How Trump Should Address Unfair Trade With China

October 23, 2018

Editors note: CPA fully agrees that we must fix dollar overvaluation to fix the trade deficit. We disagree with our good friend Rob Scott on his assessment of tariffs, which are important for national security, to optimize the composition of trade and jobs and to fix foreign trade cheating.

During the 2016 presidential campaign, Donald Trump cited my research prominently when making the case that unfair trade with China had grievously hurt workers in the United States. It wasn’t the first time my research had been referenced during a political campaign; Hillary Clinton cited it in a similar manner in 2007. But it was the first time my data informed a subsequent executive branch policy that I view with dismay: namely, the Trump administration’s heavy-handed approach to trade, which has involved imposing $250 billion worth of tariffs on Chinese goods.

[Robert E. Scott | October 23, 2018 | NY Times]

The president’s tariff approach ignores a more significant problem — the currency misalignment of the dollar and the Chinese yuan — and so could end up doing more harm than good.

Mr. Trump’s presidential campaign sought to channel the anger of many Americans over unfair trade. I understand this anger, having documented in my research the millions of manufacturing jobs lost in the United States as a result of flawed trading relationships with China and Mexico. But rhetoric doesn’t always equal insight, and the president’s approach ignores two key facts.

First, trade deals on their own don’t have much potential to help America’s workers. Contemporary trade agreements may be nominally concerned with rules and tariffs, but their primary outcome has been to tilt the playing field in favor of foreign investors, which merely continues a cycle of outsourced production. Tinkering at the margins, as evidenced by recent rewrites of the United States-Korea Free Trade Agreement and the North American Free Trade Agreement, alters mostly just the optics of trade policy. It sends a message that the president is “being tough.” But it’s unlikely to have a meaningful impact.

The second fact is that currency misalignment — not trade deals — is the single most important driver of growing United States trade deficits. From 1997 to 2014, China purchased $4 trillion in United States Treasury bills and other assets to bid up the value of the dollar relative to the Chinese yuan. (China sold some of its reserves in 2015 and 2016 to stabilize the yuan, but this year it again bought foreign assets to keep the yuan from rising.) This has made China’s currency artificially cheap, creating what is effectively a huge subsidy for Chinese exports to the United States. It also imposes a de facto tax on all United States exports to China.

China is not the only country doing this. Between 2006 and 2013, central banks in roughly 20 nations including China financed virtually all of America’s trade deficit. Growing United States trade deficits with these countries now account for most of the five million manufacturing jobs — and nearly 90,000 factories — lost in the United States in the past two decades. As my latest research demonstrates, trade with China alone has eliminated 3.4 million jobs in the United States since 2001, affecting every state and congressional district. Notably, the hardest-hit industry was not toys or apparel, but computers and electronic parts — long thought to be a source of America’s competitive advantage. It lost 1.2 million jobs.

Growing trade with low-wage countries like China has decimated the earnings of 100 million non-college-educated workers in the United States — two-thirds of the work force. And job losses have devastated entire regions of America’s industrial heartland, especially in the upper Midwest. Not surprisingly, this includes some of the once reliably Democratic states that President Trump carried in the last election.

Although China is no longer officially manipulating the value of its currency, the dollar remains significantly overvalued — in part because China is sitting on more than $3 trillion in foreign assets. The dollar is now overvalued by at least 25 to 30 percent against not just the Chinese yuan but also the Japanese yen and the euro. Notably, the dollar has risen further since Mr. Trump was elected, increasing roughly 6 percent in trade-weighted value since January 2018 alone, which further encumbers domestic manufacturers.

Unfortunately, currency misalignment can’t be fixed by updating trade deals. It’s a global problem driven largely by continuing foreign demand for United States securities and financial assets. Since 2014, private foreign investment in American financial assets has increased the dollar’s real, trade-weighted value by 20 percent. The dollar must be realigned against not just the Chinese yuan but also against the currencies of countries that have been running chronic trade surpluses for many years.

Previous Republican presidents have taken steps to tackle an overvalued dollar. (In 1971, for example, Richard Nixon imposed a temporary import surcharge on all imports; it led to an agreement four months later to lower the dollar’s value.) What’s required is the political will to stand up to powerful actors like Walmart and Apple that benefit from continued currency misalignment. The president should apply leverage on America’s trading partners — a fee on incoming foreign capital, tariff threats or coordinated currency intervention — to realign the dollar.

Congress could try to force the president’s hand, threatening to impose significant taxes on capital inflows to reduce demand for United States financial assets. But the authority to negotiate on currency rests in the hands of the executive. And until President Trump grasps the severity of the dollar problem, making a “great deal” on trade agreements will matter little for United States manufacturers.

Showing 4 reactions

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  • Franklin Kirkland
    Scott is right to point out that the updated FTAs are mostly eyewash and will only marginally impact trade deficits. But no reasonable adjustments in exchange rates will erase the trade deficits either. For among other reasons is that over 100 types of trade barriers can also be invoked by mercantilist nations. Good that Bishop references Buffett, who proposed a system of earned import certificates to force balanced trade. This proposal invoked a “closed loop”, or feedback, mechanism to drive the deficit to zero. The more practical implementation of this fundamental principle is a bilaterally imposed duty that is proportional to the bilateral trade deficit with each country. This not only would force balanced trade over time as it is phased in. but also restore goods and services choices to the market place. True free, fair and balanced trade. Anything short of this will inevitably fail.
  • Bruce Bishop

    Here is a link to Warren Buffett’s 2003 Fortune article, in which he recommends that our government mandate “Balanced Trade,” with China, over a five-year phase-in period.

    I have been following this issue since 1998, when I realized that my career as a consultant to manufacturing, and as a professor of Industrial Engineering was over. LIke thousands of others, I found myself, in midlife, with no market for my twenty years of manufacturing experience, or my hard-earned college degrees.

    The problem was not “greedy” Walmart. Sam Walton fought hard to keep U.S. manufacturing jobs here while all of his competitors (K-Mart, Penneys, Sears, and many others) were busy offshoring to the Pacific rim. When it was no longer possible to compete with Chinese prices, Walmart finally gave in and joined the crowd.
  • Bruce Bishop
    China can manufacture anything we can manufacture, at one-tenth the cost. This renders “currency manipulation,” and “tariffs,” irrelevant. There is no way we can overcome that wide a cost gap

    The globalists have argued that “Yes, Chinese labor is one-tenth of our labor cost, but labor is only 15% of product cost, so it’s not that big a deal.” What they are missing, or avoiding, is that China has a ten to one advantage across all manufacturing costs. Material, labor, overhead, energy, transportation, construction, are all done with cheap Chinese wages, or salaries. Not only do Chinese workers earn one-tenth of what Americans earn, but, also Chinese managers, engineers, truck drivers, construction workers, miners, maintenance workers, quality control workers, — everyone who contributes to the production of a product — earn about one-tenth of what Americans earn for the same jobs. And, oh yeah, China has zero “compliance costs” which are a major cost factor for U.S. companies.

    In 2003, Warren Buffett declared that offshoring of manufacturing jobs would eventually destroy our economy. He recommended that we restore “Balanced Trade,” by mandating a reduction of the trade deficit by 20% per year over a five-year phase-in period. Rather than allow tariffs to pick “winners and losers,” by mandating a forced reduction in the trade deficit, the free market would determine which jobs to bring back, and in what order. You can read Buffett’s article if you Google “Balanced Trade.” HIs original article, which appeared in Fortune, was republished by Fortune in 2016.

    China’s cost advantage is such that they can absorb any tariff we might impose, and still keep our manufacturing jobs. This is a time for drastic measures.
  • Dave Hancock
    Love the lip service given for the loss of jobs; evidently, this individual is not one of those who lost ‘most everything’. Confidence is the value in the dollar and not much else. Workers every day are faced with what the dollar will buy. Walmart, like others, will now anti-up for their pre-earned profits. However, Walmart and others have the ability to raise prices and lower cost. Some have already begun this task; been in a Walmart lately? When it comes to investing; bring all corporate off-shore deposits back to US Banks, and let US invest in US. Walmart and others made their bed and may now have to deal with a few bugs. Chinese Leaders are Big Boys with broad shoulders who can withstand honest talk, otherwise, they wouldn’t be there. So don’t sell US short nor demean their intelligence.