Monday, July 3, 2017

Will Trump's Trade War Create US Jobs?

Paul Krugman won his Nobel Prize in economics by his contributions to international trade theory.  He knows more about this subject than Donald Trump, who seldom makes efforts to learn more about subjects so that he can make informed decisions.  Trump may not understand international trade theory but he does understand how his base will respond to his decisions.  The steel industry and its labor unions will be pleased if Trump imposes tariffs on steel imports into the US.  Trump and many in the steel industry will claim that the tariffs will create US jobs.  Krugman provides an informed opinion on the relationship between steel tariffs and net job creation in the US.

Krugman's most obvious point is that tariffs on steel will make steel more expensive to producers in the US that purchase steel to build things like automobiles.  That will make US cars more expensive and reduce jobs in the car industry.  The better way to increase net jobs in the US would be for the government to invest in infrastructure that would increase the demand for steel.

Krugman reminds us, however, that there would indirect effects from steel tariffs that would impact net job creation in the US.  For example, prices would rise in the US and the Fed would respond by raising interest rates.  That would dampen the large housing market and it would also cause the dollar to increase in value by making US treasuries a better investment.  That would be harmful to US exports because it would increase the real price of US products in foreign markets.

Krugman understands that globalization has been disruptive in some communities just as other communities might have benefited from globalization.  On the other hand, globalization has already happened.  Efforts to reverse globalization would also be disruptive.  The impact of reversal would be harmful to some communities while other communities benefit. For example, tariffs would favor capital intensive industries that produce fewer jobs per unit of output than industries that are not capital intensive.  That would tilt income distribution away from labor by reducing the demand for labor.

Joe Nocero echoes many of the points made by Krugman.  He adds some value to the discussion by describing how Trump may use national security as a way to impose tariffs on steel by short circuiting the normal path that would be used to impose tariffs.  He also puts Trump's plan to help the steel industry in the context of Trump's other plans that have demonstrated his incompetence.  Trump has little regard for the failures of his many policy initiatives.  He only cares about how they play with his base of supporters.  That is Trump governance in a nutshell.

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