No doubt the millions of Americans who voted for Trump will claim he will be the economic saviour of the United States bringing back millions of jobs from Mexico and Asia. For anyone who has studied even a basic level of Economics knows that this false promise will only bring disappointment to those who voted for him.
Argentina is a classic example of what happens when a country takes a protectionist and nationalistic approach. During the years of its former President Cristina Kirchner, it gorged on a diet of economic populism including ridiculous import restrictions in the vain hope that everything would be suddenly mass produced by “Industria Argentina”. Things got so bad that at one point women could not even by tampons because they could not be imported and prices sky rocketed with inflation hitting 40%.
Americans would do well to realise that slapping a tariff of 45%, as Trump wants to do on Mexican imports, will not encourage US industry to become more efficient as it will simply isolate them from competition. Moving car production back to the US will simply serve to raise prices, and reduce demand which will lead to less demand for employees. Furthermore all the tariffs in the world will not help prevent technology from replacing humans in producing everything from I-phones to Electric cars.
The US will never be able to compete on labour costs with China or Korea, in the hope that Apple will bring back jobs from factories in Asia to California or Pennsylvania. Even the highest minimum wage in China is just US$293 a month. The US federal minimum wage is just US$7.25 an hour. So the average American worker doing 8 hours a day is already earning 435% of their Chinese counterpart in a month. This is a statistic that Trump knows very well himself given he has outsourced garment production in his own companies overseas.
Corporate tax cuts may help to a point but, given the already hefty US deficit, Trump will quickly need to explain how he plans to finance the deficit if taxes are cut so heavily. Even the cut in UK corporation tax to below 20% did not stop Pfizer from announcing almost 400 manufacturing jobs leaving the UK to move to Europe. Globalisation appears to be a dirty word in 2016, but when Americans start to see the price hikes the UK is already experiencing (e.g. 20% increases in Apple products since Brexit), they will soon realise that they will be worse off on a path of nationalism and protectionism.
Economic populists from Kirchner, to Trump and Nigel Farage can be defeated when progressive politicians show how investing in education and skills will mean higher quality, high skilled work. One only has to look at Germany, which has decide to compete on quality. Germany has consistently invested in apprenticeships, and produces high quality engineering in car manufacturing. It is for this reason that the streets of Beijing where I am this week are awash with Audis and not cheaper Japanese or American cars. It is also for this reason that Germany continues to maintain a huge trade surplus which is the envy of the US and the rest of Europe.
* Chris Key is dad of two girls, multilingual and internationalist. He is a Lib Dem member in Twickenham who likes holding the local council and MPs to account.
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9 Comments
Donald Trump’s view of economics and world trade seems to have its roots in a brand of economic theory that predates Adam Smith and David Ricardo — the mercantilist school, which essentially views world trade as a zero-sum exercise. This school sees the key to wealth as maximizing your exports, limiting your imports and, for good measure, amass as much gold as possible. England’s loss was France’s gain.
This is a long discredited school of thought that Liberals have fought against over the centuries. In the repeal of the Corn Laws in the 19th century and against the conservatives resort to protectionism in the early part of the 20th century. The only beneficiaries of mercantilism are a small class of protected producers, landowners and government officials that set the tariffs. The costs of the policy are borne by consumers in the higher costs the general public must pay for food and basic staples.
The absence of foreign competition to domestic industry has always breeded inefficiency and declining wages as such industries become no longer viable. High prices, lower wages, declining productivity lead to lower living standards and bring on what any government should be doing its utmost to avoid – a general depression.
American (and indeed Western capitalism generally) suffers from a major lack of investment in the kind of vocational skills training needed to engender greater resilience in an under-employed workforce; and a robust safety net that provides the time and space for displaced workers to retrain in growing industries.
When your poor and under educated the prospect of being retrained seems as likely as being trained to be a brain surgeon, however the attraction to follow a man shouting I’ll fix things and you get to kick the elite, now that has a certain pull. The issue is how do you provide a future for the present workforce, because to be blunt you haven’t got time to wait for the newly educated to turn up and save us all.
Free trade is not practiced by successful economies around the world – think China, India, even Germany.
Congress denied President Johnson money for the Vietnam war so he ran a budget deficit
Several Republican Presidents rang large budget deficits to weaken the economic inheritance of their successors and weaken the US federal governments. Bill Clinton inherited a problem and left a surplus, spent by Bush, deliberately leaving Obama a problem.
America is the most powerful country in the world. It is not Argentina. It already is protectionist regarding some of its big industries. Obviously, this does not mean expanding protectionism will work, but it does mean that the attempt could get very aggressive.
Comparing the USA to Argentina???? THe USA has an enormous internal market and an ‘go-get-em’ spirit that has to be seen to be believed…
Stating the obvious “US workers are more expensive than Chinese workers”, if carried to it’s conclusion, means that NOTHING will be made except by such countries…The author’s premise reminds me of the Thatcher years…Coal, Steel, Shipbuilding, Motor manufacturing could all be done cheaper elsewhere. This resulted in large parts of the UK becoming ‘industrial wastelands’ where unemployment and poverty created an uneducated underclass….UK 2016
BTW…I watched ‘Question Time’ last night and laughed out loud at the constant repetition of how the UK can influence Trump/USA and he will be good for Britain….
Having lived and worked in the US I have seen that the UK has ZERO influence on US policies. Trump, as an isolationist, is committed to tearing up the global ‘Free Trade’ agreements that post-brexit Britain has declared will be our salvation…Those who voted for him want goods to be made in the US not UK….
Obama at least said there’d be a queue we could join; under Trump there’ll be a ‘Closed’ sign…
Wait a minute – Trump is planning a major fiscal injection. Over in the Fed, Yellen has hinted – well more than hinted – that she sees the wisdom of allowing inflation to rise above the 2% target for a significant period – so her FOMC is not likely to ‘offset’ Trumps fiscal stimulus and US interest rates will stay roughly where they are throughout that period.
I remember one of the Leavers in a debate saying that once we were out of the EU, we could compete better with India and China; I assumed he meant because without EU labour laws he could employ people at 30p/hour. But obviously I was wrong and UK manufacturing will rise from the ashes*, which is why Tesla has just announced a big investment over here.
Oh, wait, that’s in Germany not the UK. Despite their higher average wages. I wonder why? It couldn’t be because Germany has taken the environment and ‘green jobs’ seriously for years, and because it’s not planning to leave the EU, could it?
https://www.theguardian.com/technology/2016/nov/08/tesla-adds-german-firm-grohmann-to-european-operations?utm_source=esp&utm_medium=Email&utm_campaign=Zip+file+editable&utm_term=199025&subid=12144548&CMP=ema_827
* Actually UK manufacturing has been recovering in recent years, but is still far far below what would be needed to make up for likely loss of financial services etc., and anyway that was before Brexit.
There is no such thing as free trade. I see a uniform pattern of protectionist measures carefully applied. The question is to what extent the US sees it in its interest to strengthen these and bring industry home again. The US is huge and perfectly capable of surviving in total isolation from the rest of the world. Unless, of course, it allows essential industries to depart its shores. And frankly, that is the globalist plan, to undercut the US economy so it is no longer capable of being self sufficient. In the long run the US has to deal with its national debt and budget deficit, and the solution to this is not buying more and more from China simply because it is cheaper than manufacturing inthe US. That simply amounts to dissipating national capital until the nation is so poor its work force becomes competitive. That is an economists solution, but not one acceptible to Trump supporters. If you are the world’s richest nation, the only way to go in a free market , is down.