Breaking the chains not a good thing
Globalized economies are complex
In an interview with the Financial Times of London last Tuesday, Peter Navarro, one of Donald Trump’s top advisers, said a bunch of remarkable things, but let’s highlight just this one:
“It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components. We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”
Navarro is the head of the White House National Trade Council, a new body that advises the President on trade. This is not to be confused with the President’s Export Council, which, well, also advises the President on trade, and has since 1973. Apparently, one can never have too much advice, especially when so much of the new administration’s focus is on tearing up decades of trade orthodoxy.
Which returns us to the import of Navarro’ s thoughts on supply chains.
The world, free- traders like to point out, doesn’t work like that.
Against the Trump administration’s more firebrand positions — threatening a “huge” tax on imports f rom Mexico and China, threatening to tear up NAFTA — there’s the simple fact that today’s globalized economies are complex. The NAFTA countries are connected with each other, and with non- NAFTA countries like China and Japan, through global supply chains.
This is how trade works, each country providing goods and services according to its comparative advantage.
“American” cars, to borrow the quotes from Navarro, are a good example.
The U. S. National Highway Traffic Safety Administration helpfully requires auto companies to disclose the percentage of new- car parts that are “North American” in origin. ( That means the U. S. and Canada, but excludes Mexico.) It turns out that in even the most “North American” cars — among t hem t he Honda Civic and the Toyota Avalon, just FYI — at least 20 per cent of their parts ain’t from around here.
Such integrated global supply chains would no doubt be hurt by the kind of import taxes Trump has been talking about and by t he demolition of t rade deals, like NAFTA, that have helped foster them.
Costs would go up, manufacturing would become less efficient, and consumers would pay more. Who would want that? Apparently, the new U. S. administration does.
It ’s not j ust t hat t hey don’t care if they disrupt global supply chains. It’s that the goal is to dismantle them.
In the context of modern U. S. policy, which has officially, if somewhat selectively, promoted free trade, this seems a radical departure.
But in the longer view, it’s a vision for an insular economy that is all too familiar. So are the ways in which the administration apparently plans to create it, all in the name of creating jobs (which you could well argue the U. S. doesn’t need very much; even in manufacturing, employment has been going up since 2010).
Those steps might i nclude not just trade- related impositions like tariffs and export subsidies ( which Congress’s proposed borderadjustment tax would be), but also domestic policy shifts, l i ke weakening of antitrust enforcement and targeted tax breaks (e.g. that Carrier plant in Indiana).
What will be the effect of this insularity on the U. S. economy?
If history is any guide, less- competitive companies, more- expensive labour, and a dearth of innovation.
Here’s a for- instance: the American Rust Belt.
It’s conventional wisdom that the sharp decline in manufacturing jobs in the Northeast and Midwestern U. S. happened because of foreign competition starting in the late 1970s, initially in the form of Japanese cars and, later, Chinese steel.
But a 2014 paper from the Federal Reserve Bank of Minneapolis, called “Competition and the Decline of the Rust Belt,” makes a convincing counterargument that the trouble really began in the 1950s, when “the region’s domestic industries faced virtually no product or labor competition.”
The paper points out that before 1980, the Rust Belt’s producers of steel, automobiles and rubber dominated the domestic market — as much as 90 per cent of it.
Oligopolies, aided by pliant governments and an array of trade protections, blocked competition. Price markups were high. And thanks to powerful unions, so were labour costs — Rust Belt workers got paid about 12- per- cent more than comparable workers in other regions.
Companies didn’t invest in new technologies — why would they? — and labour productivity growth trailed the rest of the country.
But t he r esult wasn’ t more j obs, however unproductive.
Between 1950 and 1980, t he Rust Belt’s share of manufacturing employment in the United States declined by 34 per cent. It only stabilized after 1980, when increased foreign and regional competition forced producers to invest in technology and lower wages.
So that’s the really concerning thing about the new U. S. approach to trade and protectionism: competition is good for companies, workers and economies, and the pre- globalization nirvana Trump talks about never existed.
But in trying to manufacture it, America will do itself — and by extension, Canada — no “long-term good.”
A VISION FOR AN INSULAR ECONOMY THAT IS ALL TOO FAMILIAR.