- - Tuesday, May 17, 2016

ANALYSIS/OPINION:

Donald Trump and Paul Ryan must bridge wide differences on free trade, immigration and other issues to accomplish Republican unity, win in November and govern effectively, but on trade that is hardly an insurmountable task.

Lowering tariffs and other barriers to international commerce better permits businesses and workers to specialize — each nation exports more of what it does best and buys more of what is made less expensively abroad.

The U.S. automobile industry understands this. It keeps at home product design, software development and most engines and transmissions, but outsources simpler components to Asia and Mexico.

Americans would get richer if sales abroad approximately equaled foreign sales here, because U.S. exporters enjoy greater worker productivity and pay higher wages than businesses competing with imports.

Unfortunately, it has not worked out that way.

In 2015, U.S. foreign sales totaled $2.3 trillion and that permitted Americans to buy a like amount of foreign goods and services. The resulting productivity gains from increased specialization raised U.S. gross domestic product (GDP) by some $240 billion.

However, Americans imported even more — $2.8 trillion. The resulting $529 billion trade deficit destroyed 4 million jobs that were not replaced by exports or jobs in supporting industries, and that overwhelmed the gains from trade noted above.

On net, U.S. GDP was reduced by trade by at least $289 billion. Wages paid to workers were pushed down by more than $150 billion, or about $1,000 per worker annually.

The cumulative effects of persistent trade deficits are even more devastating.

Each year, Americans have to borrow from abroad or sell U.S. assets to finance the trade gap. For example, the more than $1.2 trillion in U.S. Treasury securities held by the Chinese and the sale of GE’s appliance business and other private American corporate assets to the Chinese.

Most of the lost business activity and jobs are in manufacturing — that sector supports a lion’s share of research and development spending. Year after year, the resulting lost investments in new and improved products reduces annual economic growth by 1 to 2 percentage points.

But for the trade deficits endured during the Bush and Obama years, the U.S. economy would be about 30 percent larger — and Americans that much richer — than today.

As a former U.S. trade official, I know negotiators work hard to ensure new trade agreements create at least as much in new exports as additional imports, but too many of our trade agreements simply don’t measure up.

Bill Clinton negotiated a deal that permitted China to enter the World Trade Organization in 2001 and liberalized bilateral trade, but as implemented, the arrangement is hardly fair or balanced. China’s average tariff on imports is 9.6 percent, whereas the U.S. average levy is 3.5 percent.

Particularly important, foreign governments often push down the value of their currencies against the dollar to make their exports cheaper on American store shelves and U.S. products artificially more expensive in their markets.

According to the World Bank, if China’s currency were trading at a rate that actually reflected the cost of making goods in China, it would cost 3.53 yuan to purchase 1 dollar but instead it costs about 6.53.

American businesses face similar problems with other major trading nations such as Japan, South Korea and Mexico, but with globalized supply chains and the benefits Americans enjoy from fairly traded imports, no one wants to turn to blind protectionism and shut down trade.

Instead, the next president should renegotiate and better enforce existing agreements to ensure more balanced trade. That would boost exports, redirect U.S. consumer demand to American factories, substantially increase GDP growth and tax revenues, and reduce budget deficits.

China accounts for more than 60 percent of the U.S. trade deficit but has proven particularly recalcitrant in bilateral talks to revalue its currency or ease other trade tensions.

Just like Donald Trump in the primaries, Mitt Romney campaigning in 2012 and Noble Laurette Paul Krugman have suggested a big tariff to bring China into serious discussions. Seen in the context of getting better terms — for example, lowering Chinese tariffs and revaluing the yuan — this is really a pro-free-trade position and consistent with establishment Republican goals.

It’s really just a matter of being clearer about the objective — growing the economy and getting a fairer deal for American businesses and workers.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.


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