5 reasons Democrats should be the party of free trade
In the midst of the second round of presidential debates, the Democratic candidates are working to distinguish their economic policies from one another. Regardless of their legitimate differences, however, all the candidates should agree to move sharply away from Trump’s trade policy legacy.
The Trump administration has marketed its trade policies as addressing the needs and fears of American workers. But protectionist trade policies have done more harm than good. As is so often true with Trumponomics, American workers are getting a raw deal.
Tariffs and trade wars harm American workers in multiple ways. First, trade wars are not easy to win; instead, they tend to damage both sides. The European Union, Canada, India, China and others have retaliated to new U.S. tariffs with higher tariffs on U.S. goods. China has dramatically increased tariffs on U.S. products while lowering tariffs on products from other countries, reducing the market share of U.S. soybean farmers and many U.S. companies in a way that will be difficult to recover from.
Just last month India retaliated with tariffs on dozens of U.S. products, including apples and almonds. European tariffs have hit whiskey distillers and others. These actions have disrupted many American industries, including farming.
Second, many of the Trump tariffs are levied on intermediate products, harming the many U.S. companies that are reliant on global supply chains to be competitive in world markets. For example, General Motors paid over $1 billion in tariffs in recent months; these tariffs made U.S. production less cost-effective, contributing to plant closures in Ohio.
Similar business disruptions are wreaking havoc across a wide range of industries. In fact, U.S. importers and exporters are often one and the same, so “protecting” some companies often hurts the very same companies. No wonder business leaders find the trade war harmful.
Third, tariffs reduce the buying power of workers’ wages. The Trump tariffs are estimated to cost typical U.S. consumers hundreds of dollars; for many households, these tariff costs more than wipe out the – already fleeting – gains from the Trump tax cuts. In fact, tariffs are regressive consumption taxes, harming the poor more than the rich. Not only do poorer households consume more of their income than richer ones, but they also consume more imported products.
Fourth, while Trump claims to be using tariff threats to negotiate better deals with our trading partners, existing U.S. trade agreements already favored U.S. interests. Since the United States already had low trade barriers, trade agreements lowered our partners’ tariffs more than our own. Of course, trade agreements can still be improved upon.
For example, trade agreements need not promote business interests regarding investor-state disputes and intellectual property; instead, they should place more emphasis on reducing harmful tax and regulatory competition. Still, these agreements never disadvantaged American interests relative to those of our trading partners, and the new agreements that Trump trumpets are only dressed-up versions of prior deals.
Fifth, while the U.S. runs large trade deficits, including bilateral trade deficits with many countries, these deficits have nothing to do with our trade policy or trade agreements. Countries that run trade deficits do so because they are spending more than they earn; international borrowing is the mirror image of the trade deficit. Thus, the only way to reduce our trade imbalance is to address the sources of our borrowing, which include low U.S. savings rates and large U.S. government budget deficits. Trump’s trade policies will have little effect on the trade deficit, but the Trump tax cuts make our trade deficit worse by increasing U.S. borrowing.
For these reasons, and many more that I describe in my recent book Open: The Progressive Case for Free Trade, Immigration, and Global Capital, Democrats should not follow Trump down the path of protectionism. But the concerns of American workers are not imagined. U.S. workers have suffered through decades of increasing income inequality and wage stagnation. While GDP has grown strongly over the past 35 years, enough to (in theory) provide every American with a two-thirds increase in their standard of living, gains in GDP have not shown up as similar gains in household incomes. Workers are completely right to be upset.
Trade has disrupted many industries. But reigning in trade through trade wars and trade barriers adds insult to injury for American workers. The industries of yore will not simply regenerate due to the hasty tariff threats of the Trump administration.
Indeed, many other factors have contributed to the plight of American workers, including dramatic technological changes, the rising market power of companies and economic policy changes that have weakened labor bargaining power. If we respond to these myriad problems with trade wars, we run the risk of creating more problems than we solve.
Instead, policy solutions should go directly to workers’ problems. Tax policy is one of the most important tools at our disposal. We can expand the earned income tax credit to subsidize the work of low-income Americans, and we can systematically lower tax burdens for those at the bottom of the income distribution.
At the same time, there is room to collect more tax from those at the top, by closing loopholes that favor the well-to-do and by raising some tax rates. In combination, these policies can make sure that the winners from our dynamic economy help those most harmed by its disruptive elements.
Unfortunately, the Trump tax cuts make matters worse. The Tax Cuts and Jobs Act combined large corporate tax cuts with big tax cuts for wealthy business owners and estates. Tax cuts for workers were far more modest; nonpartisan estimates indicate that those in the bottom four quintiles receive only modest tax cuts in the early years of the legislation and small tax increases by the end of the ten-year window.
This legislation also made health insurance more precarious, harming many Americans. The repeal of the individual mandate enforcement resulted in fewer Americans with health insurance, a change that increases premiums for the rest of us. Indeed, for most Americans, increases in health insurance premiums dwarf the short-lived tax cuts.
While we’ve been distracted by the scapegoating of trading partners and immigrants, the administration has made the economic lives of the middle class more precarious.
Continuing the wrongheaded protectionism of President Trump would be foolish. If Democrats are looking for a way to respond to workers’ concerns, they should focus on policy tools that go straight to workers’ needs: progressive tax reform, improving health care access and investments in infrastructure and education.
Kimberly A. Clausing is a professor of economics at Reed College and the author of “Open: The Progressive Case for Free Trade, Immigration, and Global Capital.” Follow her on Twitter @KClausing.
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