Trump’s 45% Tariff Proposal, and the History of the “Misguided Trade Policy” Forest

Money Magazine columnist Marc Bain recently wrote an article criticizing President-Elect Trump’s proposal for a 45% tariff on goods imported from China.  His analysis included a mathematics lesson and a bit of bluster about how this would raise the price of Chinese made goods.  Well, we didn’t need a math class to figure that out.  But, by focusing exclusively on Trump’s 45% tariff, Mr. Bain misses the forest for one tree; which is exactly the type of economic orthodoxy that got us into this mess.  So, to provide a bit of context for the President-Elect’s proposal, here’s the history of the “Misguided Trade Policy” forest:

In the 1980’s, Wall Street began placing higher valuations on “asset light” companies, according to a 2013 report from the MIT Taskforce on Innovation and Production. This gave larger U.S. based manufacturers an incentive to move production offshore. But the resulting offshoring was somewhat limited because no single country had the infrastructure and labor force to take advantage of the new environment – other than China.

However, in the ’80s and ’90s, China had not yet been granted “permanent normalized trading relations” (PNTR). Each year, Congress voted on whether China would have the benefit of normalized trading relations (hence, not yet permanent). This uncertainty restrained large U.S. based manufacturers – and buyers – from making investments in Chinese production capability.

When the U.S. granted PNTR to China in 1999, the offshoring ball began to roll downhill. China’s entry into the WTO in 2001 – facilitated by the U.S. – was when that ball rolled off a cliff and we lost over 3 million manufacturing jobs to China. Why did the U.S. push for China WTO entry? Because large multi-national manufacturing companies and big box retailers were lobbying for it. And conventional economic wisdom (and the Clinton administration) believed that China would adhere to its WTO commitments (including guidelines on pollution, labor standards, currency manipulation, etc.). We all know how that has gone.

In spite of this history, economic pundits and politicians still labor under the assumption that trading manufacturing jobs for cheap imports will raise our standard of living. It is important to note that real median household income in the U.S. trended downward over the course of several years after China was granted PNTR in 1999, and still remains below 1999 levels even given last year’s 5% increase (according to figures from the Federal Reserve Bank of St. Louis). Also, when did the labor force participation rate peak in this country? Yup, you guessed it; 1999.

That, my friends, is the history – and the sad result – of the “Misguided Trade Policy” forest.

So my analysis of Trump’s proposal for a 45% tariff on Chinese-manufactured goods is that he is staking out a negotiating position that will be used to address the root cause of the problem – China flaunting WTO rules and forcing U.S. manufacturers to compete on a highly skewed playing field. And, as the CEO of a small manufacturing company, I’m not even asking for a level playing field, just a fighting chance. Perhaps President Trump can give me – and others – that chance.

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