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Analysis
Nihilism crowding out trade debate

Nihilism crowding out trade debate

Trump rails against America ‘in decline’

by Peter A. Petri in Washington

Fri 8 Jul 2016

Economic integration could become the great casualty of the US election of 2016. The centrepiece of Donald Trump’s campaign is ripping up past US trade agreements, which could make ‘Brexit’ look like a storm in a teapot.

Hillary Clinton has backed away from the Trans-Pacific Partnership that she championed as secretary of state and from President Bill Clinton’s signal accomplishments in international trade. These are ominous signs. But a return to reason remains the plausible, if uncertain, outcome.

For the last 70 years, the world trading system has supported innovation and the diffusion of knowledge. It has made luxuries affordable to middle classes, allowed billions to escape from poverty, and enabled peaceful adjustment to huge transitions in technology and economic power. The world economy has grown much faster than ever before.

The US has championed this system. And with chaos in Europe, American leadership remains indispensable.

The Trump campaign has turned trade into a monster. Never mind that trade plays a small role in US economic activity; it accounts for only 15% of GDP (and manufacturing trade for less than 10% ). Never mind that US trade trends are positive. Exports have grown faster than output and are well above their 2008 pre-crisis peak. The trade deficit narrowed to 2% of GDP in 2015 from 4.5% in 2008. Even with a strong dollar, US firms are exceptionally competitive in energy, agriculture, advanced manufacturing, technology and services. The US still runs a trade deficit. But this is a necessity as long as the dollar remains the world’s preferred reserve currency.

The 2016 election comes amid massive technological and international change. World economic growth is sluggish and productivity gains and wage increases have stalled in many countries. The distribution of income has tilted toward the owners of capital and those prepared for the technology-driven economy.

None of these problems is unique to the US and few have anything to do with trade. In fact the US economy is performing better than most others. As technological leader, it is relatively well positioned to manage change.

Yet Trump merely sees America in decline. He attributes this to decades of ‘stupid’ trade agreements and singles out Mexico and China as stealing jobs from the US. In fact, the North American Free Trade Agreement enabled US vehicle and other industries to remain competitive – despite strong challenges at the time from Japan and Korea – by establishing critical supply chains.

He also blames America’s supposed decline on China’s admission to the World Trade Organisation, which mainly committed China to global rules and difficult domestic reforms.

Trump’s claim that the US is ‘losing $500bn a year’ on US imports from China ignores 200 years of economics – imports are not losses, but goods valued by us. Imports also support export industries and their supply chains, and no doubt help to sell Trump condominiums.

The most pernicious aspect of these nationalist attacks is that they ignore facts, evidence and accumulated knowledge, and put fanciful opinion above difficult analysis.

Michael Gove, UK justice secretary and a leading campaigner for Britain to leave the EU, declared during the campaign that England had ‘had enough of experts’. Trump, too, explains that ‘my primary consultant is myself’.

Such nihilism crowds out reasoned debate and leads to outlandish proposals, including a wall against Mexican migrants and retreat to the mythical days when the US made ‘everything here’. Ratings agency Moody’s says parts of Trump’s plan would lead to recession. I have reported that protectionist measures against Mexico and China would cause large negative short-term shocks in the US, as well as long-term income declines.

Some argue that Trump will not carry out his promises. But that is not a risk that Americans can afford to take. The solution is a return to evidence-based analysis and sensible debate.

The next US administration needs to reassure allies, trade partners and investors that America will not retreat from a constructive international role. The TPP should pass quickly – it may never have as good a chance as this year.

The US must also adopt forceful solutions to income inequality and support for workers adjusting to change. America’s middle classes cannot be allowed to drift away from solutions that are likely to work.

Such positive scenarios are within reach. Prediction markets are betting heavily that Clinton will win the election, making Trump’s fantasies and political style anathema to future candidates.

The turmoil caused by the UK vote should help voters understand that meaningful plans matter. Even Republican voters are dissatisfied with Trump’s lack of substance, so a discussion of substantive policy options may yet begin. The US has a record of making good decisions even as it flirts with occasional disastrous ones.

Peter A. Petri is a Visiting Fellow at the Peterson Institute for International Economics and Carl J. Shapiro Professor of International Finance, Brandeis International Business School. This forms part of OMFIF’s series of commentaries on the US presidential election on 8 November.

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