wall Street.

Figure A

This policy memo focuses on one major economic argument in favor of increased infrastructure investment—that it would increase demand for American manufactured goods and, in turn, generate American manufacturing jobs. As this memo shows, more jobs will be created if policymakers take steps to reduce the yawning U.S. trade deficit that allows jobs to “leak” outside the U.S. economy as U.S. spending increases.

Spending in any given economic sector sets off ripple effects, or linkages, across other sectors.2 For example, an increase in demand for construction-sector output supports construction jobs directly but also supports jobs in industries that supply inputs to the construction sector. Take the case of a large infrastructure project that includes constructing intercity rail transportation. Such a project would create direct jobs in construction (jobs building tunnels and bridges and track beds, and the like). But the project would also create indirect jobs in the industries supplying the wide range of inputs required—such as construction equipment and tools, steel and concrete, and services rendered by environmental and information technology consultants.

The number of direct and indirect jobs supported by an increase in economywide spending depends in part on how much of this spending goes to purchase imports rather than domestically produced goods and services. In the case of infrastructure investments specifically, the number of U.S. manufacturing jobs supported depends on the share of purchased manufacturing inputs that is produced domestically as opposed to being imported from abroad.

The larger the share of imported inputs, the smaller the number of supplier jobs supported in domestic manufacturing. This policy memo provides an illustrative example of how many manufacturing jobs would be supported under the status quo (i.e., if the import share remains high due to the current large trade deficit) and under an alternative scenario in which the share of manufacturing inputs imported from abroad drops by a third due to a sizable decrease in the manufacturing trade deficit.

We find that by cutting the manufacturing trade deficit to a more sustainable level (by roughly two-thirds), tens of thousands of additional U.S. manufacturing jobs would be supported by any ambitious investment in infrastructure. There are many reasons why we should use the levers of policy to put American manufacturing production on a more-level playing field with global competitors. These policy levers—whether they are moves to ensure that the value of the U.S. dollar falls to a more competitive level in global markets, to stringently enforce trade laws, or to enact “Buy America” provisions that mandate some level of domestic content in government procurement—can help maximize the job creation spurred by infrastructure investment in communities across the country.

Background on infrastructure investments and trade shares in manufacturing

Currently, federal government financing supports roughly $350 billion per year in U.S. transportation and water infrastructure, either directly or through transfer of fiscal resources (grants or loan guarantees or tax exemptions) to state and local governments.3 It has been widely argued that this is insufficient and that a much larger infrastructure investment effort should be pursued.4 This policy memo considers the employment impact of a $150 billion increase in infrastructure investment that would raise annual infrastructure spending up to $500 billion.

A commonly used proxy for manufacturing trade flows includes goods imports and exports, but excludes agricultural goods from exports and excludes petroleum products from imports.5 Figure A shows manufacturing exports and imports as a share of total U.S. gross domestic product (GDP). The gap between imports and exports is the trade deficit in manufacturing goods expressed as a share of GDP. What stands out from this figure is the large trade deficit in American manufacturing.

Figure A

While the trade deficit in manufactured goods is substantial when expressed as a share of overall GDP, it is much bigger when expressed as the share of domestic consumption of manufactured goods. Domestic consumption is measured as domestic production in manufacturing plus imports of manufactured goods minus exports of manufactured goods. If trade were balanced, then domestic consumption would equal domestic production. When instead the U.S. runs a manufacturing trade deficit, this means that domestic production falls short of domestic consumption and hence manufacturing employment is depressed, even as Americans consume evermore manufactured goods.

The manufacturing trade deficit is roughly 14 percent of domestic manufacturing consumption when this consumption is measured in gross output terms. If consumption is measured in value-added terms, then the manufacturing trade deficit is closer to 38 percent. Because it is not entirely clear which is the more relevant measure for assessing the trade deficit’s impact on American manufacturing, we simply take the average of these measures—26 percent.6 This is a very large effect—domestic manufacturing production would be a quarter larger in the United States if manufacturing trade were balanced.

The trade deficit and the enormous share of domestically consumed manufactured goods that are imported are not the inevitable result of a globalized economy. Instead, they are largely the outcomes of a host of long-term policies that have hamstrung domestic manufacturing production. Policies have encouraged businesses to chase low-wage workforces to foreign nations comparatively unencumbered by regulatory protections for workers’ rights or the environment, while policymakers have failed to enforce our trade and procurement laws and have been reluctant to acknowledge and address currency misalignments—even those caused by other nations’ intentional deployment of mercantilist exchange rate management.7 These past policy failures have not just led to rampant job loss in the manufacturing sector in recent decades; they have also weakened the power of infrastructure investment to create jobs. In short, because of our trade deficit, future policy efforts—such as U.S. taxpayer-funded infrastructure investments—that would otherwise be a boon to American manufacturing may instead lead to the leakage of manufacturing jobs abroad.

Two potential infrastructure scenarios

As we note above, if an ambitious infrastructure investment plan is approved by policymakers, the United States could be spending upward of $500 billion per year on these investments. One natural question that might arise is, “How much would this infrastructure investment buoy demand for jobs in American manufacturing?” Figure B provides estimates for two scenarios.

Figure B

Scenario One is the status quo, reflecting our estimate of manufacturing jobs that would be supported through $500 billion in infrastructure spending given today’s import shares in manufacturing industries. This estimate is obtained directly from the domestic employment requirements matrix (DERM) maintained by the Bureau of Labor Statistics (BLS 2017). The DERM allows one to feed in a vector of spending in infrastructure construction activity and derive the jobs that would be supported in supplier industries, including manufacturing.

Scenario Two is an estimate of manufacturing jobs that would be supported through $500 billion in infrastructure spending if import shares of manufacturing consumption were cut by a third. We choose this share because it is roughly consistent with a 70 percent reduction in the manufacturing trade deficit, with imports and exports contributing proportionally to this closure.8 Given that manufacturing trade deficits will have to substantially shrink in coming decades if overall U.S. trade is going to move closer to a balance, it makes sense to assess what a significant reduction in the overall manufacturing trade deficit implies for import shares of manufacturing consumption.9

Under Scenario One, a $500 billion infrastructure investment yields 340,900 jobs in the manufacturing sector. Under Scenario Two, with import shares cut by a third, a $500 billion infrastructure investment yields 384,600 jobs in manufacturing, or almost 45,000 more jobs than would be supported by infrastructure investments alone.

Appendix Table 1 provides the breakdown of manufacturing industry employment gains stemming from these two scenarios. In either scenario, the 10 largest-gaining industries are architectural and structural metals manufacturing; cement and concrete product manufacturing; other wood product manufacturing; plastics product manufacturing; machine shops manufacturing; veneer, plywood, and engineered wood product manufacturing; other fabricated metal product manufacturing; sawmills and wood preservation; lime, gypsum, and other nonmetallic mineral product manufacturing; and ventilation, heating, air-conditioning, and commercial refrigeration equipment manufacturing.

Discussion of results

There are, of course, a number of tools available for reducing the leakages from excessive net imports (trade deficits) in manufacturing. The most effective ones are systemic; particularly effective are those that target misaligned exchange rates or other persistent unfair trade practices that are the root cause of overall trade deficits.10

In the specific case of jobs supported in American manufacturing by infrastructure investments, more targeted policies mandating domestic content for government procurement and contracting would also boost domestic manufacturing jobs. Such “Buy America” policies ensure that taxpayer-financed projects use goods produced by American companies and workers, providing an economic boon to our manufacturing sector with no additional spending. While existing domestic-content preference policies are of immeasurable importance, it is important to note that they are limited in their scope—in terms of both the types of infrastructure projects and the types of materials that are covered. Meanwhile, many policymakers have proposed changes that would strengthen enforcement and close loopholes to prevent leakage.

The goal of this policy memo is simply to provide an illustrative estimation of the scale of job gains that could possibly be claimed by ensuring that large-scale infrastructure investments are supported by a (reasonably) higher share of domestic content in manufacturing supplier industries. These job gains are far from trivial and would be a major benefit of policies that reduce the gap between imports and exports in America’s manufacturing sector.

Acknowledgments

This research was made possible by support from the Alliance for American Manufacturing.

Appendix Table 1

Endnotes

1. See AAM 2019 for polling results on infrastructure spending.

2. See Bivens 2019 for a description and quantification of these linkages.

3. This estimate comes from the Congressional Budget Office (CBO 2018a, 2018b). The CBO reports indicate that the federal government spends roughly $100 billion directly on infrastructure, and that the federal government supports roughly 60 percent of the $340 billion spent by states indirectly through loan guarantees or tax exemptions. The federal government also provides roughly $50 billion per year in grants to state and local governments for transportation projects. Adding these fiscal resources together, the federal government supports roughly $350 billion in infrastructure investment.

4. See the report card from the American Society of Civil Engineers (ASCE 2017) for the most-cited estimate of the insufficiency of current infrastructure investments.

5. More precise measures of manufacturing trade flows are available, but not on as timely a basis or with as long a historical time series as this proxy measure.

6. Gross output is essentially a measure of sales or revenue of an industry (with intrasectoral purchases removed). Value added is a measure of final output of an industry, with the contribution of all intermediate inputs removed. It is not entirely clear which measure is the more appropriate denominator for scaling the manufacturing trade deficit. For overall trade balances, it is clearly correct to use the value-added measure of output as the denominator in such a calculation, as the total trade deficit is the same whether measured in gross output or value-added terms. But for trade balances of specific sectors in the economy (even large sectors like manufacturing), this strict correspondence between gross output and value-added concepts of trade flows does not necessarily hold. Given this uncertainty, we simply report both measures.

7. See Scott 2017 on how policy decisions regarding exchange rates have been the dominant factor explaining rising trade deficits.

8. We choose a 70 percent reduction in the manufacturing trade deficit because this decline, coupled with unchanged service surpluses, would roughly balance overall trade.

9. As noted earlier, the manufacturing trade deficit is roughly equal to 26 percent of domestic manufacturing consumption. A 70 percent reduction in the U.S. manufacturing trade deficit (given current levels of consumption) would hence require an 18.2 percent increase in domestic production. If we assume 60 percent of this increase comes from reduced import shares (with the remainder coming from expanded exports), this implies a 10.8 percent increase in total domestic manufacturing output for any increase in domestic demand. If employment responded proportionately, this would imply a 10.8 percent increase in the level of manufacturing employment for any given increase in domestic demand. If we apply this job boost to the Scenario One measure of jobs to get the number of jobs supported by a 70 percent decrease in manufacturing trade deficits, this implies over 377,000 jobs supported by a $500 billion infrastructure investment, a number quite close to our measure that simply reduces import shares in domestic manufacturing production by a third.

10. See Scott 2017 for a discussion of the causes of manufacturing trade deficits.

References

Alliance for American Manufacturing (AAM). 2019. “Findings from a National Survey on Infrastructure and Buy American Policies” (presentation).

American Society of Civil Engineers (ASCE). 2017. Infrastructure Report Card.

Bivens, Josh. 2018. The Potential Macroeconomic Benefits from Increasing Infrastructure Investment. Economic Policy Institute, July 2017.

Bivens, Josh. 2019. Updated Employment Multipliers for the U.S. Economy. Economic Policy Institute, January 2019.

Bureau of Economic Analysis (BEA). 2018. National Income and Product Accounts (NIPA) Table 1.1.6. Accessed December 2018.

Bureau of Economic Analysis (BEA). 2019a. “Imports of Nonpetroleum Goods” [A187RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis. Accessed February 12, 2019, at https://fred.stlouisfed.org/series/A187RC1Q027SBEA.

Bureau of Economic Analysis (BEA). 2019b. “Exports of Nonagricultural Goods” [A182RC1Q027SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis. Accessed February 12, 2019, at https://fred.stlouisfed.org/series/A182RC1Q027SBEA.

Bureau of Labor Statistics (BLS). 2017. Employment Requirements Matrix. Last modified October 2017.

Congressional Budget Office (CBO). 2018a. Federal Support for Financing State and Local Transportation and Water Infrastructure. October 2018.

Congressional Budget Office (CBO). 2018b. Public Spending on Water and Transportation Infrastructure 1956‒2017. October 2018.

Scott, Robert. 2017. Growth in U.S.–China Trade Deficit Between 2001 and 2015 Cost 3.4 Million Jobs: Here’s How to Rebalance Trade and Rebuild American Manufacturing. Economic Policy Institute, January 2017.

The IMF predicts that the U.S. current account deficit—the broadest measure of U.S. trade in goods, services, and income—will nearly double between 2016 and 2022. Unless these trends are offset by a rapid decline in the value of the U.S. dollar, rapidly rising trade deficits could be devastating for U.S. manufacturing, likely giving rise to massive job loss on the scale experienced in the 2000–2007 period, when 3.5 million U.S. manufacturing jobs were lost.

The U.S. goods trade deficit with China reached a new record of $419.2 billion in 2018, up from $375.6 billion in 2017, an increase of $43.6 billion (11.6 percent). United States trade with China is dominated by the deficit in manufactured products. Although the United States has imposed tariffs of 10 to 25 percent on $250 billion in imports from China (about half of total U.S. imports from that country), China has played its ‘ace-in-the-hole’ by allowing it’s currency to fall by roughly 10 percent against the dollar. As a result, the U.S. trade deficit with China increased faster (11.6 percent) than the U.S. deficit with the world as a whole (10.4 percent). While the United States and China are poised to negotiate a deal to end their trade dispute, the proposed deal amounts “much ado about nothing much,” as Paul Krugman puts it. It will do little to reduce the massive imbalance in U.S.–China trade flows.

The vast bulk of the U.S. goods trade deficit in 2018 was explained by trade in non-petroleum products, which are dominated by manufactured goods. The trade deficit in non-petroleum products reached $825.4 billion in 2018, an increase of $91 billion (12.4 percent). The United States had a small trade surplus of 26.5 billion in agricultural products in 2018 (this sector is part of trade in non-petroleum products). The agricultural trade surplus declined by $2.4 billion in 2018 (8.3 percent), as a consequence of trade restraints in China and elsewhere, and the rising dollar. The United States had a trade surplus in services which increased from $255.2 billion in 2017 to $270.2 billion in 2018, an increase of $15.0 billion (5.9 percent). However, the growth in the services surplus was more than offset by the $83.8 billion increase in the goods trade deficit; thus the overall goods and services deficit increased by $68.8 billion (12.5 percent) in 2018.

The most important cause of large and growing U.S. trade deficits is persistent currency undervaluation by countries such as China, Japan, and Korea, which have run large, persistent trade surpluses, as well as large structural surpluses accumulated by the European Union, including especially Germany and the Netherlands. The real, trade-weighted value of the U.S. dollar increased 21.8 percent between December 2013 and December 2018, and including 6.7 percent in 2018 alone, as shown below. The Trump tax cuts will add more than $1 trillion to U.S. fiscal deficits over the next decade, putting upward pressure on interest rates and the U.S. dollar, as reflected in the chart, below. Absent aggressive efforts to reduce its value, the rising dollar will put continuing upward pressure on the trade deficit, and downward pressure on employment and output in U.S. manufacturing.

Figure A

Last month, General Motors announced plant closures in the U.S. that could lead to roughly 14,700 layoffs by the end of 2019. The shutdowns will have the biggest impact in industrial states like Ohio and Michigan, where key plants in Detroit-Hamtramck, Lordstown, and Warren are being closed. But the closures also have wider implications for American industry—and not just the machine shops and fabricators that produce rubber, steel, and glass components for auto assembly. America’s manufacturers are all struggling with the same issue—an overvalued dollar that puts them at risk from rising trade deficits. And it all derives from flawed Trump administration economic policies.

Trump’s tax cuts and increased government spending for defense and nondefense needs are widening the U.S. budget deficit, which will top $1 trillion in 2020 (5 percent of GDP). On top of that, Trump’s tariffs on China have backfired. China has reduced the value of the yuan 10 percent this year, and its trade surplus with the United States has increased 10 percent over the same period last year—even faster than the overall U.S. goods trade deficit, which is up 9.4 percent in the same period. The IMF projects that the overall U.S. current account deficit (the broadest measure of trade in goods, services and income) will nearly double over the next four years.

As a result of the rising dollar and increasing current account deficit, the U.S. goods trade deficit will increase to between $1.2 trillion and $2 trillion by 2020, an increase of $400 billion to $1.2 trillion above the $807 billion U.S. goods trade deficit in 2017, as shown below. This will directly eliminate between 2.5 and 7.5 million U.S. jobs, mostly in manufacturing (because 85 percent of U.S. goods trade consists of manufactured products). The collapse in output, especially in the capital intensive manufacturing sector, will decimate investment—and taken together, both will result in large additional job losses as income and spending collapse, resulting in a steep recession if nothing is done to reduce the over-valued dollar. The dollar must fall by at least 25 to 30 percent (on a real, trade-weighted basis) to rebalance U.S. trade and avert the coming trade tsunami that’s baked into the economy as a result of the rising trade deficit.

To see why the GM announcement is the canary in the coal mine, consider its position. Why is the company taking such a drastic step? CEO Mary Barra says the company is trying to make itself leaner, and shifting resources toward newer electric vehicles and self-driving cars.

But that’s not the entire issue. The U.S. dollar is now substantially overvalued—which keeps making imports cheaper and U.S. exports more expensive. GM is clearly trying to protect itself against a future economic downturn. It’s well known in the business community that the prospects for a recession in the next few years are quite high. This is the chickens coming home to roost on the broader Trump economic policies.

The dollar’s overvaluation stems from a rather grievous irony. The United States is the epicenter of the world’s financial markets, with overseas investors continually purchasing dollar-denominated assets and securities. That’s certainly good for Wall Street. But it invites a downside.

A continuing influx of foreign capital is driving up demand for the dollar. Trump appointees Jay Powell (Chair) and Randy Quarles (Vice Chair) at the Fed also bear substantial responsibility for recent increases in the dollar, due rapid interest rate increases within the past year, which have made U.S. investments more attractive to foreign investors.

And the resulting rise in the dollar is making America’s exports—including the cars built by General Motors—more expensive for overseas consumers. It also makes imported goods cheaper in the U.S. market. These low-cost imports deliver growing profits for multinational operations like Apple—and yield a triple-whammy for U.S. manufacturers competing against imports that keep getting cheaper.

The situation has gotten worse of late because President Trump’s economic policies have actually reinforced the dollar’s rise. Last year’s tax cuts and 2018’s spending increases are swelling a budget deficit projected to exceed $1 trillion by 2020. Just as textbooks predict, increased federal borrowing (along with Fed policy) is driving up short- and long-term interest rates, attracting even more foreign capital—and further strengthening the dollar.

The president’s policies are now backfiring on GM and domestic manufacturers because the dollar has increased 5.4 percent in value in the past year alone. And China has devalued its currency, the yuan by 10 percent this year—more than offsetting the impact of the president’s tariffs. Thus the irony that President Trump’s tax cuts and increased defense spending have short-changed working Americans even as they’ve swelled corporate coffers. The administration believes tax cuts will stimulate investment and job creation. But companies—including GM—have used the proceeds to increase dividend payments, buybacks, and CEO compensation—not worker wages.

Figure A

Figure B

Because the dollar keeps rising, the International Monetary Fund (IMF) foresees a perfect storm. Rising imports will drive America’s current account deficit up from $449 billion in 2017 to more than $800 billion in 2022. Concurrently, the U.S. goods trade deficit could double in the next four years, rising from $807 billion in 2017 to between $1.2 and $2.0 trillion. Such a massive increase could potentially tip the nation into a new recession.

Figure C

Growing gap between current account and goods trade deficits bodes ill for U.S. manufacturing

Historically, and especially between 2000 and 2006, the U.S. current account and goods trade balances tended to track one-another nearly dollar for dollar. However, since 2007, there has been a growing gap between these two measures, with the goods trade deficit rapidly increasing relative to the current account deficit, as shown below. There are three reasons for this. First, since the mid-2000s, the United States has begun to run a sizeable surplus in “services” trade (not shown), which reached $243 billion (1.3 percent of U.S. GDP) in 2017. To some, this sounds like the desirable symbol of a “modern” economy. But in fact, over half of the U.S. services surplus is in three categories: financial services (banks, brokers, and credit card companies, 23 percent); professional and management consulting (15 percent); and charges for intellectual property (13 percent). These “services” are simply rents, or profits accruing to investors, and high-wage industries in finance and business consulting. They generate few good jobs for non-college educated workers, of the type supported by manufacturing, in the domestic economy. Of the rest, “travel” is the largest single category, which is dominated by education (another high-wage sector, 13 percent) and other personal travel (18 percent), but the later primarily supports low wage jobs in industries such as accommodations and food services.

The second major, growing component of trade is growth of “primary” income, including investment income and payments to employees (such as foreign executives), which generated $217 billion of net income (1.3 percent of GDP) in 2017. The dangerous irony of the modern global economy is that outsourcing, which has shifted production to foreign countries, has generated rapidly growing flows of foreign profits and rents (royalties, profits, and wages paid in banking and consulting services) to U.S. and foreign multinationals. These flows of capital income have directly offset the growing U.S. deficits in goods trade, which have displaced millions of manufacturing jobs. In total the United States has lost 5 million manufacturing jobs since 1998, most due to growing trade deficits with China and other large exporters. The troubling irony is that outsourcing is generating a flow of profits and services income that is offsetting growing goods trade deficits in the broadest trade measure (the current account deficit), effectively disguising the negative impacts of globalization on the domestic economy.

The third major component shift in U.S. trade patterns has occurred in petroleum products. A decade ago, in the mid-2000s, the United States ran a trade deficit in crude and refined petroleum which reached 2.1 percent of GDP in 2006 (peaking at 2.8 percent of GDP in 2008). However, the rise of fracking in the United States, combined with a decline in world oil prices and rising U.S. exports of refined petroleum products, has reduced the U.S. trade deficit in crude and refined petroleum to only 0.3 percent of GDP. The U.S. trade deficit in non-oil goods (which is dominated by trade in manufactured products) reached near-peak levels of $732 billion in 2017 (3.8 percent of GDP). This is much larger than the previous peak of $520 billion in 2006, which was also 3.8 percent of GDP. Thus, the rise in U.S. oil production has also tended to obscure the impacts of the rapid growth in the U.S. non-oil goods trade deficit, over the past decade. The non-oil goods trade deficit is poised to explode as a direct result of the failure of Trump’s trade and economic policies.

On the other hand, The U.S. current account deficit—the broadest measure of our trade in goods, services and income—was widely viewed as relatively stable in 2017 at only 2.4 percent of GDP (versus an all-time peak of 5.8 percent of GDP in 2006). Thus, today’s current account trade deficit is viewed as manageable by most economists. However, in manufacturing and other traded goods sectors (such as farming), the goods trade deficit (and especially in non-oil goods) is reaching crisis levels. This explains why it is so important to focus on future trends in goods trade, as shown in the bottom two lines of Figure D, below.

Figure D

The U.S. goods trade balance forecasts (for the 2018 through 2023) shown in Figure D are based on two alternative projections. The first projection (shown in red) is based on IMF World Economic Outlook (WEO) projections of trends in the volume of goods exports and imports. However, these are overly conservative because they fail to reflect changes in import and export prices. The second “alternate goods trade balance estimate” is based on the trend growth in the ration of the goods trade to the current account balance (this ratio increased 3.4 percent per year in the 2018-2023 period).

Both scenarios lead to goods trade deficits well of at least $1.2 trillion by 2023, and possibly as much as $2.0 trillion. Given the rapid decline in U.S. trade deficits in petroleum projects, these deficits will be devastating for the U.S. manufacturing sector, likely giving rise to massive job loss on the scale experience in the 2000-2007 period, when 3.5 million U.S. manufacturing jobs were lost.

There’s still time to sort through the mess, however. Washington can take coordinated action to lower the value of the dollar by at least 25 to 30 percent. The last time the United States intentionally engineered a major currency realignment was with the Reagan administration in 1985. Treasury Secretary James Baker negotiated the Plaza Accord with Japan, France, Germany, and the United Kingdom—achieving a 30 percent depreciation in the U.S. dollar. The U.S. goods and service trade deficit subsequently fell from $122 billion in 1985, and a peak of $152 billion in 1987, to $31 billion in 1991(the trade deficit usually worsens for two years after the dollar depreciates, and then improves rapidly, in what is known as the j-curve effect).

Notably, House Democrats played a key role in the Plaza Accord. The threat of Rostenkowski-Gephardt trade legislation—which would have imposed a 25 percent surcharge on imports from Japan, Brazil, Korea, Taiwan, and others—motivated finance ministers to work with Baker on a currency deal. The threat of high, permanent tariffs lead foreign officials to seek out alternatives that would rebalance trade without introducing new trade barriers.

With GM and other manufacturers now struggling, Democrats should see an opportunity to focus on middle class jobs—starting with a revaluation of the U.S. dollar. They can force the president’s hand by threatening to impose broad, across the board tariffs on all countries with large, persistent, global trade surpluses, including China, Japan, Korea and Germany and other big surplus countries in Europe (Netherlands, Sweden, Switzerland) or the entire E.U. There are also other tools to rebalance the dollar, such as taxing foreign capital inflows. But it is perhaps best to confront a man such as Trump in a language the he understands: with the threat of higher, across-the-board tariffs. The \president campaigned on rebuilding American manufacturing, and delivering more jobs and higher wages. Instead, it could be the newly Democratic House that actually achieves this—by pressing 1980s-style trade legislation as the impetus to revalue the dollar in the same way the Reagan administration wisely did, 30 years ago.