(07) Trump campaign benefits from criticism of trade imbalances — FT.com

https://www.ft.com/content/ec200c7a-6920-11e6-a0b1-d87a9fea034f

Trump campaign benefits from criticism of trade imbalances

Both US and European policymakers have misdiagnosed what ails the global economy. It is not a short-run, cyclical problem curable with textbook Keynesian stimuli (and exotics like quantitative easing). Rather, it is a long-term structural disequilibrium caused by chronic trade imbalances — the result, in turn, of manipulated currencies, mercantilist practices and poorly negotiated trade deals. Enter, stage centre, Donald Trump.
Before the era of globalisation, which began in earnest in the 1980s, US managers improved efficiency by substituting capital for labour in domestic factories. As globalisation has taken hold, executives have offshored entire factories as a more effective means of maximising profits.
This offshoring trend is mirrored in statistics that reveal a rapid narrowing of the US manufacturing sector. In the 1970s, manufacturing employed 20 per cent of the workforce. Today, that number has dropped to a mere 8 per cent — with more than 5m manufacturing jobs lost since 2000 alone.
To those who would blame this decline primarily on automation, one need only point to Germany and Japan, which retain almost 20 per cent and 17 per cent of their labour force in manufacturing, respectively. These countries are worldwide leaders in robotics.
As the US manufacturing base has narrowed, the rate of productivity has fallen. During the 1970s growth in US unit labour costs was 6.8 per cent a year but it dropped to 3.6 per cent in the 1980s, 1.6 per cent in the 1990s and to 1.2 per cent so far this century.
This productivity decline is likewise mirrored in the rise of outward foreign direct investment. During the 1970s, total US FDI was a mere $109.2bn. With globalisation, FDI grew 59.2 per cent to $174.8bn in the 1980s, $1.1tn in the 1990s and $3tn in the first decade of this century. Today, FDI is sprinting ahead at a $4tn rate.
Of course, not all outbound FDI has been due to offshoring. The decline in US manufacturing employment and the fall in US productivity — and associated slower US growth rates and stagnant wages — have, however, been greatly accelerated and amplified by a series of bad trade deals and chronic currency misalignments that prevent trade from coming back into balance.

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This is hardly the conventional wisdom — whence the continued tilting at Keynesian windmills in both the US and Europe. New studies have, however, cast increasing doubt on the standard "gains from trade" arguments that have both justified and propelled globalisation. A joint study by Justin Pierce of the Federal Reserve and Yale School of Management's Peter Schott attributes most of the 18 per cent decline in US manufacturing jobs from 2001 to 2007 to President Bill Clinton's decision to grant China permanent normal trade relations status as part of Beijing's accession to the World Trade Organisation in 2001. Other studies have concluded the "China trade shock" to be more of a zero-sum game, with American workers and the US economy on the minus side.
The broader lesson here is that while exports do indeed create jobs, it is net exports that ultimately matter. When countries like the US and continents like Europe run massive and chronic trade deficits and countries like China do not allow freely floating currency movements to balance trade, bad things will eventually happen in the forms of accelerated offshoring, slower growth, falling productivity and stagnant wages.
This is the economic and political landscape that the US now finds itself in, and it is no wonder that Mr Trump is so popular. Like Ronald Reagan in the 1980s, the Republican nominee understands America's economic woes can only be addressed through comprehensive structural reforms, particularly in the areas of trade and tax policy.
For example, America's 35 per cent corporate tax rate means businesses carry down only 65 per cent of pre-tax earnings to their post-tax net. Mr Trump's proposed 15 per cent rate promises a 30 per cent higher earnings return than at present, and would thereby greatly improve the attractiveness of domestic investment.
Mr Trump's broader mission is to reinvigorate the US economy and restore faith in the global free trade order by ridding it of cheating and structural misalignments. Europe may want to take a page out of his playbook. This is particularly true when it comes to China. Here, Europe has lagged behind the US in imposing countervailing tariffs against dumping, and is now paying a very heavy price.

The writer, a private international equity investor, is a senior policy adviser to the Trump campaign. Peter Navarro, business professor at the University of California, Irvine, contributed to this article