To Trade or not to Trade. That is the Question.

Ever since humans could communicate, trade existed. Exchanging wheat for berries, chickens for a cow, or even other humans for gold, trade has been an essential aspect of our human nature. Also it is one of the essential drivers for our modern economies. Trade between citizens, states, and countries is what powers the economic system and allows civilizations to flourish. However, over time, trade has become increasingly complex with the introduction of currency, social tensions between cultural groups, as well as new laws and regulations that affect the flow of trade. In 2018, we find ourselves at odds with none other than ourselves, who are in a state of indecision about whether we want to trade with the world around us or use our own resources to grow our economy from the bottom up. Furthermore, the age-old debate about the effectiveness of tariffs and trade regulations is still an issue today.

One of the biggest initiatives of the Trump administration is to revitalize U.S. industrial manufacturing among other industries. Throughout his campaign, he promised to bring back manufacturing jobs into the U.S. economy, many of which were lost after the recession hit in 2008. Companies have been following a trend of outsourcing their manufacturing operations to foreign countries where labor is far cheaper than in the U.S. There are no international regulations on minimum wage, so companies attempt to lower their manufacturing costs by moving to places like China, the Philippines, and other eastern Asian countries. Trump plans to bring back manufacturing by lowering corporate taxes and promoting deregulation, which provides incentive for outsourced American companies as well as foreign-owned companies to set up shop on U.S. soil. Although Trump has not yet delivered on his promises concerning policy change, manufacturing has been on the rise for the past three years. Partly due to Obama fiscal policy and partly to renewed business optimism that came after Trump’s reelection, the number of manufacturing jobs have increased by nearly 200,000 since November 2016.

With all this growth in U.S. manufacturing, we should expect that our trade deficit would begin to swing more towards a trade surplus, where the U.S. would be exporting more than it would be importing. Alas, the trade deficit has only grown further, increasing by 7.3% over the past year. Yet, if the growth in manufacturing continues as it has for the past three years, a turnaround may soon be in our midst.

The North American Free Trade Agreement (NAFTA) has been a huge source of contention for policymakers for the past 24 years. Debate has been endless about whether NAFTA has helped or hurt the American economy. The legislation, which began in 1994, established a free trade zone among the U.S., Mexico, and Canada. This means that these countries have been barred from setting up tariffs and regulations against each other, which makes trade among them truly “free.” Although free trade means that goods and services can be exchanged easily between borders, it also means that factors of those goods and services can move with little consequence. Many have pointed fingers at NAFTA for sucking out U.S. manufacturing jobs to Mexico, where labor is cheaper than in the U.S. According to Citizen.org, the U.S. has lost more than 930,000 jobs because of NAFTA; while Americastradepolicy.com asserts that NAFTA saved jobs that would have been relocated to China when it joined the World Trade Organization (WTO) in 2001. As with everything nowadays, different statistics provide different conclusions, but what is certain is that the trade deficit has been and is now significant.

According to some economists, such as Ben Bernanke and Jared Bernstein, the trade deficit is indicative of a weak economy because the influx of foreign capital that comes with trade deficits are harbingers to financial bubbles, just like in 2006. Also, as imports decrease and exports increase, the output growth from U.S. firms slows, which results in a loss of jobs and job opportunities for U.S. workers. These jobs are simply moved to other countries where the labor is cheaper. The deficit became worrying when China experienced the “China shock” when the country underwent rapid growth in their export manufacturing industries in the 1990s. After this, China became known as the world’s factory, and labels that read “made in China” became much more commonplace on consumer products.

But what can we do about this deficit? Obviously, the country would be better off if there was a trade surplus rather than this sinking deficit we find ourselves in. Well, if the answer were easy, it would have been fixed by now. Many policymakers call for high tariff and trade regulations, but history has proved that high tariffs only result in trade wars and a decrease in demand for U.S. exports. Blocking imports without increasing national investment or saving levels results in an increase in the value of the dollar, which in turn decreases exports. A more effective method to reduce the deficit is through a more delicate diplomacy approach, such as negotiating for better access to Chinese markets for U.S. exports. Another method that has worked effectively in the past is to threaten but not bite. Presidents Nixon and Reagan both threatened Japan and Germany with unilateral tariffs in order to get them rework better trading terms for the U.S.

This article only scratches the surface of the complexities of U.S. trade, and there are so many more problems for which trade imbalance is the root. Trump’s emphasis on the trade deficit and his willingness to fix these problems is a good step towards finally closing the gap. However, a 20-year-old deficit does not just disappear in a snap of the President’s fingers.

Sources:

Benka, Samuel. “NAFTA at 20: Has It Been a Success?” Americastradepolicy.com, 1 Jan. 2014.

Gillespie, Patrick. “Is Trump Keeping His Promises on Manufacturing?” CNNMoney, Cable News Network, 4 Dec. 2017.

McBride, James. “The U.S. Trade Deficit: How Much Does It Matter?” Council on Foreign Relations, Council on Foreign Relations, 17 Oct. 2017.

“North American Free Trade Agreement (NAFTA).” Panama-U.S. FTA Overview | Public Citizen.

Tobias, Manuela. “Upticks in Manufacturing Employment, Little Policy Progress.”Politifact, 27 Dec. 2017.

United States Trade Representative. “North American Free Trade Agreement (NAFTA).”Countries & Regions | United States Trade Representative.