We Don’t Need a Trade War For Trade To Serve the National Interest
I am pretty sure that Donald Trump does not actually take anything he’s saying especially seriously – most definitely including the stuff he says about trade and immigration. Trump is running on attitude, and he figured out that “we win – they lose” was a pretty good attitude to run on right now in a GOP primary.
The risk for those – like some at this magazine – who are trying to hitch their particular policy wagons to Trump’s star is not merely that that star may be falling (we’ll see soon enough whether it is, and if it is, it’s surely still significant that it made it this far), but that it isn’t really flying the direction they want to go. If it’s ever to be taken seriously, economic nationalism deserves a far more cogent argument than Donald Trump or his campaign are likely to give it.
I’m going to try to lay out two pieces of such an argument here.
First, I want to start with this piece by Andy Grove from several years ago about how Silicon Valley ceased to be a major job creator in American manufacturing. His diagnosis:
The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.
Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.
The current economic consensus basically argues that markets are the best allocators of capital and that consumers are the best arbiters of their own interests. Therefore, a regime of relatively free trade and relatively free movement of labor, because it maximizes total output and allows both distinct geographies and distinct individuals to pursue their comparative advantage, is best for everybody. If there are negative distribution effects of this regime, they can be compensated for via transfer payments. If this system produces harmful dislocations, that’s the price of creative destruction, though that price can be mitigated through a variety of social welfare policies.
Many adherents of this viewpoint look at economic nationalists and see a kind of special-pleading on the part of those who benefitted from previous economic arrangements, and see the goal of economic nationalists to be insulating American workers from competition. That sounds like a risky strategy for the long term, because it’s not like competition is going to go away just because we hide from it behind a tariff wall. Economic nationalists sometimes respond by pointing to America’s 19th century experience, and the way in which we built a huge manufacturing base behind just such a tariff wall.
But for much of the 19th century America was actually playing catch-up to the previous economic leader – the British – who operated under more of a free trade regime. We (and Germany) were able to pursue our development strategy in part because Britain let us do so, just as Japan and China have been able to pursue theirs because we permitted it. It’s just not obvious that that strategy is applicable to a power like ours that sits at the developmental frontier. And thinking in these terms locks us into a zero-sum mentality about trade that it’s easy to imagine leading to unproductive trade wars – which is where these arguments typically end.
But Grove articulates a crucial piece of the answer to the question of how that strategy might be applicable to a frontier economy like America’s, as well as how we might think about trade in national-interest terms that nonetheless aren’t so zero-sum:
A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up. . . .
How could the U.S. have forgotten [that scaling was crucial to its economic future]? I believe the answer has to do with a general undervaluing of manufacturing—the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. It’s not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.”
I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry.
I think that’s an argument that even the Tom Friedmans of the world could understand and respect. Total global manufacturing employment is falling, and is going to continue to fall, as more and more of the process becomes automated. But we still need to have an adequate manufacturing base in key industries precisely to support the higher value-added activity that sits above it. The goal isn’t to protect American workers or products from competition, but to make it possible to continue to compete in future cycles of innovation. A Ricardian integration across the Pacific sounds all well and good, but if the core knowledge base about the underlying engineering is largely on the other side of the Pacific, then that’s where the future of innovation is going to come from. So we have to pursue policies that ensure that an adequate manufacturing base is maintained – and, in the context of that assurance, trade freely with everyone.
That means having some kind of industrial policy, whatever you choose to call it. As it happens, America is already pursuing an industrial policy through trade – just not one oriented around preserving a manufacturing base. America’s trade policy – very much exemplified by the TPP – is organized around promoting the products of knowledge industries, industries that depend on intellectual property. Pharmaceuticals, software, entertainment, genetically-modified crops – these are products where “manufacturing” doesn’t have quite the same meaning as it does for batteries or semiconductors. Precisely because scaling up production of these products is relatively trivial, their value is overwhelmingly dependent on an intellectual property regime that grants rents to the initial creators. They “just happen” to be industries where America remains a market leader. And American trade policy is substantially organized around making sure “our” companies get paid those rents.
It seems to me, then, that another piece of the economic nationalist argument needs to be not so much about how our negotiators are being taken to the cleaners by our rivals, but about who they are working for, how they are defining the American interest. I’m not persuaded when Trump says that we’re being “killed” in our trade negotiations – I suspect our negotiators are very tough indeed, and if you ask our counterparts in other countries they’ll agree with that assessment. But they are working primarily for the Chamber of Commerce, and the Chamber of Commerce cares primarily about American corporations’ profitability. Which is not the same thing as the long-term health of the American economy, or the productivity (and wage rates) of the American workforce.
Given that we already have an industrial policy organized around that IP regime, it’s hardly a killer argument to say that any such change in policy would be a violation of the sanctity of free trade. And it would seem to me that we could change the orientation of that policy without risking an unproductive trade war because we have, as it were, stuff to trade. We could, for example, direct our negotiators to offer a little relief on the pharmaceutical front, in exchange for getting more battery factories built in America.
In other words, we don’t need a trade war, we don’t need to demonize other countries for sensibly looking out for the interests of their citizens – and we don’t need to look at that pursuit as a zero-sum game where for us to win, they need to lose. Rather, we need to make sure that our negotiators are thinking about the national interest rather than the corporate sector’s interest. And then, by all means, we should pursue negotiations with a view to finding a way for all sides to claim a win. Because that’s the best way to get a deal.