Richard Baldwin
Richard Baldwin, Professor of International Economics at the Graduate Institute, Geneva, is the author, most recently, of The Great Convergence: Information Technology and the New Globalisation.
LONDON
– Donald Trump’s ignominious executive order barring entry into the
United States for refugees and others from seven predominantly Muslim
countries has dominated headlines in recent weeks. But the damage done
to America’s image, and to the global economy, will only be further
compounded by Trump’s early decisions on trade.
In speeches and
tweets, Trump has aggressively lashed out against globalization. He has
appointed the famously protectionist trade litigator Robert Lighthizer
to be US Trade Representative. And the other two members of his trade
triumvirate – Commerce Secretary-designate Wilbur Ross and White House
trade adviser Peter Navarro – are no less protectionist than Lighthizer.
Many working- and
middle-class Americans believe that free-trade agreements are why their
incomes have stagnated over the past two decades. So Trump intends to
provide them with “protection” by putting protectionists in charge.
But Trump and his
triumvirate have misdiagnosed the problem. While globalization is an
important factor in the hollowing out of the middle class, so, too, is
automation. Most of Lighthizer and Ross’s business experience has been
in twentieth-century industries such as steel production, which has
conditioned them to pursue twentieth-century solutions for America’s
twenty-first-century industrial problems.
Unfortunately,
old-fashioned protectionism will not boost American industrial
competitiveness, even if it saves a few thousand jobs in sunset sectors.
Moreover, ripping up trade agreements and raising tariffs will do
nothing to create new, high-paying factory jobs. If anything, tariffs
will only inflict further harm on workers.
Trump and his team
are missing a simple point: twenty-first-century globalization is
knowledge-led, not trade-led. Radically reduced communication costs have
enabled US firms to move production to lower-wage countries. Meanwhile,
to keep their production processes synced, firms have also offshored
much of their technical, marketing, and managerial knowhow. This
“knowledge offshoring” is what has really changed the game for American
workers.
In 2017, US workers
are not competing with low-wage foreign labor, capital, and technology,
as they did in the 1970s. Rather, they are competing with a nearly
unbeatable combination of low-wage foreign labor and US knowhow. One way
to conceptualize this is to think of US products as being made not in
the US, but in Factory North America. The goods made in Factory North
America must compete with goods made in Factory Asia, Factory Europe,
and so forth.
This means that if
the Trump administration imposes tariffs, it will turn the US into a
high-cost island for industrial inputs. Firms might be induced to move
some production back to the US, if it is strictly aimed at US consumers.
But they will be equally encouraged to offshore production that is
aimed at export markets, so that they can compete with Japanese, German,
and Chinese producers outside of the US.
Imposing tariffs on
imports, without also stemming the flow of ideas and intellectual
property, is like trying to prevent water from flowing through one’s
fingers by making a fist. A more rational approach would accept
twenty-first-century realities. The information revolution changed the
world in ways that tariffs cannot reverse. With US workers already
competing against robots at home, and against low-wage workers abroad,
disrupting imports will just create more jobs for robots.
Trump should be
protecting individual workers, not individual jobs. The processes of
twenty-first-century globalization are too sudden, unpredictable, and
uncontrollable to rely on static measures like tariffs. Instead, the US
needs to restore its social contract so that its workers have a fair
shot at sharing in the gains generated by global openness and
automation. Globalization and technological innovation are not painless
processes, so there will always be a need for retraining initiatives,
lifelong education, mobility and income-support programs, and regional
transfers.
By pursuing such
policies, the Trump administration would stand a much better chance of
making America “great again” for the working and middle classes.
Globalization has always created more opportunities for the most
competitive workers, and more insecurity for others. This is why a
strong social contract was established during the post-war period of
liberalization in the West. In the 1960s and 1970s institutions such as
unions expanded, and governments made new commitments to affordable
education, social security, and progressive taxation. These all helped
members of the middle class seize new opportunities as they emerged.
Over the last two
decades, this situation has changed dramatically: globalization has
continued, but the social contract has been torn up. Trump’s top
priority should be to stitch it back together; but his trade advisers do
not understand this. Sadly, they seem intent on imposing tariffs, which
will disrupt international supply chains, possibly lead to trade wars,
and only hasten US industry’s shift abroad.
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