President Donald Trump believes an “America First” foreign economic policy would save Americans’ income and jobs and would help rebuild the country. For Trump, the economic content of America First is aggressive trade protectionism, a closure of borders to migration, economic sanctions against U.S. adversaries, rejection of China’s investments in U.S. companies, and other measures to give the United States a purported advantage in economic power vis-à-vis America’s rivals. Putting aside the moral and diplomatic dangers in Trump’s brazen assertion of American self-interest above global well-being, there are several dangerous myths in Trump’s economic reasoning.
Trump’s most provocative and misguided claims arise in regard to America’s international trade and investment policies. He has repeatedly claimed that by getting tough with American firms moving overseas to China and Mexico he will restore American jobs and wealth at home. In this case, Trump has spotted a true phenomenon—the offshoring of jobs—but grossly exaggerated its importance and shot utterly at the wrong target.
American manufacturing companies have indeed moved jobs to China and Mexico in order to benefit from lower wages for the labor-intensive segments of the production process. A recent study shows that as of 2014, U.S. multinational firms employed around 706,000 manufacturing workers in Mexico and 753,000 in China, or about 1.5 million workers in total, in overseas affiliates in which the U.S. firms have majority ownership.4 The Mexican production is directed toward the U.S. market under NAFTA, while the Chinese production is for both the United States and the rest of the world.
Of course, 1.5 million is not a trivial number of workers, but it amounts to just 1 percent of the U.S. labor force. Manufacturing jobs as a whole in the United States are just not that numerous anymore because of the long-term processes of automation. In 1970, manufacturing jobs constituted 25 percent of the workforce; today, they constitute just 8.4 percent. It’s not that the manufacturing jobs went overseas; they mostly went the way of smart machines. Yesteryear’s assembly workers are today’s assembly-line robots. And today’s remaining manufacturing workers are tomorrow’s artificial intelligence systems.
There is another fallacy. Reversing the offshoring would not create the same 1.5 million jobs inside the United States. Production is much more capital intensive in the United States than in China and Mexico because of higher U.S. wages. The 1.5 million workers in China and Mexico might translate into 750,000 workers inside the United States. This is just 0.5 percent of the U.S. labor market. And even those supposed job gains overlook the much higher production costs that the U.S.-based companies would incur when the jobs return, causing those firms to lose international competitiveness and to cut back on other employment already in the United States, such as the R&D units that support overseas operations.
Of course, some offshore production will never return to the United States. Some of the overseas operations have nothing to do with the U.S. market. And even production for export to the U.S. market is not so easy to cajole back home.
Suppose, for example, that Trump were to follow through on his threat of a “border tax” (or import duty) on goods exported to the United States by U.S. companies operating in China and Mexico. In response, those companies would most likely divest their overseas operations and buy the same products from unaffiliated companies not subject to the border tax. Suppose that Trump were to put tariffs on products coming in from China and Mexico. He would then set off a gigantic trade war that would do great damage to the U.S. and world economy. This trade war may have started in slow motion in early 2018 with Trump’s decision to impose protective tariffs on washing machines and solar panels (January) and steel and aluminum (March). The administration is also aggressively closing the U.S. market to China’s high-tech companies such as Huawei on the grounds of national security.
What about pronouncements by Ford Motor Company, for example, promising to invest $700 million in Michigan rather than Mexico? The company declared that the move, portrayed as a response to Trump, would save 700 jobs, or roughly 1 job per $1 million in investments. At that rate, Trump is not going to get very far for America’s 152 million workers. Indeed, as of January 2018, one year into the Trump program, U.S. employment in motor vehicles and parts manufacturing stood at 955,100, down from 956,700 in January 2017.
Instead of blaming China and Mexico for the very real problems facing America’s workers, Trump should be taxing the booming incomes of the capital owners (with their stock valuations at record levels) in order to ease the economic burdens on the workers. Unfortunately, he is doing exactly the opposite: giving yet more tax breaks to corporate capital on the claim that corporate tax cuts will also bring manufacturing jobs back home.
The so-called tax “reform” of December 2017 is actually a tax monstrosity. It cuts the headline corporate tax rate from 35 percent to 21 percent with an estimated revenue loss of around $1.5 trillion over a decade, or roughly $150 billion per year. The estimated direct revenue loss plus higher interest payments on the public debt are likely to raise the overall budget deficit by nearly 1 percent of GDP per year during the decade 2018–2027, with the tax savings accruing overwhelmingly to the rich. Today’s young people will inherit a mountain of public debt and debt servicing in the future. The debt/GDP ratio could rise from today’s high ratio of 77 percent to nearly 100 percent by around 2030.
The gains in good new jobs will be very small. Indeed, much of the new investment by business will be in robotics and smart systems to replace workers, not to hire them. The tax cut could easily accelerate the shift away from labor toward capital in many sectors, thereby depressing real wages. Moreover, other nations will now cut their own corporate tax rates to prevent the United States from shifting investments out of those other economies. This will produce a “race to the bottom” in capital taxation. As more and more countries slash their corporate tax rates, no country gets an advantage over the others. Instead, they all lose revenues. The only winners are the richest people in the world, and even there, the “winning” is likely to be short-lived if the result is more political instability and social unrest.
Trump also proposes to offset the tax losses by slashing U.S. spending on foreign aid and on the United Nations. Here lies another great myth. Cutting spending on aid and the UN will save very little in dollar terms, but will cause a huge blow to America’s global interests and national security, not to mention America’s moral standing in the world. Total U.S. foreign aid is around $33.6 billion per year, roughly 0.18 percent of national income. Thus, even if all foreign aid were eliminated, it would offset around one-fifth of Trump’s corporate tax cut. If anything, the United States should be doing far more, in partnership with other countries; in chapter 16, I’ll look at the important things U.S. foreign aid has accomplished—and all that could be accomplished with just a part of the funds that will go to the tax cuts for the rich.
Trump also asserts that the United States can achieve great savings by cutting its UN contributions. Here too, the savings are tiny in dollars and recklessly dangerous in their consequences. The United States contributes 22 percent of the UN’s regular budget, the largest share of any country. But the regular budget is very modest, just $5.68 billion for the recent two years 2016–2017, with America’s assessed share 22 percent of that, or just $625 million per year. Trump pushed for $285 million in cuts for the next two-year UN budget (2018–2019). The savings are thus $143 million per year, with the U.S. portion at 22 percent of that, or $31 million per year. That comes out to around 0.02 percent of the annual $150 billion in tax cuts.
The United States spends another $7 billion or so per year in so-called “voluntary contributions” for UN agencies such as UNICEF (the UN Children’s Fund) and for UN peacekeeping operations. Not only are those additional contributions vital for saving lives and for U.S. and global security, but they are actually cost-saving for the United States as well. In each of these cases, the United States pools its funds with those of many other countries and thereby shares the global burden for peacekeeping, disease control, and other priorities. Many of those other donor countries give a much higher share of their GDP in aid and UN support than does the United States.
The main point is this: Even if all U.S. foreign aid and UN contributions were ended, the financial saving to the United States would amount to no more than 0.2 percent of GDP, roughly a quarter or a fifth of the 2017 tax cut, and roughly one-hundredth of the federal government’s outlays. The idea that such savings would substantially benefit the American worker or taxpayer is a complete myth, indeed an outright hoax. The result of such budget cutting would be to make the world even more dangerous and unstable and more vulnerable to epidemic diseases and other natural disasters.
The bottom line is that “America First” will not solve America’s jobs crisis, income inequality, or infrastructure crisis. American companies will bring few if any jobs back from China and Mexico. Slashing U.S. development assistance or outlays for the UN will produce negligible budget savings at a high cost to U.S. global interests. The tax cut will cause a significant rise in the budget deficit with little effect on growth and employment.
The key to resolving America’s ills depends on greater fairness, decency, and honesty within our own borders, and depends notably on how we share the benefits of advanced technologies such as robotics and artificial intelligence and the booming profits they are producing. The real counterpart of falling American working-class incomes is not the rise of Mexican or Chinese incomes but the soaring profits and incomes now going to the richest 1 percent of Americans. The key solutions for American workers lie right here at home, not in overseas military adventures, new arms races, or self-defeating trade wars. Yet given Trump’s misguided economic populism, that’s exactly where we’re headed.