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competition, foreign direct investment, free trade, Jobs, manufacturing, manufacturing trade deficit, Ronald Reagan, tariffs automotive, The Race to the Bottom, Trade, transplants, Trump, {What's Left of) Our Economy
On the surface, this was just another thoroughly predictable Washington Post editorial attack on President Trump’s trade policies and defense of the freest possible global commerce – a conclusion I think fair-minded people would support even if they oppose its proximate target, the possibility of new U.S. auto tariffs. But the distinctive nature of American and global automotive production and trade patterns on the one hand rendered one of these predictable trade arguments puzzling at best and downright bizarre at worst for anyone caring to think about it even momentarily: the claim that such tariffs would spur a “fall off” of the automotive quality enjoyed by American consumers because existing U.S.-based producers would face “less healthy competition.”
Let’s assume that the Post – and supporters of the longstanding trade policy status quo – are right in arguing that the least-fettered trade generally forces businesses to offer better and cheaper products in order to maintain and increase sales and profits. Does this maxim really apply to the automotive industry any more?
As widely noted, this industry is one of the world’s most globalized, and nowhere is this truer than in the United States. The Post recognized this reality as well – but in a way that casts major doubt on the relationship at least in this case between trade and the benefits of cross-border competition.
In the editorial’s words, “No doubt U.S. manufacturers, both U.S.-headquartered and Asian and German ‘transplants,’ and their workers would reap a windfall” from Trump-ian tariffs. By my recollection, this is the first time a commentary on trade policy has acknowledged that foreign-owned companies producing in the United States would benefit from American trade barriers as surely as their domestically owned counterparts.
More important, this observation leads logically to a game-changing conclusion: Trade barriers – in at least such instances – can generate a win-win outcome for Americans. The benefits of foreign competition (like better quality and lower prices) can be preserved for American consumers – since the foreign-owned firms producing domestically inevitably bring to their U.S. operations their distinctive management approaches and other strengths.
Yet because these operations have been transplanted to U.S. soil, the employment-related gains will flow mainly to American workers. The broader manufacturing-related gains (i.e., high production multipliers, strong productivity growth – at least for much of the nation’s recent history – and robust innovation activity), can mainly remain inside the U.S. economy.
Even more revealing: These foreign auto transplants initially set up shop in America partly because of trade curbs imposed by the Reagan administration. And American trade barriers in that era played a role in drawing foreign steel-makers to the United States as well. (The desire to hedge against exchange-rate risks also figured prominently in such investment decisions, along with the gains from producing abroad versus exporting predicted by the product cycle theory.)
Nor is there any reason to believe that tariffs and quotas won’t achieve similar successes today – unless you want to argue that America’s gargantuan market doesn’t give its leaders equally gargantuan leverage. In fact, as my book The Race to the Bottom reported in 2000, such restrictions have been so successful even for much smaller economies (along with China) that they’ve become standard operating procedure around the world. Here’s just one recent example of their effectiveness.
Since not all industries are the same, tariffs surely are no panacea for solving America’s intertwined problems in trade and manufacturing. (For those doubting their existence and relationship, consider that domestic manufacturing production is still down in real terms since the late-2007 outbreak of the last recession, and that this year’s U.S. manufacturing trade deficit is on course to top $1 trillion.) But the Post’s unwitting insight unmistakably reveals how and why trade curbs can help make major contributions to the American domestic economy. Time for the Trump administration to start thinking more carefully and strategically about how to accomplish these goals. And for free trade ideologues in the American chattering class to start opening their eyes.
RealityChek 