In the event that Donald Trump or Bernie Sanders becomes president, the rules surrounding what’s known as “free trade” are likely to change.
Trump says he’ll slap 45% tariffs on Chinese imports while Sanders says he would reject the Trans Pacific Partnership, the far-reaching trade deal with 12 countries including Malaysia, Vietnam and Australia. While Sanders stops short of promising high import tariffs, the Vermont senator has called the U.S. decision to grant Permanent Normal Trade Relations with China and embrace the North American Free Trade Agreement with Mexico and Canada nothing short of “abysmal failures.”
The free trade crowd doesn’t like what they’re hearing. Countering Trump and Sanders, proponents of low tariffs charge that unwinding these complex trade agreements would invite catastrophic disruption to the U.S. economy.
An exit from the World Trade Organization or NAFTA, said Emily J. Blanchard, associate professor of business administration at Dartmouth University’s Tuck School of Business, would have a terrible ripple effect on prices, jobs and tax revenue.
“If the U.S. starts backing out of major agreements, there’s an unraveling that could occur, and no one knows how bad or how ugly that could get,” Blanchard said in a phone interview from Hanover, New Hampshire. “If you start violating parts of treaties, then all the rules of global commerce start to erode.”
While Trump has said he would break NAFTA or seek to renegotiate the agreement, Sanders has stopped short of advocating the end to any existing trade pact.
Yet regardless of who wins the White House in November, the next president will have to take-up debate over the future of the TPP, a massive document that Trump and Sanders have ridiculed as being a bad deal for U.S. workers. Meanwhile, corporate donors for both Democrats and Republicans have urged its swift passage.
Companies, Consumers That Would Suffer
To scrap the TPP or even to leave the World Trade Organization or seek changes to the North American Free Trade Agreement, would risk upsetting massive networks of global production based on reciprocally low tariffs, Blanchard said. And it’s not just about the tariffs applied to imported finished goods.
Take Apple, for instance. China’s Foxxconn does much of the assembly, but parts are produced in Germany, Japan and South Korea, with much of the intellectual capital coming from the U.S. When the final product is imported into the U.S., WTO norms maintain average tariffs of 3%, keeping a check on the finished product’s retail price.
Thousands of companies use similar networks to manufacture their products. And because roughly half of all trade are intra-company transactions, higher tariffs would add costs to every step of the manufacturing process, said Robert Z. Lawrence, a Harvard professor and senior fellow at the Peterson Institute for International Economics.
The ability of U.S. companies, Lawrence emphasizes, to produce in lower-wage countries makes products more affordable for U.S. consumers.
Leaving the WTO for instance, would risk allowing most tariffs to skyrocket to 35%. Even industries such as pulp and paper, Blanchard said, which export far more than it imports in the U.S., might be negatively affected. Same with agriculture, especially wheat and corn producers, she said.
U.S. fruit and vegetable producers might benefit from high tariffs but they could eventually be hurt if wheat farmers, blocked from foreign markets, switched to growing carrots and tomatoes.
“Consumer goods like clothing, footwear, electronics, would become more expensive, disproportionately hurting poorer people,” Lawrence said in a phone interview from Cambridge, Massachusetts. “These proposal against free trade would cause huge economic disruption.”
But for Trump and Sanders supporters, the disruption caused by free trade has already occurred. Back in 1960, 35% of all U.S. male workers were employed in manufacturing; today, it’s about 12%. That trend was accelerated by trade pacts, the Massachusetts Institute of Technology economist David Autor has written in a study that shows that up to about half of the five million American factory jobs lost since 2000 are traceable to low-cost imports, largely due to China’s admission into the WTO in 2001.
Adherence to the norms of the WTO and NAFTA, argues Dean Baker, co-director of the Center for Economic Policy and Research, have incentivized U.S. corporations to move operations or invest in overseas facilities and non-U.S. workers.
While some manufacturing is returning to the U.S. or being created by new businesses, the impact has already been felt. Free trade pacts, Baker says, have fostered complex production networks that rely on low-wage labor to increase profits for companies that export to the U.S.
General Electric is a high-profile case. Since the 1980s, GE has been moving facilities out of the U.S., while growing those that its built abroad. A reversal in trade policy could benefit smaller U.S.-based manufacturing firms that compete with GE and sell largely to U.S. consumers. Higher tariffs on products produced in China, or changes in currency valuations, might help U.S. companies that rely less on imports, Baker said. The same, he added, can be said for domestic competitors to large retailers such as WalMart.
“It would be more expensive for GE to import their goods from China, which would help their domestically-based competitors,” he said. “Lower-wage workers could also benefit from higher wages and more jobs.”
Pharmaceutical producers might also be hard hit by changes in trade policy.
Existing treaties have mostly succeeded in extending U.S. patents abroad, a major feature of the WTO and an essential element of the TPP. Without such pacts, companies such as Pfizer would have less protection overseas thereby allowing cheaper-priced versions of their products to be sold internationally, and eventually in the United States, Baker said.
Better Options to Help American Trade
Even if Trump or Sanders do win the election in November, Baker said it’s very unlikely they would succeed in getting approval for higher tariffs or a U.S. exit from the WTO. Trade agreements are integral parts of the global economy and upsetting them would cause economic panic and legal chaos, he said.
The more likely strategy is actively pursuing steps to lower the value of the dollar while pushing China to raise the value of its currency.
Such measures, Baker said, are well within the parameters of existing free trade agreements, and would go a long way to disincentivizing U.S. companies to produce parts and products overseas for import into the country.
“Everyone says this is impossible, but it’s a negotiation process,” Baker said. “China has kept the value of its currency down by buying massive amounts of dollars. At some point that has to change. China isn’t going to hold huge amounts of reserves indefinitely for no good reason. We’re really just talking about the timing.”
As a result of the current debate, the next president is certain to be pressured to include mechanisms within the TPP that would give the U.S. more ways to prevent trading partners from artificially undervaluing their currencies relative to the dollar. At present, there are such mechanisms in the TPP, but they’re non-binding since no country wants to give up sovereignty over its currency.
That’s what happened in Europe, and no country except possibly Germany is happy about that.
“This is a glass house,” Blanchard said. “Every country, every central bank lives in a glass house, and I’m not sure the U.S. wants to start throwing stones.”