5 Things I Learned While Researching Trump’s Trade Agenda: Outlook for US Based Manufacturing.


I read through Trump’s trade agenda and compiled my top five takeaways.  You may or may not be surprised…

While I read through all of the policies, I’ve tried to keep the post at a high level and did not dig into the weeds.  I’ve seen just how deep the rabbit hole goes…  and I may have to make this vol 1 in a three part series.

1. What is POTUS claiming?  (Top three)

  • Claim:  Foreign sectors and markets have been distorted by subsidies, theft of intellectual property, currency manipulation, unfair competitive behavior by state-owned enterprises, violations of labor laws, use of forced labor and other unfair practices.
  • Claim:  WTO has undermined the US and other WTO members’ ability to address and manage unfair trade practices.
  • Claim:  While trade deficits have increased substantially in the last 16 years, median household income as decreased.  Additionally, from 1984-2000 industrial production rose by 71%, but since China joined WTO (Dec 2001) the US has only seen a of 9% increase and 5 million manufacturing jobs have been lost since 2000.

The White House is basically taking the stance that we’re giving too much away for the benefit of other countries and it’s had a negative impact on US based manufacturers, farmers, ranchers, workers and service providers, while we could be getting a better deal.

In other words, the US has put out a buffet and other countries are getting fat on our account; we need to charge more, limit patrons or close the buffet all together.

Trump 4

2. What are some of Trump’s solutions?

  • Bilateral vs multilateral negotiations
    • This means negotiating directly with countries as equals instead of the more complex nature of multilateral negotiations.
  • Renegotiating existing agreements (i.e. NAFTA, rejection of TPP)
  • Increased enforcement of trade policies to combat unfair practices.
  • You can see more of the solutions and projected actions planned for 2017 by clicking here, but bring a bottle of water, whiskey and a flashlight.  You may be reading for a while…

3. What are the experts saying about his solutions?

  • Economist Daniel Griswold
    • “Targeting bilateral trade balances is a fool’s errand. There are perfectly good reasons why we run trade surpluses with some countries and deficits with others, driven by supply chains, comparative advantage and other perfectly normal factors. If a president could succeed in forcing a targeted country to buy more of our exports or send us fewer imports, without a change in the underlying macro-factors that drive the overall trade balance, the result would be to simply re-allocate the balance among our other trading partners.”
  • Economist Mark Perry
    • “Most economists and analysts agree that NAFTA has been economically beneficial for the U.S., Canada and Mexico. It’s estimated that more than $3 billion of trade takes place every day between the U.S. and its NAFTA trading partners and the three countries have become increasingly integrated over the last 22 years. For the United States to pull out of NAFTA would be a guaranteed economic disaster for us and our biggest trading partners, which would be reflected in higher prices for consumers, slower economic growth, fewer jobs and a lower standard of living for Americans.”
  • The Peterson Institute for International Economics completed a study which concluded that if President Trump followed through on his promises the US economy would lose 4 million jobs and a recession would follow.
  • Increasing tariffs on Mexico and Canada have been compared to the Smoot-Hawley tariffs that many experts believe played a direct role in worsening conditions, and halting international trade during the Great Depression.

Trump 2

4. What was the argument for and against the Transpacific Partnership (TPP)?

  • Proponents claimed it would unlock opportunities among 12 countries throughout the Pacific rim through lowered tariffs and other trade incentives to serve as a buffer to China’s growing influence throughout the region.  In simple terms, the pact was made in an effort to create a Pacific rim free trade zone.
  • Opponents believed it was a gateway to exporting more manufacturing jobs to developing nations that could drastically reduce costs through lower wages. There was also concern that competition would be limited for high value products and pharmaceuticals.

5. What is the outlook for US based manufacturers?

  • Some background:
    • In 1970 US based manufacturing was 2x what it is today.
    • The current annual rate of US manufacturing growth of 1.1 percent is not only slower than the US average economic growth rate (2.3 percent), but is also far behind major trading partners: China (9.8 percent), India (5.1 percent), Germany (3.6 percent), the U.K (2.8 percent), Canada (2.7 percent), and Japan (1.9 percent).
  • Reasons for decline
    • The US is shifting to a service based economy
    • High standard of living in the US pushes manufactures out of contention
    • Federal policies put us out of the competition (manufacturing costs are 20% higher whether or not labor is taken into consideration)
    • Effective tax rate is high (37.65% as of 2011)
  • Outlook for 2017 and beyond is good!
    • Growth in manufacturing should increase and stay ahead of the general economy for the next 3 years; as high as 3.0 in 2017 slowing to 2.0 percent in 2020.
      • Contributing factors:
        • Increased productivity
          • New technologies (i.e. 3D printing)
          • Production of domestic energy sources (i.e. natural gas, shale oil)
        • Standard of living is increasing in other nations and bringing US back into the competitive fold.  Call centers have been relocated from India to the Midwest if you can believe it – link to article.
        • Americans are actively recognizing and rejecting cheaper knock-offs of American made products.

Trump Pic

Conclusion

Global markets are becoming more consumer driven and putting down hard line government policies may sound good, but it seems to inhibit growth.  For example, Apple needs rare earth metals for the iPhone and other products that can’t be reasonably sourced in the US.  So, reinventing the wheel on trade alliances for a “silver bullet” or a sexy fix-all solution would be more of a step back.

37% of companies not based in the US want to have a manufacturing facility in the US, simply for proximity to US consumers.  However those same groups cannot justify the costs and I’m not sure revamping trade policies will fix that.  The National Association of Manufacturers (NAM) supports Trumps trade policies except that NAM wants to see more free trade agreements instead of pulling out of TPP and renegotiating NAFTA.   In the case for global companies like Apple, increased costs for and parts, labor and materials will likely get passed down the supply chain to the consumer, who ultimately loses.

Resources for this post:

  1. 2017 Trade Policy Agenda and 2016 Annual Report – https://ustr.gov/about-us/policy-offices/press-office/reports-and-publications/2017/2017-trade-policy-agenda-and-2016
  2. Forbes Magazine – https://www.forbes.com/sites/stuartanderson/2016/12/03/donald-trumps-trade-policies-blessing-or-curse/
  3. Moody’s Analytics – https://www.economy.com/mark-zandi/documents/2016-06-17-Trumps-Economic-Policies.pdf
  4. Vox – https://www.vox.com/policy-and-politics/2016/9/21/12993074/trump-trade-4-million-jobs
  5. NAFTA – http://www.naftanow.org/agreement/default_en.asp
  6. https://en.wikipedia.org/wiki/North_American_Free_Trade_Agreement
  7. Business Insider – http://www.businessinsider.com/what-is-nafta-is-it-good-for-america-2017-2
  8. Trans Pacific Partnership – https://en.wikipedia.org/wiki/Trans-Pacific_Partnership
  9. New York Times – https://www.nytimes.com/interactive/2016/business/tpp-explained-what-is-trans-pacific-partnership.html?_r=0
  10. Business Insider – http://www.businessinsider.com/r-nafta-demise-fears-fade-as-us-firms-committed-to-mexico–lobby-2017-5
  11. The Balance – https://www.thebalance.com/u-s-manufacturing-what-it-is-statistics-and-outlook-3305575