Fact Checking the Washington Post’s Fact Checker on Trade and Manufacturing

By Daniel J. Ikenson of Cato.

"“Pinocchio Quattro!” is Washington Post “Fact Checker” Glenn Kessler’s response to Donald Trump, for his claims about trade, currency manipulation and manufacturing. No doubt the 4-pinocchio distinction is well-earned. Actually, without issuing a score, my analysis in Forbes today reaches similar conclusions. 

Reading Kessler’s explanation and justification for the award, I was pleasantly surprised by how well he characterized and conveyed the salient, underlying trade issues. Non-trade experts and non-trade-beat reporters often miss the nuance and get things wrong. Nonetheless, for the purpose of even greater precision, I’m going to reiterate, clarify, amplify, and slightly modify some of the points Kessler makes. (Thanks for being a prop, Glenn).

FC1:

Globalization has changed the face of the world economy, for good or bad. In an interconnected world, it’s no longer a zero sum game in which jobs are either parked in the United States or overseas.

There is no doubt that economic interdependence – best observed as transnational investment and cross-border supply chains – has increased considerably in response to trade liberalization, political liberalization, revolutions in communications and transportation, as well as other developments, such as China opening to the world. As I characterized it in this 2009 paper about the virtues of growing economic interdependence, “the factory floor has broken through its walls and now spans borders and oceans.”  One relatively unheralded consequence of this trend is that protectionism is costlier than ever.  And that’s a great thing.  It helps explain why the world avoided descending into an abyss of “tit for tat” protectionism during and after the Great Recession, and why it’s unlikely to do so in the future. This paper, which goes into greater detail about why protectionism would be eschewed, was a bit heterodox at the time.”

But let me slightly modify Kessler’s explanation.  It’s not interconnectedness that makes trade “no longer a zero sum game.” Trade is never a zero sum game. If trade were a zero sum game, it would never happen.  Two people trade because each expects to gain from the exchange. If I shine your shoes for $5, it’s because you value shiny shoes more than you value $5 and I value $5 more than the time, materials, and effort I expended.

FC2:

First of all, a trade deficit means that people in one country are buying more goods from another country than people in the second country are buying from the first country. Trump frequently suggests the United States is “losing money” when there is a trade deficit, but that reflects a fundamental misunderstanding. Americans want to buy these products from overseas, either because of quality or price. If Trump sparked a trade war and tariffs were increased on Chinese goods, then it would raise the cost of those products to Americans. Perhaps that would reduce the purchases of those goods, and thus reduce the trade deficit, but that would not mean the United States would “gain” money that had been lost.

A noxious fallacy that perpetuates confusion and fuels antipathy toward trade and trade agreements is that trade is a competition played between national teams where the objective is to obtain a trade surplus.  Under this “Us versus Them” portrayal, exports are Team America’s points; imports are the foreign team’s points; the trade account is the scoreboard; and, since the scoreboard shows a deficit, the United States is losing at trade.

But trade is not a team sport. Trade is conducted by billions of individuals, each seeking to obtain value by exchanging some of their specialized output (monetized in the form of salaries or wages) for some of the specialized output of others. The purpose of trade policy is not to secure a trade surplus, but to facilitate this process of specialization and exchange and, ultimately, to produce economic growth.

The United States has registered trade deficits for 41 consecutive years. Over those 41 years, increases in the size of the deficit have correlated with increases in GDP and decreases in the size of the deficit have correlated with decreases in GDP. Achieving a trade surplus is not the objective of trade policy. Nor is a trade deficit evidence of its failure. If there is compelling evidence to support the theory that trade deficits are bad for the United States, it has not been presented in the context of the U.S. trade policy debate. Certainly there is much rhetoric and opining about the deleterious effects of the trade deficit on the economy, but where is the support? After 41 straight years of annual trade deficits, surely economists like Rob Atkinson, Jared Bernstein, Dean Baker, Peter Morici, and other trade skeptics can identify – if not quantify – the damage done.

The objective of trade policy is economic growth. That’s why we trade – to create value. The data strongly suggest that economic growth and trade deficits increase and decrease contemporaneously. Looked at another way, if the goal of trade policy is to achieve a trade surplus, then by extension the goal of trade policy is slower economic growth, even contraction.

FC3:

Trump did manage to name specific countries with which the United States has trade deficits, but he’s wrong when he says the United States has a deficit with “everybody.” There’s barely a trade deficit with the United Kingdom, according to the International Trade Commission, and the United States has a trade surplus with Hong Kong ($30 billion), Netherlands ($24 billion), United Arab Emirates ($21 billion), Belgium ($15 billion), Australia ($14 billion), Singapore ($10 billion) and Brazil ($4 billion), among others.

Of course, the Fact Checker was merely checking Trump’s claims, but I’d say: Waste of time? Bilateral trade accounts are meaningless. They’re meaningless because of the observations made with respect to Point 1, above.

In a globalized economy of cross-border investment and transnational production sharing, where nearly two-thirds of the value of global trade flows are intermediate goods, bilateral trade accounting is simply meaningless. A $300 import from China adds $300 to the aggregate value of imports from China, regardless of whether the Chinese material, labor, and overhead (the Chinese value-added) accounts for all or just a fraction of that $300 cost. It adds $300 to the U.S. bilateral trade deficit with China even if $250 of the $300 cost is attributable to the value of components made in the United States with U.S. labor and overhead. This is not merely theoretical. Nearly 50 percent of the value of all U.S. imports from China is the value of components from other countries. When it comes to electronics, such as computers and smart phones, the foreign value content can account for as much as 95 percent of the cost, yet the product’s entire cost is chalked up as an import from China. This should give pause to those who attach meaning to bilateral trade accounting.

FC4:

Trade can lead to job losses — as well as job gains. A domestic widget-maker might lose market share, and cut staff, if lower-cost imports undercut prices. But exports also generate jobs, which is why U.S. presidents generally have sought to lower tariffs.

Granted, this is true.  But the implication that imports necessarily cost jobs is misleading, and untrue. For starters, according to the Bureau of Economic Analysis, about 60 percent of the value of U.S. imports consists of intermediate goods and capital equipment – the purchases of producers, not consumers.  This continues on the theme of interconnectedness and globalization.  What this means is that 60 percent of the value of U.S. imports are complementary goods, not substitutes.  And this is just one example of how imports support U.S. jobs.

FC5:

When speaking about the impact of trade deals, Trump (as in a USA Today opinion article) often cites research from groups, such as the Economic Policy Institute, about supposed job losses from trade agreements. Interestingly, Bernie Sanders (Vt.), a candidate for the Democratic presidential nomination, often cites the same data — such as a claim that 800,000 jobs were lost because of the North American Free Trade Agreement.

The job-loss figures often rely on simplistic formulas that are disputed by other economists. It is often difficult to separate out the impact of trade agreements on jobs, compared to other, broader economic trends. (Readers should also be wary of claims of job gains from trade deals, as we noted in this column on the Trans Pacific Partnership.)

I couldn’t agree more – on both sides.  The pro-trade and anti-trade jobs numbers aren’t at all reliable.  But EPI should be held out for special scorn.

FC6:

The manufacturing sector has declined as a source of jobs in the United States, but again Trump would be fighting against economic shifts long in the making. American manufacturing has becomes incredibly productive, so fewer workers are needed to make the same number of goods.

“In real terms, U.S. factories produced more output (looking at straight output or value added) last year than ever before in history,” said Dan Ikenson, director of trade policy studies at the Cato Institute. “Year after year (with the exception of during recessions), the sector breaks new records with respect to output, revenues, exports, imports, return on investment.” 

I elaborate further in today’s Forbes piece.

FC7:

Similarly, Trump’s complaints about currency manipulation are woefully out of date. Fred Bergsten, senior fellow at the Peterson Institute, calls himself “a big hawk” on currency manipulation but says Trump is “way out of whack.”

China has not manipulated its currency for at least two years and in recent months has been selling dollars and running down its reserves in an effort to keep the currency from weakening during an economic slowdown. Japan has not sought to lower its currency for at least a decade, with the exception of an intervention in March 2011 — a move that was supported by other leading economic powers because the yen had appreciated sharply in the wake of the devastating tsunami and earthquake.

The currency issue is a red herring, and now it is irrelevant, as China is attempting to prop up the value of its currency, as sentiment on the Chinese economy has soured.  This piece goes into a good bit of detail about the long-running debate and what to do about the issue.

FC8:

In fact, there is evidence that some manufacturing jobs are already coming back to the United States, through a process known as “reshoring,” because Chinese wages are no longer as competitive. General Electric in 2012 brought back nearly 4,000 jobs from China and Mexico, for instance. Marriott International said in March it would manufacture in the United States all of its towels for its hotels.

Many factors, not just wages, affect investment location decisions. The idea that investment chases low wages and lax environmental standards couldn’t be further from the truth.  This paper explains.

FC9:

Trump’s claims on trade, currency manipulation and manufacturing are either wrong or no longer valid. If he became president, he (and his supporters) would have a rude shock that the problems he complains about are overstated or no longer exist — and solutions such as raising tariffs might backfire. Taken together, his vision is a whopper.

Agreed!"