American workers and globalization

Continued from last week:

Donald Trump made it sound like all the fault for the United States’ difficulty in managing globalization was due to trading partners abroad that were out to cheat the United States. The worst mistakes, however, were made by successive United States governments at home, due to their sustained inaction. This inaction, according to Richard Phillips, an American financial economic analyst, in part, was due to conservative opposition in the United States Congress. Republicans were adamantly opposed to anything that smacked of “industrial policy” or government intervention in the market.

Richard Phillips argued that as a result of this ideological stance, the United States never developed a strategy for competing in the global economy. Agenda items such as training the workforce, building infrastructure to get products to market and rewriting corporate tax laws to discourage outsourcing, for the most part, remain unattended. The one important exception has been innovation, where a combination of an entrepreneurial culture, the world’s finest research universities, abundant venture capital and sensible public policy helped to build world-beating companies such as Google and Facebook.

This wasn’t all the Republicans’ fault by any means. The Democrats are plenty culpable themselves for too often putting the struggles of United States workers on a back burner. These were notably not mistakes to lay at the feet of United States trade policy. But the critics of trade from the left and right are not entirely wrong. The United States would have to negotiate harder in its own interests on trade, and insist that other countries not gain artificial advantages through currency manipulation or government subsidy of industries. The failure to do so was fodder for the Trump campaign, especially in Rust Belt states like Michigan, Pennsylvania and Ohio that swept him to victory.

China has been, of course, the most egregious example of both, and United States efforts to counter Chinese trade distortions have been mostly ineffective. As Edward Alden, the Bernard Schwartz senior fellow at the Council on Foreign Relations stated, negotiating with China is hard, to be sure, but what is more puzzling is the failure by the Obama administration to take steps that would have strengthened its leverage, and also helped appease some of the critics of trade.

Edward Alden further noted that during the congressional debate over the now lifeless Trans-Pacific Partnership (TPP) trade deal last year, for example, the administration firmly rejected an amendment sponsored by Ohio’s Republican Senator Rob Portman, a former United States Trade Representative, that would have committed the TPP countries not to manipulate their currencies for competitive advantage. The administration feared that other countries would walk away from the TPP if the amendment passed; as it stands now, the United States will be the one to walk away from TPP.

More recently, the United States Treasury has fought back against efforts by the European Commission to crack down on special tax breaks. Those had lured investments by companies such as Apple and Amazon. Apple’s belated overture to move some iPhone assembly jobs to the United States is a transparently political move after years in which the company played countries off against each other to get the lowest possible tax rate on its earnings. Tiny Ireland had, for example, enticed Apple to invest and create some 6,000 jobs in Cork, while paying taxes of less than 1% on its foreign income.

The biggest loser here is the United States taxpayer, because American companies are able to manipulate the United States tax system to park profits offshore and avoid paying Uncle Sam. While corporate profits as a share of United States GDP are up sharply since the 1980s, the corporate tax burden has fallen slightly. The result is fewer tax dollars available for education, for infrastructure, for basic research and for other initiatives that could help U.S. competitiveness.

Richard Phillips argued that yet instead of addressing the problem, the Obama administration jumped to Apple’s defense. The right path of action would be working with Europe to discourage such tax avoidance, and to create investment rules in which the winners and losers are not determined by which government is offering the biggest handouts.

For the past half century, under United States leadership, the world has moved in fits and starts towards freer trade. With Donald Trump’s election, and the UK Brexit negotiations on the horizon, that progress has been stopped in its tracks. The question now is what comes next. According to Richard Phillips, if the outcome is a slightly tougher negotiating stance by the United States, an insistence, for example, that China adhere to World Trade Organization rules and pull back on subsidies and other trade-distorting supports for its companies, then the result could be positive.

A stronger United States social safety net, as well as investments in infrastructure and worker training to help Americans and to bolster United States competitiveness, should be part of the package. But the Republicans who now control the Presidency, the Senate as well as the Congress are highly unlikely to favor spending public money on anything that actually helps the voters who elected them. And nothing in Donald Trump’s record suggests a subtle approach on trade. Instead, he has long seen trade in “zero-sum” terms, in which gains for one country are losses for another.

That portends a bitter series of trade conflicts and perhaps even a genuine trade war in which countries engage in the sort of retaliatory protectionism last seen in the 1930s. As Richard Phillips stated, the costs to the United States and to the world could be enormous.