Trump on globalisation: correct diagnosis, wrong solution
|Date:||01 March 2017|
The one issue that United States President Donald Trump has been exceptionally clear about is globalisation. He wants to protect the US economy from outside competition, because ‘jobs have disappeared to China’.
Does he have a point? Yes. That is to say, his diagnosis is correct, but his answer is wrong.
Most economists will tell you that the effects of globalisation are positive. This view rests on the argument that a global division of labour -- each country or company taking care of what it does relatively best -- leads to income growth. Free trade stimulates this process.
Research shows that this is correct, but only for the average person. However, most people are not average. Trump points towards the predicament of the middle class who, over the last 20 years or so, saw their incomes decline and also experienced job losses.
According to Trump's campaign: "Since China joined the World Trade Organisation, Americans have witnessed the closure of more than 50,000 factories and the loss of tens of millions of jobs." Labor market studies indicate that this process has especially hit the middle class, and in this respect Trumps’ diagnosis seems correct.
His proposed solution to this problem is protectionism. He plans to renegotiate the North American Free Trade Agreement (NAFTA), he has already withdrawn from the Trans-Pacific Partnership. And ongoing TTIP negotiations have been postponed, most likely indefinitely.
Trump is not alone in his free trade skepticism. The United Kingdom voted to leave the European Union. In France Marine le Pen plans to leave the EU when she wins the French elections. And even in a country like The Netherlands, that earns a third of its income on foreign markets, some politicians are playing with the thought to leave the EU.
Protectionism, however, is the wrong answer to the problems of the large and unhappy middle class: border taxes make products more expensive, both for consumers and firms who have to pay more for the intermediate products they import. The result is real income decline and as a result less spending on domestic products (with job losses as a consequence). Because US border taxes make US products more expensive it also leads to a loss of competitiveness on foreign markets of US firms.
Think of Ford that has to compete with Volkswagen in the rest of the world: Volkswagen does not have to pay Trump's border taxes on intermediate products. Furthermore, Trump expects that his border taxes will stimulate firms to return to the US. This might happen, but without the jobs he is hoping for. Instead of jobs, robots will return.
This points towards a second reason the middle class has a difficult time: automation. Besides globalisation, jobs are lost because computers and robots are replacing workers. Trump, however, is silent on the effects of robots.
Whatever the solution, unfortunately for Donald Trump and his fellow travelers in the UK, France and The Netherlands, there are no easy answers to complex questions. One can only hope that the elections in Europe will stimulate a serious debate on the effects of globalisation and automation; politicians will have to find some middle ground between naïve free trade and simple protectionism.