During the 2016 campaign, Donald Trump repeatedly promised to be the greatest jobs President ever, pledging to usher in a new golden age of manufacturing jobs for American workers. A key element of Trump’s plan to boost jobs is changing America’s trade policy. How? By renegotiating existing trade agreements, and considering tariffs on imported products.
Through an executive order, President Trump has already begun the process of renegotiating the North American Free Trade Agreement, a.k.a. NAFTA. The biggest complaint about NAFTA is that it kills American employment. Critics argue that NAFTA frees up companies to slash production costs by shifting manufacturing jobs outside the U.S. According to the Trump White House, America has lost nearly one-third of its manufacturing jobs since NAFTA.
With this figure in mind, President Trump has promised a hard-nose stance. The President has committed to communicating with NAFTA partners that America intends to immediately renegotiate the agreement’s terms. The goal is to get a better deal for our country’s workers. According to Trump, if partners don’t agree to renegotiation, the U.S. will withdraw from the deal.
In addition to the reconfiguration of NAFTA, the Trump administration is considering levying a 5% tariff on all imports into the United States. Some economists are concerned that the imposition of a tariff of this size could have a macroeconomic drag. Still others are concerned about what it signals going forward. Setting aside internal economic effects, critics are concerned the tariff could give rise to retaliatory measures from other countries and result in a trade war that would make imported products significantly more expensive for Americans.
Looking at the American economy, the 5% tariff may result in slight drag to GDP growth. In day-to-day life for Americans, companies could pass through any tariff increase to consumers in the form of higher prices. Companies could avoid tariffs by increasing production in the US. The problem, however, is that labor is more expensive in America, so the increased labor costs could push prices up, too.
President Trump has addressed frustration with American industry’s reliance on offshore manufacturing. One of the sticks Trump has threatened to wave to companies shifting manufacturing outside the U.S. is the imposition of a 35% tariff on their goods exported back to America.
There is also talk of instituting a “border adjustment” to further boost U.S. trade. This rule would exempt exports of U.S. companies from taxes, while also reducing the deductions they can take on imports to lower their taxable income. The result is a huge subsidy to exports and a huge tax on imports. Proponents of the measure believe it will cause the dollar to be stronger.
The issue with the new trade regulations boils down to protectionism. Critics believe protectionism is the wrong way to address trade concerns. Behind the argument is the idea that every time you introduce protectionism, you hurt the consumer.
But when it comes to trade, President Trump’s point is to level the playing field. In order to do this, he may have to flex the protectionist muscle. We import roughly $2.8 trillion a year of international goods and services. While renegotiating terms of our trade agreements could prove advantageous, any policy that shuts out key trade partners like China, Australia and Mexico could have devastating effects to the economy.
And when it comes to the imposition of tariffs, we have to be careful. An increase in taxes means increased government revenue, but it also means increased prices to consumers. Look, no one wants to go from paying $12 for a tee shirt to paying $35. Talk about sticker shock.
So when it comes to protectionist policies, border adjustments, and increased tariffs, there is no easy answer. There are critics and proponents of all these measures. Despite the particulars of our positions, we can all agree on a couple of things – the more jobs we keep in America for Americans, and the more we can keep prices reasonable for consumers, the better off we’ll be.
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