PS: Trump’s Anachronistic Trade Strategy

In case you missed it, there is a good post on Project Syndicate by Richard Baldwin on the Trump team’s misreading of the unemployment problem.

An excerpt:

Trump and his team are missing a simple point: twenty-first-century globalization is knowledge-led, not trade-led. Radically reduced communication costs have enabled US firms to move production to lower-wage countries. Meanwhile, to keep their production processes synced, firms have also offshored much of their technical, marketing, and managerial knowhow. This “knowledge offshoring” is what has really changed the game for American workers.

In 2017, US workers are not competing with low-wage foreign labor, capital, and technology, as they did in the 1970s. Rather, they are competing with a nearly unbeatable combination of low-wage foreign labor and US knowhow. One way to conceptualize this is to think of US products as being made not in the US, but in Factory North America. The goods made in Factory North America must compete with goods made in Factory Asia, Factory Europe, and so forth.

This means that if the Trump administration imposes tariffs, it will turn the US into a high-cost island for industrial inputs. Firms might be induced to move some production back to the US, if it is strictly aimed at US consumers. But they will be equally encouraged to offshore production that is aimed at export markets, so that they can compete with Japanese, German, and Chinese producers outside of the US.

Imposing tariffs on imports, without also stemming the flow of ideas and intellectual property, is like trying to prevent water from flowing through one’s fingers by making a fist. A more rational approach would accept twenty-first-century realities. The information revolution changed the world in ways that tariffs cannot reverse. With US workers already competing against robots at home, and against low-wage workers abroad, disrupting imports will just create more jobs for robots.

Read the full post here.

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