Trump won’t make American great again
In 1945, the United States was the world’s economic colossus. While Europe and large parts of Asia faced a major task of rebuilding their destroyed manufacturing plants, America had the capacity to aid in that rebuilding.
During the next three decades, it used its power to build a rules-based global trading environment that underpinned sustained economic growth throughout the non-communist world. But, as Europe and Asia grew, the relative power and economic position of the U.S. was reduced.
Beginning about three decades ago, economic forces began to exert powerful pressures on the manufacturing sector in the U.S. The advent of instantaneous reliable communication and intercontinental jet travel eliminated the much of the protection that distance afforded manufacturing, particular manufacturing dependent on unskilled labour.
Moving large amounts of manufacturing to low-cost offshore locations made sense. The introduction of automated production further reduced manufacturing employment.
While this was happening, the United States was developing a significant comparative advantage in the services sector; that is, everything from financial services to health care, legal services, engineering and business consulting, and intellectual property such as patents, movies and books. This transformed the U.S. into a service-dominant economy.
The problem with this transformation is that its demand for unskilled workers is minimal and labour markets and training facilities for labour have been slow to adjust. This situation was exacerbated by a rising level of immobility on the part of residents in areas where the loss of manufacturing jobs was highest. People simply became more unwilling to move to where jobs were. President Donald Trump’s pledge to “Make America Great Again” is trying to do the impossible because he assumes that manufacturing can be restored to a dominant presence in the U.S. economy.
Tariffs and bullying will do nothing more than shut off export markets for U.S. goods and services and provide a huge opening for China to expand its trade and its position as a world economic leader. Perhaps Trump could achieve greatness if he instituted policies to strengthen the service sector; but, lacking economic insight, he is pursuing a set of policies aimed at restoring a bygone era. It’s not going to happen.
Trump doesn’t understand that goods and services trade each have an impact on a nation’s balance of payments. In the case of Canada, the U.S. has a pronounced surplus in the trade in services. Just think of the snowbirds and movies as two such services. Furthermore he foolishly views all trade as a zero-sum game. If I gain, you lose. He cannot get it through his head that both trading partners can experience a net gain as they both grow.
Moreover, the fact that the U.S. runs trade deficits allows the U.S. to borrow from nations with savings surpluses, thereby financing the U.S.’s own gigantic domestic budgetary deficits. Trading in U.S.-dollardenominated securities is also is a major reason why the financial sector in the U.S. is the dominant global financial power. Indeed the U.S. is unique in this capacity to act as the world’s central bank since the American dollar is de facto the world’s international currency.
The Trans-Pacific Partnership Agreement (TPP) that Trump rejected constituted a significant achievement for U.S. trade negotiators. It established a rules-based trading environment that did not include China. Most importantly, it provided significant benefits to U.S. creators of intellectual property, one of the key elements of a service-based economy.
The revised and slimmed-down version now called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership has weakened Intellectual Property provisions but still gives IP strong protection.
All the U.S. can do now is decide whether it wants to join the treaty; it will not be renegotiated back to the terms that existed when Trump pulled out.
If Trump continues his protectionist policies, the U.S. economy will shrink — not grow- and American greatness will continue to fade. As the President often says, “Sad!” David Bond is a retired bank economist who resides in Kelowna. To contact the writer: curmudgeon@harumpf.com.