Monday, April 24, 2017

Trump's Isolationist Strategy Is Detrimental to the Economy

Vijay K. Mathur

“The land flourished because it was fed from so many sources-because it was nourished by so many cultures and traditions and people.”
Ronald Reagan

President Trump’s announced trade and immigration policies are isolationist in nature and could have damaging affects on the economy if fully implemented.  Historically, waves of isolationism have periodically interrupted waves of globalization since 1870.  However, after 1945, due to the decline in transport cost and reduced trade barriers among developed countries, trade has accelerated.  International migrants as a share of world population have also increased over the last 50 years (Pew Research Center, December 15, 2016).  It appears that in the new political environment in the US, we are going through a recurrence of nationalism anchored in isolationism aimed at curbing immigration and trade.

One of the principles of international trade is, assuming other things are the same between two countries, that trade is a close substitute for the movement of factors of production, such as labor and capital between countries.  This occurs because trade tends to equalize the rewards of these inputs, thus reducing the incentives to move or invest.

Let me use the example of trade between US and Mexico.  If trade makes Mexico prosper, and wages and returns to capital rise to levels of the US, there will not be any incentive for Mexican workers and capital to migrate to US. These are stylized results of trade theory, but they do foretell the trend in the movement of factors of production due to increasing trade with Mexico. A working paper, No. 8998 (2002), by Ximena Clark, et al., for the National Bureau of Economic Research, empirically investigates US immigration from 81 source countries for the period 1971-1998. Controlling for factors such as cost of moving, age and immigration policies, they find that US immigration decreases by 6% for a 10% increase in the per capita income in a source country.

Pew Research Center, November 19, 2015, reports negative net migration from Mexico to US from 2009 to 2014.  It is indicative of prosperity of the Mexican economy. In 2015 World Bank data show that Mexico’s exports of good and services were 35.4% of its GDP, while US exports were only 12.6% of its GDP.  Hence, as opposed to Mexico, most of US production is for domestic consumption.  Canadian exports are 31.5% of its GDP.  Mexico and Canada are part of top three trading partners.  Their share is close to one-third of the total trade of the US in the world.  Therefore, reducing trade flows between these neighbors would be severely detrimental to the US economy and the economy of its neighbors.     

Complex supply chains distort trade data.  They pose a thorny problem in imposing “border adjustment taxes” on imports and export subsidies, as proposed by the President.  For example, Apple iPhones are designed in US but are assembled in China. When shipped from China to the US, they are counted as imports from China.   However, the phones have parts produced in several Asian and European countries.  The Chinese workers contribute only 3.6% of the wholesale cost of $178.96 of an iPhone shipped from China (See The Wall Street Journal, December 16, 2010).  Another such example is Boeing 787 Dreamliner assembled in the US with parts and components imported from several countries.  Therefore any unilateral actions for tariffs and subsidies, defying World Trade Organization rules established by participating countries including the US, would bring about trade wars and shrinking of trade and employment.

President Trump is also misinformed about some immigration issues.  For example, it is claimed that lesser skilled American citizens (with no more than high school education) are facing employment and wage losses due to immigration, especially from Mexico and Central America.   However, the American Enterprise Institute report  Filling The Gap”, June 2013, argues that low skilled native-born workers and foreign-born workers are concentrated in different occupations.  For example, foreign-born workers are concentrated in occupations such as “Construction and Abstraction” and “ Food Preparation and Serving” that frequently face labor shortages. Native-born are disproportionately concentrated in occupations, “Office and Administrative”, “Health Care Support”, “Sales and Related” and similar non-physically intensive occupations.  

Labor shortages now and in the future are especially noteworthy in highly skilled occupations.  Laurent Belsie, National Bureau of Economic Research, December 18, 2016, finds that more than half of STEM (science, technology, engineering, and math) workers are immigrants.  In addition, a Duke University study, January 4, 2017 ( found that in the past decade immigrants founded 25.3% of engineering and technology companies in the US.  In 2015, immigration-founded companies generated $52 billion in sales and close to 450,000 jobs.

There are economically efficient ways to solve the illegal immigration problem by implementing comprehensive immigration reforms that are cost effective and beneficial to the economy.  The pursuit of an emotionally and politically expedient policy of using vast amounts of resources on building the wall and hiring personnel to solve the immigration problem is counterproductive.

If failed isolationist policies of the past are any guide, the President would be more successful in his job agenda if he implements policies that complement the knowledge based globalised economy.  Resources could be directed to create incentives for trade expansion, entrepreneurship, innovations and investment in physical and intangible capital, such as education and training programs, and R&D.  Trade and immigration is not the roadblock to Americans’ well being.

Mathur is chair and professor of economics and professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.  He resides in Ogden.

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