Trumponomics
Published in El Comercio
(Peru) on 17 May 2017
by Enzo Defilippi (link to original)
(Peru) on 17 May 2017
by Enzo Defilippi (link to original)
Translated from
by Kaleb Vick.
Edited by Elizabeth Cosgriff.
Trump gives the impression of being so arrogant that he believes his executive order can override economic laws.
The latest presidential campaign in the United States was so sui generis that four months after Donald Trump assumed the presidency, we still don’t know what his economic policy is.* That’s why a recent interview he did two weeks ago with the British publication, The Economist, is so relevant.
His goal, which is no surprise, is for economic growth to increase the number of decent, paying jobs. The fear comes when he explains how he believes this growth will be generated: He reveals ideas that are fundamentally wrong about how international trade generates growth and well-being.
Trump says his economic vision is fundamentally linked to free trade agreements that, according to him, have never been well negotiated. Why? Because for him, a trade agreement is only well negotiated if it prevents his country from creating a trade deficit. As the U.S. reaches $70 billion in trade with Mexico and $15 billion in trade with Canada, he calls for a total and complete renegotiation of NAFTA, as well as taxes of at least 35 percent for companies that move production plants abroad.
Why is this view wrong? Because, as any economics textbook will tell you, trade deficit is explained by the difference between what a country saves and what it invests. What is negotiated in the agreements is almost a footnote when one looks at the whole story.
On top of that, the size of the trade deficit is a poor indicator of the benefits of free trade. Seventy-seven percent of the trade deficit in the United States is generated under regulations set by the World Trade Organization. The evidence collected by an independent agency of the same North American government indicates that belonging to WTO increases trade flows between 50 percent and 100 percent, which leads to larger markets for U.S. products that are cheaper for consumers, and which provide better competition in domestic markets.
Even worse, Trump says that he will stimulate the economy, generating massive fiscal deficits, reducing taxes and investing in large infrastructure projects, policies that will not generate the growth that he’s looking for, but that, without a doubt, will increase the trade deficit. The same thing would happen if he were successful in stimulating private investment, which will increase imports. What is he going to do then? Take even more protective measures? How does he think his trade partners, especially China, will react?
The main problem with this economic view is that it is anchored in the past. As the British newspaper states, Trump is so focused on protecting industrial employment (which represents only 8.5 percent of the total) that he doesn’t realize that technology, not free trade, is what is reducing the number of workers in other industries, like retail, that employ even more low-skilled workers. Nor does he realize that if businesses aren’t able to relocate their factories abroad, they will turn to relying on machines to stay competitive. Productivity will increase, but the employment industry won’t.
Trump gives the impression of being so arrogant that he believes his executive order can override economic laws. It’s a shame that thousands of families have to pay for his mistake.
*Editor’s note: Sui generis is Latin for one of a kind, unique, without equal.
The latest presidential campaign in the United States was so sui generis that four months after Donald Trump assumed the presidency, we still don’t know what his economic policy is.* That’s why a recent interview he did two weeks ago with the British publication, The Economist, is so relevant.
His goal, which is no surprise, is for economic growth to increase the number of decent, paying jobs. The fear comes when he explains how he believes this growth will be generated: He reveals ideas that are fundamentally wrong about how international trade generates growth and well-being.
Trump says his economic vision is fundamentally linked to free trade agreements that, according to him, have never been well negotiated. Why? Because for him, a trade agreement is only well negotiated if it prevents his country from creating a trade deficit. As the U.S. reaches $70 billion in trade with Mexico and $15 billion in trade with Canada, he calls for a total and complete renegotiation of NAFTA, as well as taxes of at least 35 percent for companies that move production plants abroad.
Why is this view wrong? Because, as any economics textbook will tell you, trade deficit is explained by the difference between what a country saves and what it invests. What is negotiated in the agreements is almost a footnote when one looks at the whole story.
On top of that, the size of the trade deficit is a poor indicator of the benefits of free trade. Seventy-seven percent of the trade deficit in the United States is generated under regulations set by the World Trade Organization. The evidence collected by an independent agency of the same North American government indicates that belonging to WTO increases trade flows between 50 percent and 100 percent, which leads to larger markets for U.S. products that are cheaper for consumers, and which provide better competition in domestic markets.
Even worse, Trump says that he will stimulate the economy, generating massive fiscal deficits, reducing taxes and investing in large infrastructure projects, policies that will not generate the growth that he’s looking for, but that, without a doubt, will increase the trade deficit. The same thing would happen if he were successful in stimulating private investment, which will increase imports. What is he going to do then? Take even more protective measures? How does he think his trade partners, especially China, will react?
The main problem with this economic view is that it is anchored in the past. As the British newspaper states, Trump is so focused on protecting industrial employment (which represents only 8.5 percent of the total) that he doesn’t realize that technology, not free trade, is what is reducing the number of workers in other industries, like retail, that employ even more low-skilled workers. Nor does he realize that if businesses aren’t able to relocate their factories abroad, they will turn to relying on machines to stay competitive. Productivity will increase, but the employment industry won’t.
Trump gives the impression of being so arrogant that he believes his executive order can override economic laws. It’s a shame that thousands of families have to pay for his mistake.
*Editor’s note: Sui generis is Latin for one of a kind, unique, without equal.
Previous article![]( "Tax Reform in the United States")
Next article![]( "Donald Trump’s Political Misstep")