Fifteen Asia-Pacific countries just signed the largest trade agreement in history, the Regional Comprehensive Economic Partnership. These countries account for 30% of global Gross Domestic Product. This agreement is in addition to the Trans-Pacific Partnership Agreement (TPP) the same countries signed in 2018, which also included the western hemisphere countries of Canada, Mexico, Chile, and Peru. The United States had been a participant in the TPP negotiations but withdrew when Donald Trump was elected President. Since that time, the Trump Administration has followed a strategy of pulling away from trade agreements and engaging in trade wars by imposing tariffs on our trading partners. Trump tweeted that “Trade wars are good, and easy to win”. And what has been the actual results of Trump’s trade policies? For the most part, they have been disastrous.
- Overall the tariffs resulted in a loss of 180,000 jobs across the economy.
- On average, the tariffs cost each American household $1,000 per year.
- The growth rate of the economy dropped from 2.9% in 2018 to 2.3% in 2019.
- While Trump stated that “We will end our chronic trade deficits,” the trade deficit deficit actually increased 26.7% during his Administration.
So how will Joe Biden change America’s trade policy? Positively he will:
- End the trade wars.
- Re-engage with the rest of the world on trade.
- Work to expand trade and partner with other countries in trade agreements.
- Work to improve the education and training of American workers to make them move productive and competitive in the global economy.
- Increase government funding and commitment to research and development.
- Focus on cutting edge industries in areas like clean energy and artificial intelligence.
While the above policies move the country in the right direction, the Achilles heal of Biden’s trade policies is his commitment to use tax dollars to buy products made in the United States, which means the country will continue to support non-competitive, declining industries. The foundation of this commitment is the Buy American Act of 1933. The Act currently requires that products purchased by the Federal government have a domestic content of at least 51%. Biden supports increasing it to 55%, with an increase of 95% for steel and iron products Does such a policy make economic sense?
As I have argued in my book Capitalism, Socialism, and the Promise of Democracy, these types of policies raise the living standards of individuals “connected” to the targeted industries (primarily stockholders and workers) at the expense of everyone else (in this case, taxpayers). For example, it is estimated that Trump’s tariffs on Chinese steel came at a cost of $900,000 per domestic steel job saved, a staggering sum borne by taxpayers and consumers.
Biden’s policy of buy American will have a similar impact; taxpayers will pay an unnecessarily higher price for products produced more efficiently somewhere else. It makes no more sense than to insist that consumers buy higher priced American-made cars rather than lower-priced (and higher quality) foreign made cars. Are Americans worse off for having turned away from domestic auto manufactures over the last 50 years, and instead buying foreign cars? The result has been a decline in the American automobile industry, falling stock prices of domestic car companies, and fewer jobs in the U.S. auto industry. However at the same time, Americans chose to buy foreign-made cars because they were better designed, better constructed, safer, more fuel efficient, and less expensive. Buying foreign-made cars increased the living standards of the vast majority of Americans, even though the living standards of stockholders and workers in the domestic automobile industry may have fallen. The result? Overall, living standards in the United States went up.
Instead of using hard-earned taxpayer money to support inefficient, failing industries like steel, Biden should instead direct even greater tax dollars to industries of the future and industries where America can have an advantage over foreign producers. These include sectors like clean-energy, artificial intelligence, bio-technology, medical technology, wireless technology like 5G, advanced technologies in manufacturing, and space travel.
To support these industries, the Federal government needs to provide funding to improve the public education system so that Americans are better prepared to work in these very industries. The steady decline in the quality of public education over the last several decades is one of the greatest risks to the ability of our country to compete economically against other countries. Although Biden has pledged to provide greater support for more advanced, higher tech industries as well as for public education, every dollar spent trying to save declining industries is less money that could have been spent to move us forward in these other areas.
The key to the economic welfare of our country and raising the living standards of our people is to engage economically with the rest of the world by trading with them. To do so, we need to increase the productivity of our people so that we can effectively compete in the global economy. This requires a concerted effort to improve the public education system. We must then focus our efforts on the industries that we have a competitive advantage in relative to other countries. For the United States, this will primarily be more futuristic, higher tech industries.
Requiring that the government or American citizens buy domestically made products to fruitlessly try to save jobs in declining, non-competitive industries is politically popular for individuals connected to those declining industries. But it is economically counter-productive and comes at a high cost to the nation as a whole.
Adam Smith’s idea that increased trade results in higher living standards, and David Ricardo’s insights on comparative advantage, that countries need to focus on areas where they have a competitive advantage, are as relevant today as when they were first advanced over 200 years ago. Biden needs to listen.
