America's Role in the World
Trade
Our Take
Since his second inauguration, Donald “Tariff Man” Trump has loved comparing himself to William McKinley, the 25th president of the United States (1897–1901). He even celebrated McKinley in his inaugural address, declaring that McKinley “made our country very rich through tariffs and through talent.”
There is just one problem: the current president leaves out an important part of McKinley’s story. McKinley was unquestionably a protectionist. He initially believed tariffs could shield U.S. manufacturers and workers from foreign competition, and he signed the highly protectionist Dingley Tariff into law in 1897. But as American industry and productivity surged, McKinley started to understand that the United States could not simply build tariff walls around an increasingly powerful and productive economy. He came to recognize that American companies needed customers abroad.
As a result, by the end of his presidency, McKinley was championing reciprocity agreements that would lower trade barriers and open foreign markets to American goods. By then, McKinley wasn’t arguing that America should retreat behind ever-higher tariff walls; rather, he was telling Americans that their newfound industrial might made greater access to the world economy essential. In his final public speech in 1901, he declared: “We should sell everywhere we can and buy wherever the buying will enlarge our sales and productions” and “the period of exclusiveness is past… commercial wars are unprofitable.” America, he explained, was producing more than its domestic market could consume: “What we produce beyond our domestic consumption must have a vent abroad.”
… an approach significantly different from that of President Trump, who has used tariffs not to protect American industries or negotiate better trade terms, but as a blunt-force instrument of economic coercion to influence policies having little to do with trade itself (like immigration, for example).
Tariff Man Trump is also wrong to credit tariffs with making the United States “probably the wealthiest it ever was” during the 1890s – a decade that included one of the most severe economic contractions in American history. In fact, the Panic of 1893 was followed by years of bank failures, business collapses and extraordinarily high unemployment, with a sustained recovery not taking hold until around 1897.
And when prosperity returned, America was experiencing extraordinary gains in industrial productivity and technological innovation, massive railroad and infrastructure investment, rapid population growth, expanding exports and capital formation. At the same time, new supplies of gold helped expand the money supply.
President McKinley certainly believed in tariffs. But the lesson he eventually drew from our emergence as an industrial powerhouse was ultimately less protectionist than The Donald claims: protect American industry when necessary, but recognize that a rich, productive America also needs the world’s markets.
Look, there is no question that global trade has hit certain sectors of our economy hard and that the federal government should provide a financial backstop for these families and communities, just in case there is any gap between winding down old jobs and beginning new ones. This should include temporary income replacement, strong protections for pensions, and retraining and relocation support. Learn more about U.S. Works here!
(click here)
That said, a more connected world is not wholly responsible for the displacement of certain American workers. Even if we halt all progress toward globalization, including imports and outsourcing, advancements in technology alone would cause certain jobs within industries such as steel, textile and automobiles to eventually become outdated.
The coolest thing about a capitalist economy, however, is that it offers everyone the opportunity to adjust as the demands of the economy evolve.
W know we sound like a broken record, but it’s better for all of us to reject isolationism and embrace the world market. We do not have such an embarrassment of riches in this country that we can afford to abandon this golden opportunity solely out of fear and misperception.
Thanks to the Trump/Vance administration’s extremely misguided and misinformed beliefs about this topic, perhaps the number one misconception about global trade is that there must be “winners” and “losers.” This is a false premise.
One of Tariff Man’s favorite rally lines is that the entire world is out to get us, screwing us at every opportunity. But that’s just not true. Guys, honestly, that’s just not happening.
Donald, we need you to listen up, pal: Contrary to what you seem to think, trade deficit doesn’t automatically mean we’re getting screwed. Trade deficits are not scorecards that keep track of who is winning and who is losing, or if trade deals are “good” or “bad.” Unlike what you seem to believe about everything, trade is not a zero-sum game.
Let’s say that China really loves American tractors. They just can’t get enough of our tractors over there! So, China buys $100 worth of our tractors. We, in turn, love us some Chinese fortune cookies. We just can’t get enough of Chinese fortune cookies! So, we buy $200 worth of Chinese fortune cookies.
The difference between these two purchases is the trade deficit (i.e., the gap between how much in goods and services we import from other countries, and how much we export to them). As it stands now in our example, China has a $100 trade surplus and America has a $100 trade deficit. But notice that no one is “winning” or “losing” in this scenario. Remember, we didn’t just write China a check for nothing ...we got a lot of fortune cookies for our money!
It’s true that trade deficits are subtracted from the Gross Domestic Product (GDP) so, on paper at least, if one country is selling less stuff, they could be producing less, which means there could potentially be less jobs. But in real life, that’s not necessarily true. For instance, the United States had a large trade deficit in 2009, when the unemployment rate was 10 percent, but had an even larger trade deficit in 2006, when the unemployment rate was just 4.4 percent. The trade deficit is more a function of the value of the U.S. dollar (more on this in a minute).
Isn’t this fun!?! Now, there’s a flip side to all of this that some people fail to consider, and it’s a major one. When we last left our tractor/fortune cookie trade, China had a $100 trade surplus. So, what is Xi Jinping going to do with that $100?
Well, he can do one of two things: 1) He can do nothing and just keep the money in a back account somewhere. However, this will just increase the value of his currency and ultimately push his domestic prices upward; OR he can 2) Take the $100 and invest it back in the United States through stocks, bonds, or direct investment (i.e., plants, equipment, and real estate). The Economist explains this concept way better than we can: “It is as if container ships arrived at American ports to deliver furniture, computers and cars, and departed filled with American stocks and bonds. Over time, those assets yield returns in the form of interest, dividends and capital gains.”
This is awesome because foreign direct investment (FDI) is vital to our economic growth and development – and the U.S. attracts more foreign direct investment than any other nation in the world.
The Economist continues, “To the extent that trade deficits thus represent borrowing from abroad there is some truth to the idea that they could erode American wealth. But that is to ignore a crucial point about the debt incurred: it comes cheap. America has run current-account deficits – which are substantially driven by the balance of trade – almost every year since 1982. As a result, foreigners own American assets worth $8.1 trillion more than the assets Americans own overseas, a difference equivalent to 43 percent of America’s GDP.” (this was written in 2017)
It’s very important to keep in mind that trade deficits are different for the United States than other countries because our currency is the dominant global reserve currency – meaning the U.S. dollar is used in many transactions that the United States has nothing to do with. Many countries trade with one another – and borrow and lend – using the U.S. dollar. This increases the demand for our dollar on foreign exchange markets which, in turn, makes our dollar stronger. A stronger U.S. dollar, in turn, makes our exports more expensive and imports less expensive – which ultimately leads to an overall trade deficit.
In fact, because of our currency’s position in the world, the U.S. running a trade surplus would create serious strain on the entire global market. That sounds dramatic but remember that, in the past four decades, the United States has had current-account surpluses in only three years –1980, 1981 and 1991 – and each of those years was tied to a recession.
Far from being a burden, we as a country want this role. It gives us unparalleled power in global finance, not to mention lower interest rates which leads to cheaper financing.
So, guys in the Trump/Vance administration, the lesson here is that, if the U.S. economy is growing faster than other economies around the world, our trade deficit will probably increase – because strong domestic growth increases America’s demand for imports while, at the same time, weaker foreign growth decreases the world’s demand for America’s exports.