America’s great already; trade wars won’t make it greater

The issue that needs to be analyzed is whether higher tariffs that Trump had repeatedly campaigned for are the best way to save US manufacturing jobs.

In a day or two from now ex-President Trump will again take office. His Inauguration will take place while southern California is still reeling from the impact of raging wildfires. America and most of the world has been beset by various environmental, social, economic and political maladies. This latest disaster follows two decades of rising homelessness, low and/or falling male labor force participation rates, high mortality resulting from various drug abuses, alcoholism, lack of health care for the poor, and more generally “deaths of despair”.

The right wing historian Sir Niall Ferguson last year characterized America as being similar to the Soviet Union in its late stages -- a military super power in a state of decay.  That characterization is both extreme and inaccurate. America continues to be a huge global magnet for skilled and unskilled, legal and illegal labour.  As national currencies go, the US dollar is still very much the world’s reserve currency, even though Bitcoin has been denting that status. Despite deep underlying fractures in its soil, America does not need to be made great again. It is great in many ways.  Instead, to make Make America Safe and Livable Again for its majority is, in my opinion, a worthwhile and more realistic goal to pursue.

Against this backdrop, this article focuses on a specific but burning issue – saving American jobs in manufacturing, or more accurately, reducing the extent of its manufacturing job losses. The issue that needs to be analyzed is whether higher tariffs that Trump had repeatedly campaigned for and pursued are the best way to save US manufacturing jobs.

This article will take it as given that saving manufacturing jobs is a desirable goal, though economists will differ on that.  In the roughly twenty year period from the fall of the Berlin Wall in 1989 up to the global financial crisis of 2008, neo liberal proponents of free trade reigned supreme. At the height of the neo liberal dominance, policies to promote or preserve manufacturing jobs were scoffed at.

As a strategy or policy to revive or strengthen manufacturing, tariffs are risky.  They run the risk of retaliations and even all out trade wars.  But the far bigger problem with such a strategy is not that is it is risky, but that it is oblivious to the main reason for job losses.

The fundamental fact that protectonists are missing is that trade by itself does not steal good manufacturing jobs. Planet Earth as a whole is a closed economy. It does not lose manufacturing jobs to Mars.  Granted, manufacturing jobs do shift from higher cost to lower cost regions, both within and across countries. Automobile production in the US partly shifted from high cost Detroit to lower cost Tennessee in the South, just as manufacturing after 2000 has shifted from USA to China and now lower cost Vietnam. Automation – now robots in their latest manifestation – is the main invisible thief.

By the same token, the emphasis on trade as the reliable engine of job creation in rich countries is somewhat misplaced.  Free trade economists, arguing against protection, always stress that jobs in new sectors are being created to replace old ones. For them trade is a positive sum game, in which all nations overall benefit. According to them, while displaced workers in declining industries suffer, they get reabsorbed in growing ones.

Labour market data does not quite validate this view for two reasons.  First and foremost, there has been a massive expansion of Government jobs and welfare spending at all levels in America, and most countries, since World War II. Such spending has been a huge source of job creation, both directly and via multiplier effects and linkages for private sector jobs.

Second, and to a lesser extent, specifically for America, the labor force participation peaked around 1999 at around 67 percent and has been falling fairly steadily, barring the Covid period, to 62.6 percent by 2024.  The unemployment rate averaged 4.2 percent in 1999 and 4.0 percent respectively. Thus although the unemployment rate has remained low since the millenium, that reflects low labor force participation, and not just creation of new jobs.

Neither free trade nor protection can staunch job losses due to robots. Both President Trump and his critics miss a factor that is fundamental to the problem of unemployment. Capitalism, especially in the post-World War II period after the gold standard, lacks a mechanism to convert productivity gains into shorter average hours per worker.

To save manufacturing jobs, shorter work hours, via incentives or by mandate, are badly needed. Despite a phenomenal rise in manufacturing productivity since the 1950s, the average manufacturing workweek has not fallen.

Raising tariffs is not a safe or sustainable way to save manufacturing jobs. My suggestion to Trump’s economic policy advisers Elon Musk and Vivek Ramaswamy is to start by abolishing the 50 percent wage premium for overtime hours. This 50 percent premium was enacted in the aftermath of the Depression to share the work, by making it costlier to employ workers over 40 hours. But it created perverse incentives to work longer. Abolishing the overtime premium is unlikely to make a big dent in overtime hours. But it would be a good start to various policies leading to shorter manufacturing work hours that should be considered.  Neither tariffs or free trade can ensure that productivity gains do not lead to huge layoffs, as at present.