Trump can get us the China deal we deserve
By Dr. Peter Morici
To win the presidency, Donald Trump promised to cut taxes, boost energy production, roll back excessive business regulations and much more, but nothing would deliver more punch for growth and jobs than his promise to fix America's broken trade policy.
The economic reasoning behind free trade is simple. Lowering tariffs and other barriers to international commerce raises productivity by permitting businesses and workers to specialize more at what they do best.
For the iPhone, that's why Apple keeps in America product design, software development and some sophisticated parts manufacturing but outsources to Asia many other components and assembly.
If US foreign sales approximately equaled purchases from abroad, Americans would be a lot richer, because workers in exporting industries are about 10 percent more productive than those competing with imports.
Sadly, our trade deals have not worked out that way — dating back to the 1947 General Agreements on Trade and likely through the proposed Trans-Pacific Partnership.
Lowering tariffs and other barriers to international commerce raises productivity by permitting businesses and workers to specialize more at what they do best.
In 2015, US foreign sales totaled $2.3 trillion and that permitted Americans to buy a like amount of foreign goods and services. The resulting productivity gains from greater worker specialization lifted US GDP by some $240 billion.
However, American imports totaled about $2.8 trillion, and the $500 billion trade deficit destroyed 4 million jobs that were not replaced by exports.
On net, lost demand for US-made goods and services directly reduced GDP by $260 billion — and at least another $130 billion if we count in lost spending by idled workers and shuttered businesses.
Those losses overwhelmed the productivity gains from trade and the benefits consumers receive from purchasing less expensive consumer goods.
The trade deficits with China and on petroleum account for virtually the entire US imbalance — thanks to Chinese currency manipulation, restrictions on American-made products and investment, and US government constraints on transportation projects like the Keystone Pipeline and on the production of domestic oil and gas.
President-elect Trump would be well within his executive powers to temporarily impose a 45 percent tariff on Chinese imports to leverage renegotiation and better enforcement of the 2001 US-China bilateral agreement that facilitated China's membership in the World Trade Organization.
He could free up some energy projects through executive order but would need congressional approval to instigate expanded drilling in many areas. Still, working with Republican majorities in the House and Senate and Democrats from energy-producing states, making America energy independent is well within his grasp.
None of this would require very much additional federal spending, but it would generate a lot of new revenues to help pay for Trump's proposed tax cuts. Eliminating the trade deficit would boost GDP by at least $500 billion — or at least 2.5 percent — and create about 4 million good paying jobs over three to five years.
The longer term effects of eliminating trade deficits are even more profound.
Most of the additional economic activity gained from eliminating the trade deficit would be in manufacturing. That sector supports a lion's share of research and development (R&D) spending — the wellspring of American innovation, international competitiveness and productivity growth. Eliminating the trade deficit could easily boost R&D enough to permanently increase economic growth by 1 or 2 percentage points.
As a former US trade official, I know our negotiators work hard to ensure new trade agreements create at least as much in new exports as additional imports but too many of our trade agreements simply don't measure up or are not adequately enforced.
For example, the 2001 agreement permits China to maintain a 9.6 percent average tariff on imports, whereas the US average duty is 3.5 percent. And Presidents George W. Bush and Obama repeatedly denied industry pleas to take substantive action against China's undervalued currency.
Now President Obama would like congress to ratify the recently negotiated Trans-Pacific Partnership with 11 other nations. However, consider the impact of the US-Korea Free Trade Pact. Since it was inaugurated in 2011, the bilateral trade deficit is up about $16 billion and more than 130,000 jobs have been lost.
No one should want to withdraw America from global commerce — economic isolationism merely limits consumer choices, stifles competition and encourages stagnation.
Getting a fair and balanced deal for American workers was a winning campaign strategy for Trump and for America's future, because it makes good economic sense.
Peter Morici is a business professor at the University of Maryland and from 1993-95 served as director of economics at the United States International Trade Commission.