The Trump administration claims that it will now look at everything from the perspective of the “American worker.” But that slogan will be impossible to implement because there is no single policy that will benefit every “American worker.”
In particular, the trade initiatives of the new administration may protect some existing jobs but will not benefit those employed by the companies that have mastered the management challenges of international supply chains.
The Trump trade appointments evaluate trade using a one-sided method of accounting that has always been employed by protectionists: keep executives from moving manufacturing outside the U.S. That very restricted definition of what benefits the “American worker” is a motive for the recent presidential bullying. Unfortunately, using that definition as the sole basis for trade policy makes it likely that a more important source of trade benefits will not be realized.
Specifically, from 1953 through 2016, the Consumer Price Index (CPI) increased at an annual rate of 3.6 percent. Over that same period, the prices of three groups of products whose commercial practices were transformed by trade increased at significantly smaller rates. The rate of increase for new vehicle prices was approximately half the CPI rate, the prices of footwear two-thirds as large and the price of apparel (excluding footwear) approximately one-third as large.
Over the same period the prices of products not affected or less affected by trade behaved differently.
For example, food increased by 3.5 percent per year, about the same as the CPI, and shelter costs increased 4.2 percent per year. Put differently, the differences in the rates of inflation imply that shelter is 13.5 times as expensive today as it was in 1953 while apparel is only 2.6 times as expensive. Clearly, more liberal trade saved the U.S. consumer money.
There is little doubt that the lower rates of inflation for shoes, clothing and vehicles are, in part if not entirely, the consequence of trade liberalization.
For example, from 1953 to 1971 when trade was less important, shoes became relatively more expensive as their prices increased by 72 percent while the CPI increased only by 50 percent. In 1971, Nike, then a small private company, created its “swoosh” trademark. The sophisticated international supply chain it built and those of its competitors have limited shoe price increases.
Any product whose price increased as fast as the CPI from 1971 through 2016 now has a price six times as expensive. Shoes, however, are only 2.4 times as expensive.
It is the same story for new vehicles.
From 1953 to 1994 as trade in autos grew, new vehicles did become less expensive relative to other products. Any product whose price increased with the CPI was 5.5 times more expensive at the end of the period while new vehicle prices were more expensive only by half that amount. When NAFTA became effective in 1994, the growth of international supply chains in the auto industry widened the difference in appreciation between vehicle prices and the CPI.
Simply put, from implementation of what Trump calls the “worst trade deal in history,” through 2016, the CPI jumped by 75 percent. Yet new vehicle prices advanced by only one-fifth of that amount. That implies an astonishingly low post-NAFTA annual inflation rate of .4 percent for new vehicles.
Job losses that result from more open trade understandably get attention certainly in the communities where they occur. Few, however, acknowledge when they buy sneakers that their purchase would have been 2.5 times as expensive if shoe prices had increased since 1971 as rapidly as the cost of what they eat. In short, we are always vulnerable to economic charlatans using one-sided frameworks to analyze trade.
In the eyes of the new administration, an entrepreneur who cleverly organizes an international supply chain and the U.S. citizens he or she employs apparently do not fit the definition of an “American worker.”
Some in the administration condemn them as globalists who provide no benefit. We, however, should be thanking them. Dismantling the agreements that enabled trade will adversely affect employment in the companies that trade created. Those companies are likely to be vulnerable even if the agreements are renegotiated but not dismantled.
Most importantly, when we assess the consequences of the new administration’s trade policies, we should be asking to what extent “very major border taxes” would make what every “American worker” buys significantly more expensive.
The people who count only the costs of job losses for domestic producers and ignore the effect of trade on prices should be wearing hats that say “Make America More Expensive Again.” When they are finished fiddling with tariffs, we will all face higher prices and the companies based on intricate supply chains will be smaller or out of business.
There is no reason to expect that lost trade jobs will be offset by employment increases in newly protected industries. Even if there is a net increase in employment, higher prices for consumers are likely to create losses that are larger than any gains to the newly employed by a significant margin.
Ron Schmidt is the Janice M. and Joseph T. Willett Professor of Business Administration for Teaching and Service at the Simon Business School at the University of Rochester.
The views of contributors are their own and not the views of The Hill.