In Monday night’s debate, Donald Trump repeated his assertion that the Chinese “are devaluing their currency and there’s nobody in our government to fight them….So we’re losing our good jobs, so many of them.” The implication is, therefore, that we are now overmatched against a powerful China.
Trump’s claims regarding China are as much wrong as they are right. China, while its size and power continue to increase, has significant problems of its own and is not as potent as Trump implies.
First of all, Trump’s currency claims are indeed a little musty. He charges that China is devaluing its currency—i.e., making it weaker—but China’s currency is 20 percent stronger than it was in 2000, and is at rough parity with where it was in the crisis year of 2008. Since that time, it has both strengthened and weakened, but all within about a 10 percentage point range. That’s a lot if you are a leveraged currency trader, but it should be reasonably manageable for most U.S. businesses.
Putting Trump’s currency claim aside, however, his more fundamental point is that we are losing jobs because of our trade policy, and trade policy involves much more than currency issues—it involves things like trade agreements, tariffs, and taxes. It is regarding this set of issues that Trump may have made one of the better points of his campaign.
Mainstream economists dismiss the significance of trade deficits and view free trade as an indispensable part of sound economic policy. Furthermore, economists and politicians alike are quick to invoke the specter of the highly protectionist Smoot-Hawley Tariff of 1930 as either the cause of the Great Depression or as the act that deepened and prolonged it.
But it may not be that simple. As iconic a free market figure as Ronald Reagan once imposed a 100 percent tariff on Japan to force the modification of that country’s trade practices. And the United States has had very long periods where it had both highly protectionist tariffs—often as high as 50 percent—and very strong growth. Smoot-Hawley was neither the cause of the Great Depression nor a major factor in its severity. (That distinction belongs to the massive private debt accumulated in the 1920s and the misguided practices of banks and of the Federal Reserve in the 1930s.) I don’t mention these things in order to advocate protectionism. Far from it. Instead, I mention them to suggest that the issue is more multi-dimensional than many policymakers choose to recognize.
There is very little that Trump has said in his campaign that I can agree with, and much that has horrified me, but this is one area that deserves attention. It has clearly struck a chord with certain large and important constituencies. We have lost jobs. Over the last few decades, the bias in trade policy for both Democrats and Republicans has been in favor of the shareholders and management of large corporations (or in some cases to trade economic benefit for political support), often at the expense of workers. Perhaps it is time to modify this bias and do a more thorough and careful job of thinking through the issues and the outcomes of our trade policy on workers.
As regards our trade deficit, it has declined from 6 percent in the pre-crisis boom year of 2006 to 3 percent today. That is still high by historical standards, and two-thirds of that deficit is with China. We do need to address that imbalance over time and as opportunity allows.
But, in doing that, we need to properly understand China’s economic situation. China may again devalue its currency, but, if it does, it will be from a position of weakness instead of strength. And, given the lack of demand in the rest of the world, it will yield little benefit. China is now confronted by an array of problems unlike any it has faced since Deng Xiaoping introduced market reforms in 1978. It now has a massive private debt burden, millions of empty homes, unprecedented overcapacity in key industries, growing worker unrest, and vigorous competition from cheaper labor markets such as Vietnam. Like Japan in the 1990s, which, after its boom in the previous decade, entered a period of economic stagnation that persists to this day, China is now facing a slowdown that could last a generation.
Trump may not have his facts quite straight on China, but beneath it all, he may have made an important point. The United States has long had the size and influence to achieve its ends in trade negotiations. We should make sure that, where a domestic industry risks disruption from a trade agreement, our trading partners open their markets to create opportunities that truly compensate for this disruption, and that the affected workers are provided the training and counsel to continue commensurate careers. The American worker deserves a higher priority in the trade equation.