Free trade among nations is not much different than specialization across our continental economy—California in high tech and New York in finance.
Nations raise productivity by focusing on what they do best. Trade deals dating back to the Reciprocal Trade Agreements Act (1934) increase annual U.S. growth by about $280 billion.
Wider markets enable bigger R&D budgets for leaders such as Intel INTC, -0.41% and Alphabet GOOGL, -1.67%. That creates additional dynamic gains that can be the difference between gross domestic product growing at 2.5% and perhaps only 1.5%.
Pitfalls of protectionism
President Joe Biden’s Middle Class First trade policy keeps in place the Trump tariffs on Chinese goods and that will frustrate China’s ambitions in electric vehicles. He wants tax incentives to purchase EVs biased toward American-made cars, the federal government to only purchase union-made EVs and other Buy America policies.
Prejudicing domestic production toward union-made vehicles illustrates the pitfalls of protectionism. Tesla TSLA, 3.00% sets the pace globally for EVs, but GM GM, 1.79% appears unable to make a Bolt that doesn’t pose a fire hazard. Tesla with the Chinese are pioneering lower cost, safer batteries, not GM.
Biden wants to promote equity, address climate change and support unions in trade negotiations and generally eschews new, comprehensive trade agreements. Those strategies tend to throw all our trading partners in the same basket as China.
Policy fails Americans
U.S. policy has failed Americans by not creating enough good jobs in export industries to replace those lost to imports and not preparing enough young people in the skills required by those industries.
The benefits of free trade taught in economics classrooms since David Ricardo’s Theory of Comparative Advantage assume balanced trade. The $700 billion trade deficit robs American workers of opportunities to move from industries such as apparel to higher-paying jobs in activities such as factory automation equipment and artificial intelligence.
The United States has a chronic trade deficit thanks to the dollar’s BUXX, 0.73% status as the primary reserve currency. As the world requires more dollar-denominated assets, the Treasury sells bonds TMUBMUSD10Y, 1.555% that ultimately pay for imports.
As important are China’s mercantilist practices and the inability of high schools and universities to recognize the demands of globalization.
The Chinese Communist Party makes no pretense to run a Western market economy. It’s pouring massive subsidies and imposing market-access barriers to accomplish self-sufficiency in semiconductors, artificial intelligence and other cutting-edge industries.
Too much college prep
Our high schools overemphasize college preparation at the expense of vocational education and enrollment in apprenticeship programs. Each year about half of the freshman class at U.S. colleges acquire debt but little else—they drop out or take a useless major.
We cannot solve America’s trade problems without refocusing high schools toward broader, skills-based education and requiring greater accountability from universities in the career paths they enable for participation in student loan programs.
Without confronting China’s mercantilism, the world will devolve into competitive national industrial policies to foster high tech. The sad news for the acolytes of protectionism and industrial policy that populate the Biden economic brain trust is that China’s authoritarian-capitalism appears better at that game than we are.
The Biden administration talks about strengthening America from within but its industrial policy goals center on only four sectors—microelectronics, pharmaceutical ingredients, EV batteries and rare earth minerals. We need a wider focus, such as embraced by France, to repair vital links in our supply chains, reduced vulnerabilities to pandemics and similar disruptions and create a broader range of possibilities for our workers and capital.
The essence of Trump’s America First policy was to use tariffs and whatever other cudgels he could find to open the Chinese market. U.S. Trade Representative Katherine Tai’s review of our China policy offers little new and concedes China will never change. It lacks a fresh vision, keeps Trump’s tariffs in place and promises negotiations that have failed in the past.
Two tracks of trade policy
Trade policy should run on two tracks:
First, foster closer ties with allies by rejoining the Trans-Pacific Partnership and negotiating a trade pact with the U.K., then use those as a wedge to complete a free-trade agreement with the European Union.
Second, regarding China, tariffs—big ones—can have a purpose. Require licenses to import goods and services from China, issue those licenses to U.S. exporters for each dollar of goods sold in the Middle Kingdom, and let the exporters sell those licenses to U.S. importers.
That would fix the bilateral trade deficit by law. If the Chinese can manage trade, so can we, and they need some lessons in the rule of law anyway.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.