Tim Duy: I don’t absolve the policy community from their role in this disaster

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

Except for the strange focus on the 1990s, and the strange focus on China, this post that says exactly what I was hoping someone would say:

Is this the right narrative? I am no longer comfortable with this line:

…for the most part we’re talking about jobs lost, not to unfair foreign competition, but to technological change.

Try to place that line in context with this from Noah Smith:

Then, in the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China’s accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages. But this sacrifice on the part of 90% of the American populace enabled China to lift its enormous population out of abject poverty and become a middle-income country.

Was this “fair” trade? I think not. Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough. To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers on the theory that a.) the marginal global benefit from the job gain to a Chinese worker exceeded the marginal global cost from a lost US manufacturing job, b.) the U.S. was shifting toward a service sector economy anyway and needed to reposition its workforce accordingly and c.) the transition costs of shifting workers across sectors in the U.S. were minimal.

As a consequence – and through a succession of administrations – the US tolerated implicit subsidies of Chinese industries, including national industrial policy designed to strip production from the US.

And then there was the currency manipulation. I am always shocked when international economists claim “fair trade,” pretending that the financial side of the international accounts is irrelevant. As if that wasn’t a big, fat thumb on the scale. Sure, “currency manipulation” is running the other way these days. After, of course, a portion of manufacturing was absorbed overseas. After the damage is done.

Yes, technological change is happening. But the impact, and the costs, were certainly accelerated by U.S. policy.

It was a great plan. On paper, at least. And I would argue that in fact points a and b above were correct.

But point c. Point c was a bad call. Point c was a disastrous call. Point c helped deliver Donald Trump to the Oval Office. To be sure, the FBI played its role, as did the Russians. But even allowing for the poor choice of Hilary Clinton as the Democratic nominee (the lack of contact with rural and semi-rural voters blinded the Democrats to the deep animosity toward their candidate), it should never have come to this.

The transition costs were not minimal.

But I would change this:

Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough.

to this:

Sometime during the Eisenhower Administration, it was decided that an economically strong Asia was good for both the globe and the U.S. Fair enough.

The goal was to keep our allies unified in the struggle against Communism. And there was the sense that trade and prosperity might lead to peace:

During the 1950s, imports of cotton textiles increased rapidly, and by the end of the decade imports accounted for over one-third of the U.S. market in several important product categories. These import surges prompted inflammatory statements against Japanese exports and an occasional congressional bill to impose quotas or other limits.

There was little chance that such bills would gain approval. The lessons of the Smoot-Hawley tariff were fresh in mind, and Congress was reluctant to take direct action to limit imports. There was even less chance that a protectionist bill could avoid a presidential veto. While Congress perceived trade policy as a means of helping local industry, the executive branch of the U.S. government saw trade policy as an important instrument of foreign policy.

Influenced by Wilsonian ideals of the international rule of law and the populist idea that trading made good neighbors, the executive’s approach to trade policy was conditioned by two decades of progress. The executive branch had been in an almost continuous negotiation with its trading partners over trade restrictions. Not just principle but conditioned reflex pushed the executive away from unilateral action on trade restrictions.

In the 1950s, domestic USA manufacturers still had a lot of political power and could still sometimes get the government to engage in acts of protectionism, but the general trend, from the1950s onwards, was to loosen restrictions. When the Nixon administration caught Japanese manufacturers engaged in illegal dumping, the Japanese manufacturers were let off the hook without penalty, in exchange for Japan’s continued support of the USA’s struggle against Communism, especially in Vietnam.

And the debate among economists, about the disappearance of jobs, and whether that is due to technology or trade, dates to the early 1960s.

In short, I agree with everything Tim Duy says, but the crucial decade is the 1950s, not the 1990s, and the aim of the USA was not “a strong China” but a strong “free world” united against Communism, and whatever other foreign policy threats that the USA felt were important.