During the 2016 US Presidential election campaign Donald Trump charged that the US economy continued to lose jobs because the US was getting a raw deal from its international trade involvements and because foreign countries were engaging in unfair trade practices, such as keeping wages artificially low and manipulating foreign exchange rates. If elected, Trump said, he would work to bring jobs – especially manufacturing jobs – back to the US and to stop further employment losses to other countries.
True to his promise, Trump right after his election ordered the US’s withdrawal from the Trans-Pacific Partnership (TPP), ordered a review of the North American Free Trade Agreement (NAFTA), threatened to impose a twenty percent (20%) tariff on all imports from Mexico and accused China of manipulating the exchange value of the yuan to gain an unfair competitive advantage for Chinese exports to the US.
These and similar moves are intended to bring about fulfillment of Mr. Trump’s promise to “bring jobs back to America.” Are they likely to achieve that goal? If pursued forcefully, they are likely to do so, but only temporarily. There are three reasons for this.
The first and most obvious reason is that countries at the receiving end of US tariff-easing action are not going to sit back and do nothing. They will retaliate. The Mexican government has let it be known that it is readying higher tariffs against US goods in the event that the Trump administration makes good on its threat to raise US tariffs on Mexican exports to the US. These reciprocal actions will hurt American-Mexican trade seriously, considering that the US and Mexico are major trade partners of one another. Neither country will be able to claim a victory.
Autarchy, or economic isolation, was never a sound strategy for economic policymakers to pursue, and by being deprived the benefits of international competition, the US economy would soon become flabby and inefficient. American goods and services would not be able to test themselves against foreign-made goods in international markets. There would be no way of effectively determining whether American goods and services were still competitive vis-à-vis their competitors.
The third reason why a policy of autarchy would be bad for the US economy is that international trade gives Americans access to lower-priced foreign goods and services and that American consumers would be deprived of that benefit if the US government chose to stay out of trade arrangements – regional and bilateral – and to engage other countries in tariff wars. Generally speaking, imports tend to have a beneficial effect on consumers’ purchasing power and is thereby anti-inflationary.
US companies establish manufacturing plants overseas for operating-cost reasons in order to be able to operate in close proximity to their foreign customers, which makes their products competitive with the products made in the host countries. Foreign companies like Toyota, BMW and Nestle put up manufacturing plants in the US for exactly the same operational reasons that American companies put up manufacturing plants in the UK, France and China.
Those reasons revolve mainly around taxes, transportation and inventory management. Wages are particularly important. Comparatively lower wages in developing countries make it compete with host-country producers and to contribute to head-office profit.
Can Donald Trump make good on his campaign promise to “bring jobs back to America?” Yes, if his administration is prepared to subsidize the differences in taxes and wages paid by US companies at home and the taxes and wages that they pay overseas. Otherwise, no.
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