The wheels are coming off Trump’s trade policy

U.S. Trade Representative Robert Lighthizer testified before Congress this week, reprising his recent claim that the era of U.S. offshoring is “over.” It’s essentially the same message as President Trump’s new “American Comeback” campaign ads, which tout industries and jobs returning to the U.S. But Trump’s trade policies are actually failing to curb most of this offshoring — and simply don’t address the root causes of America’s growing trade deficits. 

The reality is that COVID-19 has wiped out much of the job gains seen in recent years. Unless steps are taken now to curb dollar overvaluation, which is making imports artificially cheap in the U.S. market, and to curb tax incentives for offshoring, there won’t be a comeback.

Unfortunately, Trump has ignored the linkage between his policies and a rising trade deficit. And so, his administration continues its rosy pronouncements.

In his testimony, Lighthizer praised several companies that have scrapped offshoring efforts or have “announced” plans to move production to the U.S. He also praised both the U.S.-Mexico-Canada Trade Agreement (USMCA) – which takes effect July 1 – and the current “Phase One” China trade deal. 

Here’s what the data shows us. Thanks to increased domestic purchasing spurred by tax cuts and an expanded federal budget, average employment per manufacturing plant increased between 2016 and 2019. But offshoring has continued throughout. Overall, the U.S. has lost more than 91,000 manufacturing plants and nearly 5 million manufacturing jobs since 1997, including nearly 1,800 factories that disappeared under Trump between 2016 and 2018.

Any recent manufacturing gains were abruptly wiped out by the COVID-19 lockdown — with a staggering 1.2 million manufacturing jobs lost this year. If Trump wants to take credit for an economic boom after a decade of recovery from the Great Recession, then he must also own this collapse, thanks to his administration’s mismanagement of the pandemic, including its refusal to organize an effective national response.

But U.S. manufacturing was struggling even before COVID-19. Starting in 2014, the U.S. dollar has appreciated in fits and starts, climbing nearly 28 percent. More than half of that rise has come since the Trump tariffs were first imposed in March 2018. This stronger dollar keeps making U.S. exports more expensive and imports cheaper. Equally problematic, the 2017 Trump tax cuts on corporate profits incentivized offshoring for certain types of production while also raising after-tax profits. This has attracted more foreign capital to U.S. stock markets, spurring the dollar even higher.  

If Trump’s trade policy really encouraged “reshoring,” America’s trade balance would have improved. But the U.S. trade deficit in manufactured goods rose significantly between 2016 and 2019. In fact, the real U.S. trade deficit has increased every year since 2016, reducing GDP growth by roughly one-quarter of one percent annually over the past three years.  

As for the USMCA, it is unlikely to resolve longstanding U.S.-Mexico trade issues. America’s trade deficit with Mexico increased by more than 29 percent in 2019 alone. And GM has been closing assembly plants in Ohio, Michigan and Maryland while increasing its reliance on imports from Mexico. Offshoring to Mexico is also taking place in aerospace and other sectors, with aerospace exports from Mexico increasing 10 percent in 2019. While the USMCA significantly improves labor protections compared to the previous NAFTA agreement, its overall provisions are inadequate to stem these offshoring trends.

The “Phase One” China trade deal is a bust, too. China promised to increase purchases of U.S. goods and services by $200 billion over 2017 imports. But Beijing is unlikely to meet these targets. And the deal doesn’t even address China’s egregious, systematic labor rights violations.

Beijing has also strategically adjusted to the Trump tariffs. China is simply exporting more goods elsewhere, and the U.S. trade deficit with China’s trading partners rose rapidly in 2019. In fact, China’s overall trade surplus with the world climbed significantly in 2019. China also reduced the value of its currency by 11.4 percent against the U.S. dollar since March 2018, helping to offset the tariffs. 

The tariffs are a signature element of the Trump trade agenda. And they’ve helped sectors like steel and aluminum. But the president misses a key point: If you increase tariffs without taking steps to prevent the dollar’s appreciation, the overall benefits are simply neutralized. 

These problems have been compounded by mistakes on tax policy. U.S. multinationals continually engage in massive, international tax avoidance, with some paying no income tax. The 2017 tax cut also created a new, lower corporate tax rate for “global intangibles income.” The pharmaceuticals industry has reaped major rewards, and moved plants to countries with the lowest possible corporate tax rate. As a result, the U.S. now has a massive trade deficit in pharmaceuticals.  

The U.S. trade deficit is likely to shrink during COVID-19. But unless steps are taken to address dollar overvaluation and tax incentives for offshoring, these deficits will simply reemerge when recovery occurs. Washington must embark on major investments in infrastructure, R&D, training, renewable energy and other industrial policies. Congress may also consider Rep. Peter DeFazio’s (D-Ore.) proposal to withdraw from the WTO — to help implement stricter Buy America requirements for infrastructure investment.  

In 2016, Donald Trump campaigned against globalization and failed trade deals that have hurt U.S. manufacturing. It worked. He captured nearly 80 percent of the electoral votes in the Top 25 manufacturing states. But he has since failed to deliver for working Americans. Now the wheels are coming off. It’s time for a meaningful rewrite of failed U.S. trade and economic policies.  

Robert E. Scott is a senior economist with the Economic Policy Institute (EPI). Follow him on Twitter @RobScott_EPI.

Tags China China-U.S. trade war Donald Trump Free trade areas GM Offshoring Peter DeFazio Robert E. Lighthizer Robert Lighthizer Trade War Trump tariffs United States–Mexico–Canada Agreement USMCA

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