Would a Trump or Sanders Trade Policy Create Jobs?

Bernie Sanders scored a major upset in Michigan on Tuesday, leaving statisticians scrambling to explain their failure to predict it.

Bernie’s victory has been attributed to his willingness to call out Hillary Clinton for her past support of trade agreements like NAFTA and the TPP. This is a horse that Donald Trump has already been riding to victory across the early primary states. Some have even suggested that this shared critique gives Sanders a tool to beat back a Trump presidency that Hillary could not credibly wield.

What are their positions on trade? Trump has vacillated between celebrating globalization, to calling trade deals like NAFTA and TPP disasters, bashing trade negotiators as idiots, to pledging a 20 percent tariff on all imports, to a 35 percent tax on Mexican goods, to a 45 percent tariff on Chinese goods, to declaring China a currency manipulator, to deploying the U.S. military to the area to bully China at the trade negotiating table. For his part, Sanders has proudly touted his votes against each trade deal that came before Congress during his time in office, and led the effort to repeal permanent normal trading relations with China. According to his  campaign website, he pledges to reduce inequality by

Reversing trade policies like NAFTA, CAFTA, and PNTR with China that have driven down wages and caused the loss of millions of jobs. If corporate America wants us to buy their products they need to manufacture those products in this country, not in China or other low-wage countries.

The two candidates have noticed their close alignment on this issue, with Trump telling reporters

“Well it’s very interesting that you say that, because the one thing we very much agree on is trade,” Trump said on CNN’s “State of the Union.” “We both agree that we’re getting ripped off by China, by Japan, by Mexico, by everybody we do business with.”…

“The difference is, I can do something about it. I’m going to renegotiate those trade deals and make them good – and, believe me, they’re going to be really good,” he said.

“Bernie can’t do anything about it, because it’s not his thing,” he added. “He won’t be able to do anything about it. I’ll create absolute gold out of those deals, whereas right now we’re losing tens of billions and even hundreds of billions of dollars.”

“I will create gold, and Bernie will just talk about how bad they are.”

Are these plans feasible? As a technical matter, a Bernie presidency could withdraw from NAFTA and the WTO on six months’ notice. Re-negotiation would be harder, in that our major trade deals involve many countries, and a super-majority of countries (if not all) would have to sign off for any changes. Negotiators have spent over 15 years trying to conduct a new round of WTO negotiations, to very little success. And if you ask for something, you’re going to have to give something. Would Sanders or Trump allow other countries to violate U.S. copyrights in exchange for higher steel tariffs? Maybe. Or would some other sector of the U.S. economy pay for the trade-off?

More importantly, would these plans be effective in creating jobs? I think of the trade-jobs link as involving three policy options: the ineffective, the indirect, and the direct.

First, let’s look at an ineffective approach. This is when the U.S. imposes tariffs on goods from specific countries like China. The Obama administration did this with Chinese tires in its first term – a move permitted under special accession rules for China in effect from 2001 to 2013.

There are two problems with this approach. First, it allows U.S. retailers to simply shift their purchases from China to third countries. Economist Sunghoon Chung and coauthors recently crunched the numbers, and they found that the tire safeguard created no jobs because imports from Canada and other countries simply replaced the Chinese supply. Second, there would be a litigation cost. It is hard under our trade agreements to selectively penalize China. They became full members of the WTO in 2001, all WTO members are to be accorded most-favored nation treatment, and there is no provision for expulsion. Similar story goes for Mexico under NAFTA. Dispute settlement bodies under both agreements would almost certainly find that the U.S. violated its trade obligations, and authorize sanctions.

The indirect approach is to impose a tariff on U.S. imports from all countries, at least in certain sectors. As Ha-Joon Chang has documented, this is not a crazy strategy: most now rich countries used such protectionism to develop their so-called “infant industries.” It tackles the trade diversion problem of the country-specific tariff. Even standard trade theory suggests that tariffs can create jobs in import competing sectors.

There are challenges to this approach. First, there are higher prices to consumers. Domestic producers will respond to the higher price on imports by raising the prices they charge to near that level. So there is  concentrated benefit to a few workers, at a diffuse cost to the economy as a whole. Second, it would trigger litigation. The tariff rate Trump is discussing is above the average rate that the U.S. has committed to at the WTO. To go above this is to invite litigation and ultimately retaliation. While the WTO permits countries to impose temporary tariffs, the legal bar is very high and has never been met.

There are also political factors that inveigh against the indirect approach. As World Bank economist Chad Bown and co-authors wrote in a recent paper, economies are so tightly integrated that our exports contain imported parts, and our imports contain products made in America. For this reason, it’s difficult to mobilize industry in favor of protection: their global supply chains have made them no longer purely national companies. And retaliation is a political mine field for other reasons too. When the Bush administration imposed steel tariffs in the early 2000s, the WTO ruled against us, and other WTO partners responded by targeting the industries of states Bush needed to win in the 2004 election. As legal scholar Jide Nzelibe writes…

The EC understood that the disputed steel tariffs would help shore up political support for President Bush in certain swing states like West Virginia, Pennsylvania and Ohio. In response, the EC specifically targeted a range of industries for retaliation located in states that are likely to be political battlegrounds in the 2004 presidential election such as Florida, South Carolina, Washington, and North Carolina. For instance, as much as 100 percent tariffs were going to be tacked unto certain goods like fruit juices, apples, dried vegetables, t-shirts, and other products from these battleground states. The EC ostensibly put the President into a political dilemma: he could keep the steel tariffs and reap political spoils in Ohio and Pennsylvania, or he could face a political backlash from industries subject to retaliation in states like Florida. On the eve of the EC’s retaliation deadline, President Bush decided to scrap the steel tariffs.

Finally, we have the direct approach. Here, the job benefits are clearest. The government doesn’t just impose tariffs and hope everything shakes out. If the government wants to build bridges, the government hires people to build bridges. This is the approach underpinning Sanders’ infrastructure proposals.

This is also not without its risks. First, there’s a leakage problem. Without strong domestic content requirements, infrastructure money can be used to buy foreign products. This serves to stimulate overseas activity, and limits the direct benefit to U.S. workers. But that raises a second and now familiar problem: litigation. Domestic content requirements are generally banned under trade deals (unless a waiver was taken). More generally, some trade deals empower corporations to sue the U.S. government over regulation more generally, even without domestic content requirements. Lawyers could imagine up a number of ways to sue the U.S. over policies that do not seem at all related to trade.

In sum, to really evaluate whether Sanders and Trump’s trade policies would bring back jobs, we would need a lot more information about what they would do, and in what sequence they would do it. Simply withdrawing or renegotiating trade deals would have no immediate job impact; only separate action by Congress or the executive can do that. The U.S. is still sovereign in its territory, and can do what it wants. But U.S. sovereignty now operates against the backdrop of a global governance system that allows litigation and structures retaliation. Is that worse that a world where retaliation is not structured? How constraining this world order is depends on one’s own theory of how governments respond to litigation threats: do they change their policy paths from what they would otherwise pursue, or do they plow forward and take the litigation hit?

Trump recently said: “I don’t settle cases. I don’t get sued because I don’t settle cases, I win in court.” Words to ponder, as we think of what a hypothetical Trump presidency would look like on trade.

Advertisements

2 Comments

Filed under Uncategorized

2 responses to “Would a Trump or Sanders Trade Policy Create Jobs?

  1. Pingback: Populism and Bernie | Todd N. Tucker : Under Two Ceilings

  2. Pingback: WSJ Econ Forecaster Panel Likes Establishment/Conservative Candidates | Avoiding Citation

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s