Donald Trump is wrong about trade agreements: Scrapping them won't protect U.S. jobs

Not signing any trade deals might save middle-class jobs in the short term, but it will cost us more in the end

Published May 13, 2016 9:56AM (EDT)

Donald Trump (Reuters/Rick Wilking)
Donald Trump (Reuters/Rick Wilking)

Let’s face it, we have an enormous economic problem on our hands: Globalization.

This problem is so big that it transcends our entire economic system. Our free-market economy has been outmatched. It is utterly unable to offer any solutions toward solving this predicament.

The problem is simple. Undeveloped nations around the world are increasingly becoming available as low-cost locations for manufacturing. As a result, global corporations in developed nations like America are relocating their manufacturing facilities to these low-cost locations overseas, and thus droves of middle and lower-class jobs in America are eliminated.

This produces devastating effects in America. The middle and lower classes lose an enormous segment of their employment base, so their wages decline and they fall into economic hardship. The corporate executives and shareholders, on the other hand, reap the profits from the cost-savings of relocating overseas, so they become richer and richer. As a result, income inequality is dreadfully exacerbated and American society becomes a hollowed-out shell of its former self.

The reason our economic system fails to self-correct this problem is because our free-market system does not even perceive this as a problem at all. It thinks this is all terrific. The cost of production is lowered, goods become available at lower prices, and the investors in these enterprises earn greater profits. It’s all wonderful.

Unfortunately, however, our free-market system cares only about profits and not about the lives of real working people.

Some contend that international trade agreements are to blame for all of this, such as the North American Free Trade Agreement (NAFTA) from 1994, and the current proposed Trans-Pacific Partnership (TPP). And indeed, this contention is quite logical. After all, one primary purpose of these trade agreements is in fact to establish foreign jurisdictions as viable manufacturing locations for American corporations. So if we would simply not enter into these trade agreements at all, the reasoning goes, then American corporations would be unable to relocate overseas and all the good middle-class jobs would remain in America.

One of the loudest voices against these trade agreements is that of Donald Trump. He is constantly railing against these trade agreements and attacking them as a major cause of our job woes. "Our leaders have negotiated terrible [trade] deals that are bleeding this country dry," Trump declared. "The TPP is another terrible one-sided deal that rewards off-shoring and enriches other countries at our expense," he blustered on, and "[w]e will move manufacturing jobs back to the United States and we will make America great again."

But the critical flaw in this reasoning is that it overlooks the reality of globalization. Regardless of whether America enters into any trade agreements, these foreign jurisdictions around the world are still opening-up for business as low-cost manufacturing locations, with or without America.

Due to globalization, American companies must increasingly compete against companies around the world. So if America declines to enter into any trade agreements, other competing nations will enter into trade agreements of their own with these low-cost jurisdictions. As a result, American companies will be saddled with the high costs of paying expensive American middle-class workers, while competing foreign companies will enjoy the devastating competitive advantage of a lower cost of production by manufacturing in these cheaper locations.

Not signing any trade agreements may save middle-class jobs in the short term, but in the longer term, even more jobs would be lost because American companies would not be able to compete in a global environment and would soon be out of business.

Therefore, not signing any trade agreements is simply not a viable option in today’s globalizing world.

Some contend that we could resort to the age-old maneuver of protecting American companies by imposing tariffs upon foreign imports into America. If an American-made product sells for $1 in America, and the same product imported into America by a foreign competitor from a low-cost jurisdiction could be sold for 75 cents, then America would impose a tariff on these imports equal to 25 cents, and thus both products would then be sold for $1 in America and they would compete against each other on a level playing field.

It all sounds good. The problem with tariffs, however, is that it is a messy game. If we impose tariffs on foreign countries seeking to sell goods in America, then these foreign countries will retaliate and impose tariffs against American companies seeking to sell American goods in their foreign countries. This leads to trade wars and all sorts of complications. And the notion that America could simply cut-off the rest of the world entirely and live as its own isolated island unto itself without importing or exporting internationally of course does not work. Thus, imposing tariffs upon foreign imports is not a viable solution.

So we’re in a pickle.

Signing trade agreements leads to the loss of manufacturing jobs, drastic income inequality, and the devastation of the middle and lower classes. Yet not signing trade agreements is not a viable option because it would render American companies unable to compete globally. This is a lose-lose situation.

What we need is a solution.

One possibility that seems fair would be to go ahead and enter into trade agreements enabling American corporations to utilize low-cost locations around the world, but then require the corporations to share the profits with the American people.

Otherwise, as has been happening, all the profits would go to a very small number of privileged executives and shareholders to make them fabulously wealthy while everyone else would be left behind to suffer. That certainly does not seem fair, especially since these executives and shareholders are not inventing or creating anything of particular value, but instead they are simply relocating production to lower-cost locations.

While achieving a lower cost of production is great, it seems that everyone in society should share in this benefit, especially the middle and lower classes who bore the greatest sacrifice of losing their jobs, which is what produced this wealth in the first place.

A practical way to share this newfound wealth with the people would be to “follow the money,” as they say, and impose a huge tax on these profits. The executives and shareholders could receive some of the profits for doing the work, but most of the profits would go to the people, especially those who lost their jobs. This money could be used to subsidize the cost of living for the middle and lower classes by such measures as subsidizing health care, housing, food, daycare, and education.

Now, there is one tiny little loophole. Corporations, of course, will not wish to share any of this wealth and thus they will strive mightily to avoid paying this tax. They will no doubt play the relocation game of moving their corporate headquarters out of America and into foreign countries that do not impose this tax so they could keep the windfall profits all to themselves.

Solving this problem is tricky. What it really calls for is an overall framework agreement among all the nations that sign onto the applicable trade agreement. All the nations should agree to impose this tax equally, and for corporations relocating to a lower-cost nation, the receiving nation should collect the tax and remit it back to the nation that lost the corporation. This way, corporations could not evade the tax merely by relocating to a new country. And for corporations that did relocate, the new country would still impose the tax and the country that lost the corporation would still receive the benefit of the tax revenue.

Of course, this is no easy task. Coordinating among nations is always a difficult endeavor. But globalization is presenting the world with the monumental change of developed nations transferring their production operations to undeveloped nations. Private corporations are able to globalize much more quickly than international regulatory regimes. Corporations can then exploit this under-regulated international business environment to mine enormous profits for themselves at the expense of ordinary citizens. A global regulatory system is needed in order to keep pace with the stampede of globalizing private corporations.

The world’s economies and the world’s citizens are facing an enormous sea-change of a transformation.

In order to manage globalization fairly for all people, ordinary citizens must be protected by an enormous sea-change of a solution.

By Cody Cain

Cody Cain is the author of the new book, "Mend or Spend: How to Force Rich People to Solve Economic Inequality," available here. Follow Cody on Twitter @codycainland.


Related Topics ------------------------------------------

Capitalism Donald Trump Globalization Market Economy Nafta Tariffs Trade Ttp