Would Trump's Trade Policy Really Cause a Recession?

On Thursday, Governor Mitt Romney gave an anti-Trump speech in which he called upon Republicans to vote for anybody but frontrunner Donald Trump so as to produce a brokered convention.  Romney claimed that Trump's economic plans would cause a recession. He said:

If we Republicans choose Donald Trump as our nominee, the prospects for a safe and prosperous future are greatly diminished. Let me explain why[.] ... His proposed 35 percent tariff-like penalties would instigate a trade war and that would raise prices for consumers, kill our export jobs and lead entrepreneurs and businesses of all stripes to flee America.

On Friday, the U.S. Census Bureau announced that the U.S. goods and services trade deficit was $45.7 billion in January, up one billion dollars from $44.7 billion in December.  January exports were $176.5 billion, $3.8 billion less than December exports.  The reduction in U.S. exports predicted by Romney just happened, but Trump is not yet president.  On February 26, the Bureau of Economic Analysis announced that U.S. economic growth slowed to a measly 1.0% during the last quarter of 2015, but Trump is not yet president.  Billionaire investor Jim Rogers predicts a 100% chance of a U.S. recession within a year.  If he is correct, a recession will occur, whether or not Trump is elected president.

It is true, as Romney claims, that Trump has called for tariff-like penalties to prevent American factories from moving abroad and also to bring currency-manipulating countries (including China, Japan, and Mexico) into trade-balancing negotiations.  But would Trump's tariff threats slow U.S. economic growth?  No!  Exactly the opposite!

Trade-surplus countries have a lot more to lose from a trade war, so Trump's negotiations would likely succeed.  For example, in 1981, Congress threatened trade-balancing import restrictions against trade-surplus Japan, which resulted in President Reagan negotiating "voluntary restraints" on Japanese automobile exports.  As a result, Japanese automobile companies built factories in the United States that continue to employ American workers and to buy American-made auto parts, greatly increasing American incomes.

Positive Effects of Tariffs

Even if Trump's negotiations did not succeed, the American economy would benefit if he imposed his tariff-like penalties.  First, government revenues would increase, which would reduce the budget deficit.  Second, American consumers would be encouraged to switch their purchases to American producers and to the products of those countries, such as Brazil and Canada, that buy more from us when we buy more from them.  America would become more attractive to foreign manufacturers and to American manufacturers who had moved their factories abroad.  American factory production would increase, and so would the employment and incomes of American workers.

Romney's current attacks are ironic, because during the 2012 campaign, Romney talked tough on Chinese currency manipulation and other trade violations.  Romney said that the U.S. should tell China, "You can't keep on holding down the value of your currency, stealing our intellectual property, counterfeiting our products, selling them around the world, even to the United States."  But Romney's attack on Trump reveals Romney's stance as the sham that many of us suspected it was at the time.  Trump is right to propose imposing significant tariffs on China precisely because of the litany of trade violations 2012 Romney claimed to be exercised about.  But now Romney claims that if Trump does anything about China's rampant mercantilism, it will lead to a depression.  Clearly he planned to go no farther in his China trade policy than another ineffectual round of asking China to stop its mercantilism.

In short, Romney doesn't appear to understand the economics of trade. Economic research about the "tariff-growth paradox," including one of our own academic papers, has found that tariffs hurt economic growth only when trade is relatively balanced.  But periods of history during which world trade has been relatively balanced (such as 1840-1865 and 1950-1973) have been followed by periods during which world trade became more and more unbalanced.  The world is once again experiencing a period of high trade imbalances (like the 1890s and the 1930s) in which trade-deficit countries can grow more rapidly simply by increasing their tariff rates.  Anything that Trump does to balance the enormous U.S. trade deficits will be economically beneficial. 

How Trade Deficits Have Been Hurting the U.S.

When countries run trade surpluses with the United States, they give us trade deficits.  Those trade deficits reduce aggregate demand for American products, American incomes, and investment in American factories.  In his speeches, Trump has focused upon the three countries that have large trade surpluses with the United States: China, Japan, and Mexico.

  • China.  Despite running huge and growing trade surpluses with the United States, the Chinese government won't let its people buy American-made Boeing passenger jets, Cadillac SUVs, or Caterpillar tractors.  Instead, the Chinese government forces Boeing, GM, and Caterpillar to build new factories to China in order to sell to the Chinese market.  If Trump's negotiations force China to import as much from the United States as we import from them, American companies could locate new factories in the United States for shipment of their goods to China.  Also, American farmers would export more meat to China.  The benefit to American exporting industries and to American workers would be enormous.
  • Japan.  Under the Trans Pacific Partnership (TPP) trade agreement, Japan can continue to manipulate the yen-dollar exchange rate so it can grow its enormous trade surpluses with the United States.  With the yen priced low compared to the dollar, the costs of production in Japan will continue to be low compared to the costs of production in the United States.  These low costs give Japanese vehicle and electronic producers high profits, which they have plowed into R&D and robotics so that they can continue to gain market share in their competition with U.S. vehicle and electronic producers.  If anybody but Trump is elected, American companies that produce in the U.S. will continue to lose market share in their competition with Japanese producers.
  • Mexico. Despite being part of the NAFTA free trade agreement with the United States and Canada, Mexico manipulates the dollar-peso exchange rate so that its businesses have lower costs than businesses that produce in the United States.  As a result, American industries move factories to Mexico.  If Trump succeeds in his negotiations with Mexico, U.S.-Mexico trade will move toward balance.

Effect of Trump's Trade Balancing on the U.S.

So if Trump succeeds, how much would his trade balancing help the U.S. economy?  Doing so would cause businesses to locate new factories within the United States.  Since R&D gets located near factories, new innovations would be invented in the United States.  Since workers learn by doing, American workers would gain on-the-job skills, increasing their pay over time.  Since American workers buy services from American service providers, American entrepreneurs would prosper.  In sum, Americans would get more pay, more factories, more R&D, more innovations, and a more prosperous country.

Trump is the only candidate who has consistently opposed TPP. Although he voted against fast-tracking it on final passage, Senator Cruz had helped TPP get momentum by co-authoring an op-ed with Paul Ryan in its favor.  The other Republican candidates have always supported TPP, and Hillary Clinton was part of the administration that negotiated it.  All are members of the Republican/Democrat establishment consensus, which supports overseas production in return for campaign contributions.

And TPP is not just about trade.  It is also part of the open borders agenda, to which the establishments of both political parties subscribe.  Under TPP, foreign service providers will be able to recruit cheap workers in Mexico and Malaysia and bring them legally to the United States to take American service-sector jobs.  The destruction of the American middle class will accelerate.  The popularity of socialist candidate Bernie Sanders tells us where this is going.

The economic case for Donald Trump is clear.  If any other candidate is elected, U.S. economic growth will continue to stagnate in the 1% to 2% range.  In contrast, Trump's trade policies would return the United States to its normal 3% per year growth.  If any other candidate is elected, median U.S. family income will continue to decrease, but if Trump is elected, it will return to its normal increase.  Under Trump, the U.S. middle class, a bulwark against socialism, will gradually be restored.

The Richmans co-authored the 2014 book Balanced Trade: Ending the Unbearable Costs of America's Trade Deficits, published by Lexington Books, and the 2008 book Trading Away Our Future, published by Ideal Taxes Association.

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