Which political candidate is right on trade?
Since 1979, the real (inflation-adjusted) wages of high school dropouts have fallen by 14.8 percent, while the real wages of high school and college graduates have fallen by 1.2 percent and 1.9 percent, respectively. The poorer performance of dropouts is thought to be due in large part to the shift of manufacturing jobs overseas.
In response, trade has become a big issue in the current election. Most dramatically, Donald Trump has called for a tariff of 45 percent on Chinese imports and 35 percent on car and truck imports from Mexico. Bernie Sanders also supports higher tariffs, although he has not said how high.
What can economics tell us about the effects of higher tariffs? For consumers, tariffs would be bad news: cutting off cheap imports would drastically raise the prices of durable goods (which fell by 32 percent between
1994 and 2015 because of cheap imports, mainly from China).
But higher tariffs would create jobs, right? Not necessarily. To see why, suppose first that other countries do not retaliate by raising their own tariffs. Even in this best-case scenario, the effects on jobs in the U.S.
It’s true that the tariffs would encourage domestic manufacturing firms to ramp up production for U.S. consumers. This would create jobs. On the other hand, tariffs would raise the prices of imported inputs that domestic firms use, such as steel. This would cost jobs. The net effect on job creation is ambiguous.
Also, the firms that would benefit from tariffs are the inefficient firms:
those that can sell to U.S. consumers only when they are protected from import competition.
Now suppose other countries retaliate by raising their own tariffs. By shutting our exporters out of the world market, this response would cost jobs at our most efficient firms: those who — in the current low-tariff climate — are selling successfully in the global market.
In summary, higher tariffs would shift jobs from efficient U.S. firms to inefficient ones, raise production costs by making imported inputs more expensive, and raise consumer prices. It’s hard to see a silver lining here.
What should we do instead? Mr. Sanders has some good ideas: public infrastructure investment, small business loans, and job training. These are all uncontroversial and likely to help somewhat.
Mr. Sanders (and, to a lesser degree, Hillary Clinton) also favors raising the minimum wage. However, economists disagree as to the employment effects of such a step. Some think it would raise unemployment while others do not.
In light of this uncertainty, the minimum wage should be raised only gradually in order to make sure there are no adverse effects on jobs. It would also make sense to impose slower increases in low cost-of-living rural areas.
In addition, we should explore the idea of subsidizing new manufacturing industries that have the potential to create high-paying manufacturing jobs in the future. Such an “industrial policy” was used by South Korea to create its auto industry.
In the U.S. context, industrial policy presents two challenges. First, if politicians decide which industries to subsidize, special interests might influence the outcome. It would be safer to let unelected officials make these decisions. Examples could include the Federal Reserve Bank, or a judicial panel.
Second, once the new manufacturing jobs have been created, firms could simply outsource them as usual. Some sort of clawback provision might be needed to prevent this.
Despite its practical difficulties, industrial policy has helped create high-wage jobs in other parts of the world such as Asia. It could work here as well.
• David Frankel is associate professor of economics at Iowa State University, where he specializes in financial and urban economics. He has also taught at Cornell, Stanford, and Tel Aviv University. He studied at Harvard, MIT, and Oxford, and is a former Marshall Scholar.