On Jan. 23, President Trump withdrew the United States from the TransPacific Partnership trade agreement. Later in the week, Trump’s team floated the idea of a 20 percent tax on imports from Mexico. And the website of the United States Trade Representative now touts its “America First Trade Policy.”
For those in North Carolina concerned about their economic well-being, “America First” may appeal. Even as our state’s overall employment has expanded, manufacturing jobs have declined. They accounted for 24 percent of employment in 1990, but only 10 percent in 2016. Parts of our state were hit hard by closures of textile and clothing mills, and recovery has been slow. On the campaign trail, Donald Trump linked this decline to the North American Free Trade Agreement.
Yet economic analyses as well as historical experience indicate that “America First” trade and investment policies – penalizing U.S.-based companies that locate all or part of their production abroad, withdrawing from current or pending trade agreements – are not a means to prosperity.
First, economic globalization benefits not only U.S. citizens and businesses. Economic openness brings the possibilities of better jobs, higher wages and improved education to individuals in India, Mexico, Vietnam and elsewhere. These effects are by no means automatic, but they are rendered possible by participation in the global economy and by access to U.S. markets. Those developing countries that have achieved high rates of growth have done so by engaging, rather than avoiding, international markets.
Second, even if one thinks in narrower terms, economic growth in foreign countries is a boon for U.S. firms and workers: As foreign citizens’ incomes rise, so to does their demand for electronics, pharmaceuticals and financial services. When U.S. firms can expand their sales to foreign markets, U.S. shareholders and employees benefit. And these internationally-engaged U.S. firms, which tend to be more efficient and larger than domestically-focused U.S. firms, can – assuming appropriate tax policies are in place – be an important source of tax revenue to local, state and the federal government.
If the U.S. turns away from the global economy, other countries will step in to fill the void, capturing these gains. Chinese, rather than U.S., firms may capture the gains from new consumer demand in India, Malaysia and Vietnam. And if the U.S. raises its trade barriers, other countries are likely to do the same. In 2015, 23 percent of North Carolina’s exports were destined for Canada, and another 11 percent went to Mexico. North Carolina’s chemical, machinery, computer, transportation equipment and textile firms – the top five exports to Mexico – would likely suffer were the U.S. to impose border taxes.
Third, freer trade benefits U.S. consumers. The 18th century theory of comparative advantage reminds us that trade is welfare-enhancing. Producing labor-intensive goods in labor-abundant locations like Vietnam lowers prices for U.S. consumers. Additional taxes on U.S. firms that produce abroad will mean that Americans pay more for their clothing, computers and furniture. As such, their wages will not go as far. And since lower-income households spend a greater percentage of their income on consumer goods, these price hikes will fall more heavily on those who can least afford them.
Uneven gains, losses
None of this means that economic globalization benefits every individual and every business in our state. Some lose when trade barriers are reduced. Many apparel and textile jobs came to North Carolina in the late 19th century, as firms moved south to take advantage of lower labor costs and less restrictive labor laws. Many of these same firms moved overseas in the 1980s and 1990s – initially to Latin America but, ultimately, to Bangladesh, India, China and Vietnam. In 2014, China accounted for 39 percent of U.S. apparel and textile imports; Mexico accounted for just under 5 percent.
For those who once worked in such industries, the losses are heavy, the resources for adjustment are meager and the transition can be long and painful. Yet many of those who have lost out materially have not lost out because of international trade and investment. “America First” wrongly places the blame for wage stagnation, for rising income inequality, and for manufacturing job losses on the global economy. But, as numerous rigorous studies have demonstrated, these outcomes are due largely to technological change and automation; to a lack of skills development; and to domestic tax policies.
Withdrawing from TPP, renegotiating NAFTA or imposing a “border tax” on U.S. firms that source abroad will not bring back a significant number of manufacturing jobs. Indeed, while some textile production has returned to our state (North Carolina now accounts for the largest share of textile exports of any U.S. state), the jobs created tend to be higher skill and higher paying, but far fewer, than the previous generation of labor-intensive mills.
Therefore, continuing to engage the global economy; devoting resources to education and infrastructure, especially for less privileged communities; and offering consumers continued access to efficiently-made, foreign-produced goods are the ways forward. And these strategies spill over: Workers abroad will continue to have access to the global economy as a pathway toward prosperity. When their home economies are strong, they will be less inclined to seek opportunities via emigration. Let us not forget the mistakes of the early 1930s, in which nationalist economic policies in the U.S. and Europe brought not prosperity, but economic decline, domestic political turmoil and, ultimately, international conflict.
Layna Mosley is Professor in the Department of Political Science at the University of North Carolina, Chapel Hill.