US President-elect, Donald Trump, has vowed to drop out of the Trans-Pacific Partnership (TPP) on his first day in office, scuppering the prospective trade alliance between 40 percent of the world’s population. After spending his campaign brashly attacking China for gaining unfair advantages in trade, Trump’s first action in office will inadvertently hand China exactly the trade advantage he had hoped to avoid. While China was initially excluded from the deal, if Trump’s plans go ahead, the door will be left open for China to pursue its own trade alliance in the Asia-Pacific region.
The move against the TPP is the first indication that Trump is serious about following through on his bold campaign rhetoric
The move against the TPP is the first indication that Trump is serious about following through on his bold campaign rhetoric – which goes directly against economic orthodoxy, championing protectionist policies as a means to boost growth and employment. “Under decades of failed leadership, the United States has gone from being the globe’s manufacturing powerhouse – the envy of the world – through a rapid de-industrialisation… I am the only candidate in this race who will bring our manufacturing jobs back”, Trump wrote in an op-ed for USA Today on March 14. But, as Trump endeavours to restore the country’s manufacturing greatness by performing open-heart surgery on the US economy, leading economists warn of the negative consequences such a move could inflict.
A picture of what could have been
It is intrinsically acknowledged that by pursuing trade alliances and free trade, an economy will naturally gravitate to the manufacture of products it can produce relatively efficiently – amounting in a boost, but not without loss. “Freer trade has always been known to cause losses to some who are displaced because of greater international competition”, Steven Suranovic, professor at George Washington University and author on the topic of globalisation, told World Finance. “The groups that will lose are the owners and workers who are stuck in older industries that are not so dynamic. Companies in these industries will face pressures from firms abroad who have lower production costs and can now sell their products in the US market.”
Despite these challenges, Suranovic regards the TPP as a missed opportunity for the US, saying: “Free trade increases competition and that is what spurs innovation and growth. Think about a dynamic industry like automobiles… here in the US we can buy cars made in the US or in Germany, Japan, Sweden, etc. These firms are constantly trying to improve their products by both lowering costs and increasing quality because they have to compete with so many other firms. As a result, cars are more reliable and have more features now than ever before.”
While globalisation has played a role in increasing unemployment, the emphasis on protectionism mistakes the predominant cause
An independent report by the United States International Trade Commission also presents a broadly positive forecast of the US economy under the TPP, estimating an overall improvement for export industries, jobs and growth if adopted. The report also predicts the agriculture and service sectors would see a substantial boost, while manufacturing and some natural resource sectors would be expected to contract. The real world impact of this contraction was estimated at an $11bn blow to manufacturing output and a reduction of 0.2 percent to employment in the sector.
Despite the likelihood that this would be outweighed by gains elsewhere in the economy, the prospect of a blow to manufacturing industries defines Trump’s opposition to free trade deals. His vision of a booming manufacturing sector therefore makes a sacrifice, the US will lose out on the broad benefits that free trade can bring, namely: higher demand for exports, efficiencies, greater consumer choice, economic growth and lower prices.
A picture of what is to come
Trump’s rhetoric has always come back to unemployment: focusing heavily on the manufacturing sector and its relative decline over the past 40 years. In an effort to bring jobs back to the US, Trump has promised to introduce tariffs on Chinese goods and stop “disastrous” trade agreements like the TPP from coming to pass.
Estimates of the potential damage the TPP could have in store, coupled with promises of tariff protection, create the impression that Trump’s victory will be a big win for those in the manufacturing sector. However, while globalisation has played a role in increasing unemployment, the emphasis on protectionism mistakes the predominant cause. The reality is that technological developments and increasing mechanisation have been at the heart of the unemployment problem in the sector. As production lines become increasingly automated, low-skilled manufacturing jobs are slashed in favour of machines; these are jobs that no amount of protectionist policy can bring back.
Moreover, while the potential benefits of Trump’s policies are concentrated in the manufacturing sector, the negative implications would be much broader. Suranovic believes: “If Trump were able to put up a trade wall of 45 percent tariffs against China, it might not take long for the prices of appliances and many other items to rise for all Americans, and this would be especially damaging for lower income groups.”
The result would be just a small victory in a losing battle to retain manufacturing jobs, and would come at a price to the rest of the economy
Furthermore, if Chinese tariffs were imposed, jobs would not simply revert back to the US. Gary Burtless, economics expert from the Brookings Institution, told World Finance: “US companies heavily dependent on Chinese manufacturing, including Apple, would probably look for alternative sources of production, but it would be surprising if those alternatives are highly concentrated in the US. For example, iPhones might be assembled in Taiwan, Malaysia, or Korea rather than the US. Still, I would expect some growth in US manufacturing and hence in US manufacturing employment and wages.”
The cost of providing this moderate boost to manufacturing, however, will be felt keenly in the wider economy, particularly as retaliation looks increasingly inevitable. An op-ed piece in China’s Global Times – a state-controlled newspaper – asserts that China will take a tit-for-tat approach in response to US tariffs: “A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted.” Moreover, Burtless emphasised: “The US is a major exporter of non-manufacturing services such as financial services, and an international trade war might hurt the exporters of those services.”
Now that Trump has successfully utilised his protectionist platform, his rhetoric will, at least in part, become reality. The manufacturing sector once spearheaded growth and prosperity in the US, making the stance Trump’s campaign took a clever play on nostalgia. However, if he continues to follow through on the trade-policy his campaign promised, it wouldn’t be the victory for US jobs that Trump promised – protectionist measures certainly wouldn’t automatically restore US manufacturing jobs to those communities that have lost out as a result of free trade. The result would be just a small victory in a losing battle to retain manufacturing jobs, and would come at a price to the rest of the economy.
As the US faces falling behind economically, it also stands to lose international influence. By reversing the TPP, Trump has put the reputation of the US as an international leader on the line, bringing years of negotiations to a shuddering halt. Furthermore, the TPP was a framework through which the US could write the rules of trade in the region; a power that will now be passed to China should it fill the gap with its own trade agreement. Trade talks have already begun at the Asia-Pacific Economic Co-operation summit, promising greater trade liberalisation for those countries let down by the US and presenting a new opportunity for China to establish itself as a true international leader. Trump will have to face the reality that his efforts to put “America First” are backfiring, and could mark a pivotal moment in the balance of economic might between the two superpowers.