If we want to boost the economy, create certainty about trade policy



Robert Krol | The Dallas Morning News

We pay a high price for the low politics that make it harder to hire American workers.

The COVID-19 pandemic and the economic shutdown used to contain the coronavirus has resulted in the worst economy since the Great Depression. To dampen the impact, most countries have used aggressive monetary and fiscal policy tools, with comparatively little discussion of the role trade could play in promoting a strong recovery. This missed opportunity is about more than any one specific policy — it’s about providing businesses both large and small with some degree of certainty in an uncertain time.

Moving forward, leaders should send clear signals that businesses can expect policies that will promote global, open, bilateral trade — and thus proceed with plans to hire American workers and sell much-needed goods to consumers.

President Trump famously views international trade as a zero-sum game: One side gains at the expense of the other. After three-plus years of disruption to long-held free-trade agreements and alliances and a trade war with China, we’ve seen higher tariffs take money out of the pockets of our own consumers and businesses. The president’s trade policies cost businesses and consumers about $3 billion per monthin added expenses.

Making matters worse, unpredictable economic and trade policies create powerful incentives for businesses to postpone investment and hiring. This is especially costly at a time of high unemployment when many businesses are struggling to survive.

Uncertainty over whether the rules of the game are about to change makes proprietors wonder whether they may have to lay off a worker they’d like to hire. It makes the return on investments like expanding businesses less certain. Too many of the enterprises that we will need to jump back into the game at some point see value in waiting.

We know that because many of them already were waiting.

Economists Scott Baker, Nicholas Bloom and Steven Davis have devised indices that measure economic and trade policy uncertainty in the United States and other countries around the world. The indices are based on newspaper counts of articles that mention uncertainty over economic and trade policy.

I have used these measures to quantify the impact of uncertainty on three key drivers of American prosperity: U.S. imports, exports and direct foreign investment. Importantly, these estimates come from recent data, but don’t reflect added uncertainty brought on by the pandemic.

My estimates suggest that increased economic and trade policy uncertainty can be blamed for as much as $10.5 billion less in American imports and a $7.5 billion loss in U.S. exports per quarter. If these declines continued at the same level for a year, imports and exports would drop by about $40 billion and $30 billion, respectively.

Fewer imports result in less variety in the products we get to choose from and higher prices for consumers as well as businesses. The decline in exports reduces the number of high-wage jobs and profits for businesses engaged in international trade.

The impact on the way foreigners invest in America and its people is even more dramatic. My estimates suggest a drop in foreign direct investment inflow by as much as $53 billion per quarter, or by more than $200 billion if this were sustained for a year. That means fewer resources for businesses operating within our borders and, once again, fewer jobs for Americans.

Foreign businesses have traditionally found the United States to be an attractive place to invest, and their money brings high-paying jobs and new ideas with it. However, when the rules of the game start to fog up, foreign businesses can be expected to back off. Both sides are worse off.

One of the dramatic changes in the international trading system over the last 25 years has been the development of global supply chains. Goods are no longer produced and assembled in one country or location. Businesses take advantage of the ability to source components from lower-cost producers. To assure quality, these relationships are often long-term in nature and depend on trade policy certainty. With that certainty turning to uncertainty, the long-term nature of these types of commitments becomes less secure, slowing the development of global supply chains and raising production costs. This makes the final products more expensive for consumers.

It’s hard to overstate the impact trade has had on the U.S. economy. Just in the post-World War II period, increases in international trade have raised the U.S. standard of living by more than $7,587 (in 2020 dollars) per person. The income gains are even higher for lower-income individuals because they tend to consume more imported goods.

The Trump administration’s unpredictable approach to trade policy has certainly harmed the economy. If it continues, it will hamper the recovery from the COVID-19 recession.

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