Free trade has become a major topic in the US presidential election. Both Republicans and Democrats are campaigning against free trade. If the US turns its back on trade, though, it won’t be American workers who will benefit. It may be China’s.
Donald Trump, the leading contender for the Republican ticket, has threatened to erect a 35% tariff barrier against imports from China and Japan. Bernie Sanders, the self-proclaimed socialist competing for the Democratic nomination, says American workers should not have to compete with those in China or Mexico.
The force of the anti-globalization mood in the primary campaign is such that even Hillary Clinton, a chief architect of the Trans-Pacific Partnership when she served as President Barack Obama’s secretary of state, now claims to be against the deal because it has too many loopholes that will undermine American manufacturing. Mainstream economists such as Jared Bernstein now denounce free-trade agreements (FTAs) such as Nafta or TPP as corporate handshakes that have left ordinary workers behind.
The populist anti-trade movement blames these FTAs for betraying American workers for the dubious benefit of lower consumer prices. Real wages have been stagnant since the 1970s even as worker productivity in the US has soared. The financialisation of the US economy isn’t new, but the global financial crisis of 2008-09 made obvious just how blatantly “the 1%” line their pockets (and in the case of bankers, go on to enjoy taxpayer bailouts).
Yet this angst is odd when seen from Asia. Yes, global trade and the guarantee of pax Americana have enabled the continent’s path to prosperity, but for American ends.
The vast majority of jobs created by Silicon Valley innovation have been in China and other Asian countries, where large, flexible and cheap forces of labour could be mobilised to produce iPhones and the like. It is true that the tech boom has not led to mass employment in the US.
But this story is already obsolete. China faces wage inflation and its policymakers are struggling to maintain a strong renminbi, rather than engage in a beggar-thy-neighbour currency war. (Japan is relying on a cheap yen to boost exports, but after a massive decline, the yen is also staging a recovery. In a world of loose money, zero interest rates and debt overhangs, currency gains have proven ephemeral - for Japan, the eurozone, the US, and everyone else.)
Critics of trade ignore the trends of the US on-shoring manufacturing, let alone the emergence of Chinese investment backing job creation in the US, just as Japanese companies have done for decades, notably in the US automobile industry.
Moreover, US diplomacy is on the cusp of a huge strategic victory. The TPP deal would tie the most dynamic countries of the Pacific Rim to new rules of the road to US norms, as Clinton well knows. The things that matter in the 21st century economy, such as intellectual property rights and government procurement policies – the areas in which American companies enjoy strategic advantages – would be enshrined. This would shift trade away from China, which is pointedly not a TPP participant, and toward the US.
Of course, anti-traders in the US election may recoil at such a prospect. Oh no, more byzantine deals hatched by faceless corporations, undermining our workers! But what TPP actually represents is a huge challenge to America’s trade rivals, particularly China. TPP is like a giant gravitational force that would swing activity away from China’s moon and closer to America’s sun.
Until now, China has been left with consolation prizes: admitting the renminbi into the IMF’s basket for special drawing rights, or its new institutions to promote investment and development. America gets deeper relationships with Canada, Australia, Japan, Vietnam, Singapore and Mexico; China gets one belt with Kazakhstan and one road to Mongolia. Who’s the economic superpower of the future again?
US protectionism will only harm its interests in Asia, including those of US labourers. TPP is the best bet for restructuring Japan’s most protected industries; engagement rather than isolationism is more likely to make Japan change its ways vis-a-vis its trading partners. And the whole point to China’s economic policy is to shift away from reliance upon exports, and to create a consumer economy. How can that not benefit an America that remains active in trade?
But now imagine the next US president, be it Republican or Democrat, declares against TPP. This would be the equivalent of the US Senate voting against Woodrow Wilson’s League of Nations. In other words, a disaster for America’s “pivot” to Asia and a huge opportunity for China to capitalise on the error.
Such an outcome would undermine US foreign policy and trip up US companies keen to penetrate Asian markets. But would it be bad for US workers? Of course it would be. It’s still companies that create jobs; it's companies that sell goods and services to Asian consumers.
Free trade doesn’t create jobs. Its benefits have always been oversold by politicians. It creates and destroys jobs in particular sectors (what economists call the pattern of employment, rather than the quantum). Technology – automation, artificial intelligence, digitalisation – plays a far greater role in shaping both the pattern and the quantum of employment.
Inequality, loss of opportunity and the decline of good jobs for both blue and white-collar workers are genuine problems in the US; the anger toward trade is understandable, the gesture politics of blaming foreigners irresistible. But there are other ways to address these issues: a massive, state-funded effort to rebuild American infrastructure would generate lots of good jobs as well as pave the way (literally) for future economic growth, while "helicopter money" from the Federal Reserve could stimulate consumer demand at home, thereby supporting a rise in corporate investment.
If the US turns its back on TPP and on free trade, this will signal the end of pax Americana in the Pacific, encourage Asian trading partners to redouble their integration with China, and erode US corporate advantages. It’s hard to see an anti-trade stance actually adding jobs in the US. It’s easy to see it eliminate the opportunities of the future.