Bernie Sanders and Donald Trump are leading a new American awakening on global trade. According to the new emerging consensus, America has been the victim of bad trade deals – including the yet-to-be-ratified Trans-Pacific Partnership (TPP) – for decades. These deals have shipped millions of good-paying American jobs abroad and in the process hollowed out the American middle class.
When Sanders and Trump recently began questioning the merits of trade with allies such as Japan as well, however, many believed them to have crossed a line. It is one thing to attack China for “stealing” jobs but quite another to sell short a close and faithful ally.
Americans have long harbored schizophrenic attitudes on trade, however.
In the recent Republican debate in Detroit, for example, the biggest applause went to Ted Cruz when he lamented how Detroit used to be “the Silicon Valley of America” – a city of “2 million” with “the highest per capita income in the country” – and vouched to bring Detroit and America back to their former glory. Left politely unsaid, yet understood by every former auto worker in Detroit, is the fact that the adversaries that have so decimated Detroit hail not from low-wage countries such as China or India, but advanced economies such as Japan and Germany.
Americans’ tendency to blame so many of America’s ills on trade – especially with “low-wage” nations – is perplexing since such trade – if anything – is supposed to be complementary rather than competitive.
Consider the case of the iPhone and iPad.
While these devices are labelled “Made in China,” Chinese labor accounts only about 3% of their overall value. According to one estimate, some 60% of the proceeds of each iPhone or iPad sold go to Apple, with the bulk of the rest going to various component and part manufacturers from Japan (34%), Germany (17%), and S. Korea (13%).
Part of the reason for America’s populist fervor may be with anachronistic methods of accounting for trade.
As the “factory of the world,” China imports on average $.41 for every $1 of export, leading its deficit numbers to be overestimated by 70% on average. America’s bilateral deficits with China is probably inflated even more given that America imports mostly consumer electronics, clothing and machinery – which generally require China to import more materials, parts and components on average.
China’s nominal deficit numbers hide other important metrics as well.
As part of China’s steady “opening up,” for example, American companies have become intimately involved in all aspects of China’s export business. It is estimated that American-owned ventures in China today captures some 52 .6 % of the value of all Chinese exports!
Foreign companies have directly invested over $100 billion annually in China for the last decade. Each time investors exchanges their U.S. dollar reserves for Chinese Renminbi to invest, however, a current account deficit is recorded China’s favor. China’s “huge” dollar reserve turns out to be a result of trade liberalization than “unfair trade”!
It is popular in America today to lament how trade has hallowed out the American industry. Facts show however that American manufacturing productivity and capacity are at their highest in history; America’s manufacturing wages have remained strong as well.
Manufacturing jobs have decreased because the American economy has become more service-oriented. Even had America isolated itself from trade, the regions of the nation that focused on assembly jobs would have become disproportionately poor with respect to rest of the nation anyways.
Both American companies and American consumers are big winners of global trade. What America needs is a new social contract to ensure more of its workers participate and share in the fruits of the new economy.
One way is to enact universal healthcare.
The U.S. stands almost entirely alone among developed nations without universal health care. Offering universal healthcare would not only help to even the global playing field for American manufacturers, it also has the distributive effect of alleviating some of the economic inequality that has crept up over the years.
Another way is to encourage more investments in American workers.
Current U.S. tax system makes it difficult for American companies to bring profits abroad back home to invest. Henry Ford – who had seen high wages and investment in local communities ultimately as an investment in future profits – would have been appalled by this state of affairs.
As the U.S. reforms its tax code, it should also contemplate making it easier for foreign companies – especially Chinese companies, which are too often viewed with undue suspicion – to invest. Had Chinese leaders displayed the same level of paranoia that American leaders display today, very few American companies would have been allowed to invest in China over the years – to the detriment of China.
Finally, America needs to prioritize to invest in itself again.
The U.S. has developed an account deficit with the world over the last three decades because it has allowed its household savings to plummet and its government deficits to soar. It currently has a bilateral deficit with all the major economies: from Japan, S. Korea, ASEAN, Germany, France, Great Britain, the E.U., Mexico, Canada, and India to, finally, China.
Yet even as Japan, S. Korea, Germany and others have emerged to build businesses that can beat the best from America in industries as diverse as auto, aerospace, and high tech, America continues to play as if it were a uni-polar world.
When Obama boasts how that the U.S. spends more on defense than the next eight nations combined, it is both a testament to America’s success as well as ills.
When Defense Secretary Ash Carter proclaims the TPP to be “indispensable” to America’s so-called pivot to Asia, comparing its ratification to stationing another aircraft carrier, the U.S. proves just how difficult it is to re-prioritize in a changing world.
To revitalize America for the long haul, America must learn to think more about building hospitals, schools and roads at home rather than deploying aircraft carriers and military bases abroad. It needs to reach out to rising powers like China to forge new common grounds for sustained prosperity rather than to foment old alliances to preserve outdated status quo.