One of the central themes of Donald Trump’s presidential campaign was that American workers were severely affected by trade. Its story was that the country had signed bad trade deals that were put in place by “stupid” trade negotiators.
Trump’s story was half right. Workers in the United States have been severely affected by the trade, a fact that many members of the general public are still hesitant to acknowledge despite overwhelming evidence.
The base stitch is a simple stitch that has a long pedigree in economics dating back to the famous Stolper-Samuelson
trade theorem. The United States has relatively more highly skilled workers (less than a university degree) than developing countries and relatively fewer less educated workers (less than a university degree). This means that when we open trade to China and other developing countries, we expect more educated workers to benefit and less educated workers to lose.
We have seen this story in action over the past decade in very important ways. From 2000 to 2007, we lost 20% of all manufacturing jobs in the United States. (This was before the Great Recession; the loss of jobs was due to the explosion of the trade deficit during those years, not the collapse of the housing bubble.) We lost 40% of the jobs held by union members in the manufacturing sector in those years.
It’s important to remember that Stolper-Samuelson’s prediction that non-college workers are losers (roughly two-thirds of the workforce) is a balanced business story. The situation is of course worse when the United States has a large trade deficit, because most of what we import is manufactured, a sector that employs a disproportionate number of unskilled workers.
The Stolper-Samuelson effect is also magnified by the fact that we do not have free trade in items produced by the most educated workers. Doctors and other highly paid professionals from foreign countries cannot freely compete with our professionals. We have maintained and even strengthened professional barriers that keep our doctors’ salaries well above levels in other wealthy countries and even higher than their salaries in developing countries.
In short, our trade deals have had the intended and actual effect of redistributing income upward. But it wasn’t because our trade negotiators were stupid, as Donald Trump accused him. In fact, I’m sure the vast majority of our trade negotiators were very smart and hard-working people. They devised deals that redistributed upward income because they worked for the beneficiaries of that upward redistribution.
They wanted trade deals that would make it easier for Boeing and GE to outsource jobs to take advantage of cheap labor in developing countries. They wanted deals that would make it easier for Walmart to build a low-cost supply chain to undermine its competition. They wanted to increase market access for Goldman Sachs in China and elsewhere. And they wanted Pfizer and Microsoft, and now Facebook and Google, to get more money from patents, copyrights, and other forms of intellectual property.
Our trade negotiators have done their job very well. The problem is, their goals were largely antithetical to the interests of most American workers.
Okay, but now Donald Trump has declared trade war on China, on behalf of the American worker. What are the prospects?
Unfortunately, the picture does not look bright. Although China’s “currency manipulation” has been a major theme of Trump’s campaign, this issue appears to have largely disappeared from his trade war agenda. (I prefer to say that China “manages” its currency, because there is nothing hidden or underhanded about China’s intervention; it has an official exchange rate that it aims to maintain.)
Many economists in retrospect insist that China deliberately lowered the value of its currency in the past (they didn’t recognize this at the time), but this is not the case now. The argument is that China has stopped buying large amounts of foreign exchange reserves, the tool used to suppress the value of the yuan. What these economists ignore is that China continues to hold massive amounts of reserves, which lowers the value of the yuan from what its value would be if China held more than normal amounts in reserve.
China’s reserves have the same effect on the value of its currency as the Fed’s holdings in keeping long-term interest rates down. While most economists recognize the impact of the Fed’s holdings of assets, for whatever reason, they ignore the impact of China’s reserves. No one ever said economists were consistent.
By keeping its currency below market levels, Chinese products become more competitive internationally. This allows it to continue to run large trade surpluses, even though a fast growing country like China is generally expected to run large trade deficits.
If Trump focused on currency, he would likely be able to strike a deal with China, which would reduce his trade surplus with the United States. This would create more jobs for manufacturing workers in the United States, which would likely be a boost for the large segment of the workforce without a college degree.
But currency no longer appears to be at the center of Trump’s trade war agenda. Instead, he is pushing for policies like demanding that China respect the intellectual property claims of American companies more. It may be good for Boeing, Pfizer, Merck, and other companies that rely heavily on intellectual property for their profits, but it’s bad news for most working Americans.
There are three reasons why most workers shouldn’t want to see Trump win his intellectual property battles. The first is obvious. If large US companies know they can do offshore operations in China without having to worry about transferring technology to China (a common complaint), they will be more likely to relocate operations to China.
It is truly astonishing that this obvious point never seems to appear in discussions of the United States’ trade war with China. How would American workers benefit from a policy that would make it more profitable for large American companies to outsource jobs to China?
The second reason is a bit more complicated. If China has to pay Merck and Microsoft more money for their patents and copyrights, it will have less money to spend on other US goods and services.
The way it practically works is that, other things being equal, the money China needs to pay Merck and Microsoft will increase their demand for dollars. For example, if they need an additional $ 100 billion a year to pay royalties and license fees to American companies, it increases the demand for dollars in international currency markets by $ 100 billion a year. This will increase the value of the dollar against the yuan, making other American goods and services less competitive than if China did not pay Merck, Microsoft and the rest for their intellectual property.
The third point is that by increasing the enforcement of intellectual property claims, both in the United States and abroad, the government is redistribute even more income
to those at the top. If you need a visual aid to figure this out, think of Bill Gates, one of the richest people in the world. If the government did not threaten to jail anyone who made copies of Microsoft software without Gates’ permission, it is likely that they would still be working for a living.
Economists often talk about how technology rewards people with technical skills in fields like computers and biotechnology. This is a lie. It was our intellectual property policy on the technology that explicitly structured the market to give the Bill Gates crowd more money.
Rather than challenging a policy that has played a significant role in the upward redistribution of the past decade, Trump’s Chinese policy appears to be a further step in that direction. It is absurd both to complain about the upward redistribution of income, as most progressives do, and then to support trade policy explicitly designed to make the rich even richer.
The refusal of most progressives to understand how we structure the markets to redistribute them up is striking. I’m going to skip amateur psychology, but it’s worth noting that the standard view, that free-market winners did it through their hard work and natural abilities, is flattering to those who come in. head. It is even flattering for those who might favor a policy of downward redistribution through taxes and transfers.
Getting back to the trade war in China, a deal designed to help workers would instead focus on sharing knowledge and technology. China, along with India, Brazil and many other developing countries, has in fact been pushing in that direction
in the case of pharmaceuticals. If we had a mechanism for sharing research costs between countries, then new drugs could sell for a few dollars per prescription, instead of a few thousand dollars, since the research costs would have already been paid.
There is a similar story with clean tech. China has more wind and solar power installed than the rest of the world combined. It also sells more electric cars. A forward-looking administration would negotiate ways to share these technologies as quickly as possible, without locking them into patent and copyright monopolies.
At this point, it’s too early to say who will win the US-China trade war, but given the terrain on which the war is unfolding, we can be fairly certain that American workers will be the losers.
This article originally appeared on Dean Baker’s Patreon page.