Best Drupal HostingBest Joomla HostingBest Wordpress Hosting
WORLD POLICY ON AIR

World Policy Journal is proud to share our weekly podcast, World Policy On Air, featuring former Newsweek On Air host David Alpern with timely insights from global affairs analyst Michael Moran of Transformative.io, risk and geostrategy consultants. Click here to subscribe on iTunes!

THE LATEST

AddToAny
Share/Save

Trump’s Ineffective Protectionism

By James H. Nolt

President Donald Trump’s rhetoric on trade is unprecedented among American presidents or even major party candidates since before World War II. Many still debate whether Trump’s protectionist “America First” trade rhetoric was just empty campaign posturing or genuine policy commitment. Recently, further statements and trade actions suggest Trump does intend to use protectionism more broadly than did any of his recent predecessors, though the net effect will not necessarily be broadly protectionist.

Trump’s first major action upon taking office was to repudiate the Trans-Pacific Partnership (TPP) trade deal negotiated among 12 Pacific Rim nations, including the U.S., Canada, Mexico, and Japan. This was widely expected, since the top three presidential candidates from both U.S. parties had criticized the agreement. On April 17, Vice President Mike Pence also criticized the separate U.S. bilateral free trade agreement with South Korea—as did Trump himself more recently—citing the widening U.S. trade deficit with South Korea (from $16.6 billion in 2012 to $27.7 billion in 2016) and obstacles to U.S. companies operating there.

While Trump has long criticized trade agreements such as TPP and NAFTA, his first industry-specific trade actions involved placing or investigating tariffs on intermediate or primary goods, including steel, aluminum, and softwood lumber. These are significant because all are inputs purchased by other American industries. Steel is used especially in construction and automobiles, aluminum in aircraft and many other manufactures, and lumber mainly in home building. Using tariffs to raise the price of such intermediate products increases the cost of production for the industries that consume them, making these industries LESS competitive in international trade.

Trade economists have long used a useful concept, effective protection, to consider the overall effect of trade restrictions and tariffs on the prices, and therefore competitiveness, of various industries. Calculating effective protection depends on knowing the value added at each stage of a manufacturing process. This is expressed using matrices that show the proportion of each industry’s output that is used as input for another industry. The result can be effective protection rates that are much different than what nominal tariff rates suggest. That is why measures such as average tariff rates can be misleading. It is actually possible to lower some tariffs, for example, on primary or intermediate products, and thereby increase the effective protection on final products. The reverse is also true, as in the case of Trump’s recent actions. Effective protection for many U.S. industries will actually decrease, making foreign goods more competitive compared to domestic goods.

Many industries today manufacture globally. They import materials and component parts from around the world. If the prices of important inputs become more expensive because of tariffs that affect only those components, not the final output of the industry, then that industry’s products will become less competitive. The rate of effective protection can even be negative if tariffs apply to the industry’s inputs but not to its output. Negative effective protection makes competiveness even lower than what it would be if universal free trade prevailed. This outcome will be likely if the current trend of Trump’s trade actions continues.

Another important distinction in trade economics is between tradable and non-tradable goods and services. Non-tradable goods and services are things that cannot be imported or exported, but must be performed within the national economy. Many services are non-tradable, such as transportation, restaurant meals, haircuts, sporting events and concerts, etc. The enormous construction industry is also non-tradable, since houses, bridges, and commercial buildings must be built within the economy where they are used. They cannot be built in one country and then exported to another. In general, if tariffs increase the price of importable components of construction, such as steel and lumber, then all new construction is more expensive. Non-tradable goods and services are immune to direct competition from imports, but can still be affected indirectly by changes in the prices of tradable goods.

Introductory courses in trade theory do not consider the asset price effects of protectionism, but these are especially relevant in the case of real estate. Remember, assets are all those things that constitute wealth, including tangible assets like real estate and factories, plus more intangible assets like financial securities (stocks and bonds) and money. Of course, the stock price of any industry that gains protection will tend to rise. A tariff on steel imports would generally increase the value of steel company stocks. On the other hand, a tariff on an input would tend to lower the value of a company that consumes it, especially if it is a vital input. Thus U.S. tariffs on car parts coming from Mexico would tend to decrease the value of U.S. automobile company stocks. These are pretty obvious effects.

Real estate and construction are more complicated. Increased prices of steel and lumber due to tariffs would adversely affect the construction industry, causing new construction to increase in price. Not all of the cost could be passed on to consumers, so construction companies themselves would take a hit, somewhat depressing their stock values. On the other hand, owners of existing real estate, like Trump and many of his associates, would benefit from existing properties gaining value as new construction becomes more expensive. Less or more expensive new construction means less competition for existing properties.

Therefore, although Trump has advertised his “America First” trade actions as good for American jobs, what he has actually done on the trade front so far tends to increase costs for industries and therefore decrease competiveness and job growth. It is possible, if he and Congress ever manage to enact a tax reform bill, that tax changes could benefit the competitiveness of tradable products made in the U.S., but the details of any such bill are yet unknown. If the tax changes (as seem likely from what is known now) largely favor tax breaks when ownership changes (such as eliminating the inheritance tax and reducing capital gains taxes), this will not create jobs. Changing the ownership of any asset does not employ people—only increasing real investment in means of production or increasing utilization of existing productive facilities can do that.

Recently, not only in the U.S., but also worldwide, productive investment spending has been rather sluggish because the growth of world demand, too, is sluggish and many industries already have significant excess capacity. Steel is a clear case of this. There is no point for profit-seeking capitalists to add jobs unless consumers have more income to spend. Adding to the wealth at the top tends only to create bubbles in asset prices as rich people compete for ownership of the choicest real estate and the hottest new asset positions. Few jobs are created this way.

Contrary to the ideology of increasingly fashionable anarcho-conservatism, concentrating wealth at the top does not trickle down, but merely promotes further concentration as asset prices soar and those owning little are left behind. The only way to increase real output and expand good-paying jobs is to invest directly in job-creating activities. Inflating asset prices benefit only those who own them, concentrating wealth in the hottest markets while labor incomes stagnate throughout much of the world.

*****

*****

James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.

[Photo courtesy of SumOfUs]

Share/Save

Post new comment
The content of this field is kept private and will not be shown publicly. If you have a Gravatar account, used to display your avatar.
CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.
Image CAPTCHA
Enter the characters shown in the image. Ignore spaces and be careful about upper and lower case.
FALL FUNDRAISER

 

Around WPI

Jihad in Sub-Saharan Africa 

This paper, “Jihad in Sub-Saharan Africa: Challenging the Narratives of the War on Terror,” examines the history of Islamic movements in Africa's Sahel region to contextualize current conflicts.

World Economic Roundtable with Vicente Fox 

In this World Economic Roundtable, former Mexican President Vicente Fox discusses his current quest to make his country a hub for technology. 

Intern at World Policy


Want to join our team? Looking for an experience at one of the most highly sought-after internships for ambitious students? Application details here.

 

Al Gore presides over Arctic Roundtable 

As the United States prepares to assume chairmanship of the Arctic Council in 2015, this inaugural convening of the Arctic Deeply Roundtables launches a vital conversation for our times. 

SPONSORED

When the Senate Worked for Us:
New book offers untold stories of how activist staffers countered corporate lobbies in the U.S.


MA in International Policy and Development
Middlebury Institute (Monterey, CA): Put theory into practice through client-based coursework. Apply by Feb. 1.


Millennium Project’s State of the Future 19.0: Collective Intelligence on the Future of the World

WEEKLY NEWSLETTER

To learn about the latest in media, programming, and fellowship, subscribe to the World Policy Weekly Newsletter and read through our archives.

World Policy on Facebook

FOLLOW US