Trump's Trade Talk Has a Truth Deficit
Donald Trump’s recent Trademaggedon speech has unleashed a lot of “elite” spluttering. He doesn’t understand economics! He gets his facts wrong! His remedies are wildly unrealistic and counterproductive!
Which is all true. But just as important was one point where he got some of his facts right, because it highlights the difficulty of talking straight about trade -- for Republicans and Democrats alike.
As evidence of the destructiveness of bad trade deals, Trump cited the South Korea-U.S. Free Trade Agreement, the second-largest U.S. trade pact after the North American Free Trade Agreement and a model for the Trans-Pacific Partnership:
It was also Hillary Clinton, as Secretary of State, who shoved us into a job-killing deal with South Korea in 2012. As reported by the Economic Policy Institute in May, this deal doubled our trade deficit with South Korea and destroyed nearly 100,000 American jobs.
Trump (and EPI) are correct that in the four years since KORUS was concluded, the deficit in U.S. goods trade with South Korea has more than doubled, to $28.3 billion in 2015. 1 He could have gone further: In April, exports of U.S. goods to South Korea were the lowest since January 2010, and the U.S. posted its largest-ever monthly goods deficit with that country.
So, was KORUS a bad deal that boosted the deficit? In the church of free trade, trade agreements that increase overall trade are good, and trade deficits (or surpluses) in and of themselves are not useful indicators of economic health. But such abstract reasoning is cold comfort to a displaced worker. It also doesn’t count for much in the zero-sum world of Trump, who has based much of his case against Clinton on her supposed poor negotiating skills. If only for the politics involved, it’s worth unpacking the trade numbers and what they tell us about the agreement's impact.
Here’s the problem with Trump’s claim: The doubling in the U.S. goods trade deficit with South Korea doesn’t seem to have had much to do with the agreement. The single biggest component of increased South Korean goods exports to the U.S. since 2012, for instance, was automobiles (accounting for 57 percent) -- and tariffs on autos didn't drop until this year.
A better explanation for the post-2012 increase in South Korean imports, and the relative stagnation of overall U.S. goods exports to South Korea, lies in the two countries’ varying economic fortunes. The U.S. recovery, though tepid, has steadily powered U.S. consumer demand for, among other things, Kia and Hyundai cars and Samsung phones and flat-screen televisions. Meanwhile, South Korea’s economy has slowed -- depressing demand for imports by nearly 17 percent last year.
Relative to South Korea’s other big trading partners, including Japan, the European Union, and Australia, the U.S. has actually been doing pretty well. Its share of South Korean imports, for instance, increased from 8.5 percent in 2011 to 10.1 percent in 2015. And U.S. exports of manufactured goods to South Korea rose by 8.4 percent from 2011 to 2015, more than twice as fast as such U.S. exports rose to the rest of the world. A recent International Trade Commission study estimated that without KORUS, the overall U.S. trade deficit with South Korea would have been much higher in 2015.
Trade numbers also reflect events no negotiator can predict or control. A historic U.S. drought in 2012 drastically cut corn exports to South Korea; U.S. beef and pork exports shot up in the two years before KORUS, driven by South Korea’s worst outbreak of hoof-and-mouth disease and fears that seafood from Japan had been irradiated by the 2011 Fukushima meltdown.
Unfortunately, the deal’s critics aren’t the only ones to run afoul of the numbers. The Barack Obama administration claimed the agreement would “support 70,000 American jobs from increased goods exports alone” and that tariff cuts would “increase exports of American goods by $10 billion to $11 billion” -- numbers it got by extrapolating from a 2007 analysis by the ITC.
That hasn’t exactly happened. As Daniel Pearson, the former chairman of the ITC, has pointed out, the commission’s analysis made “no attempt to estimate how the U.S. and global economies would evolve over time.” But those subtleties were lost in the administration’s fact sheets, which ran with the ITC’s top-line numbers, liberally seasoned with the phrase “job-creating.” (Never mind that the ITC study said that “aggregate U.S. output and employment changes would likely be negligible.”)
Politicians routinely fall back on new jobs to sell trade agreements. But as Pearson told me, “the whole issue of job creation in relation to trade has been oversold.” Moreover, “it reinforces the idea that exports are good and imports are bad.” Even if Trump may turn that kind of talk up to eleven, it also underlies Obama’s National Export Initiative. Yet the purpose of free trade isn’t necessarily to create jobs; it’s to make a nation’s economy more efficient (and thus improve its welfare) by exposing companies to outside competition. Economic dislocation is a feature, not a bug.
If American politicians talked more honestly about trade, they might also be more willing to address its disruptive effects. In 1962, when President John F. Kennedy introduced Trade Adjustment Assistance to help workers displaced by lower tariffs, he spoke at length about how imports “have generally strengthened rather than weakened our economy.” He also said that “those injured by that competition should not be required to bear the full brunt of the impact.”
But backing for the program he championed has been fitful at best. Even the shock effect of China on U.S. labor markets hasn’t prompted Congress to consistently support, much less adequately boost, TAA funding -- undermining political backing for future free trade agreements. Trump’s claims about the negative impact of KORUS may be largely false. But if they strike a chord, it’s because they reinforce the suspicion that free trade’s champions don’t care about its losers.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Trump may not be aware that he's citing a left-wing think tank that slammed his tax plan's "massive tax cuts to the rich" and "novel (and particularly stupid) detours that make no sense as good policy."
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