By Paul Krugman
Paul Krugman took questions from readers about trade after President Trump’s announcement of tariffs on steel and aluminum imports. Here are his answers to some of the hundreds of questions he received. — By the Editors
1. Literally every small consumer item I buy is made in China. Please explain how this came to be (and whether you think we can or should take steps to change it).
2. Should all manufacturing jobs flow to the lowest-cost, lowest-wage environments, regardless of working conditions or environmental impacts? If not, how can a free-trade system prevent this?
3. The government of China is subsidizing the growth of its electric car industry by providing very significant subsidies (about one-third of cost) to consumers. This subsidy will allow the industry to scale up much more quickly and produce electric cars cheaper than anyone else. In a free-trade world, is this good planning, or cheating? — Nick Van Kleeck, Tucson, Ariz.
Paul Krugman: 1. It’s partly a sort of optical illusion. China dominates assembly of many goods thanks to a combination of still-low wages and an extensive industrial “ecology” of supporting firms. But much of the value of the good actually comes from elsewhere. For example, iPhones are “made” in China, but China only accounts for less than 4 percent of their price.
2. Not entirely — there’s some room for insisting on basic working conditions and environmental rules. But not too much. Consider Bangladesh: all it really has is a large labor force, with fairly low productivity. Low wages are the only way they can sell on world markets. If we insist that they follow first-world rules, we’re basically telling them to go starve.
3. It’s tricky. Subsidizing consumers is O.K. under the rules, while subsidizing producers isn’t. If the U.S. offered tax breaks for electric cars, it would be perfectly legal under W.T.O. rules. The trouble is that given Chinese reality, you’re not going to see a lot of foreign electric cars sold there. But as these things go, it’s not a particularly egregious example.
I remember in undergraduate school (1964) studying President Kennedy’s Trade Expansion Act of 1962. This was in a political economics class. What was the significance of this act and was it bipartisan? Also, recommend some readings on political economics. — Morgan Rauch, Houston, Tex.
PK: It was bipartisan, and really a continuation of the process of reciprocal trade liberalization that began in 1934 under F.D.R. What changed under the “Kennedy Round” was that as easy targets for trade deals ran out, we shifted to internationally agreed formulas: cut all tariffs by X percent, then negotiate the exemptions. But most of the heavy lifting in tariff reduction had already happened.
My question: How will American steel workers fare as a result of this tariff? I heard the head of a steel workers union on NPR welcome this tariff and he sounded as if their prayers have been answered! — James C., Brooklyn
PK: We will gain a few jobs in steel. But we’ll lose jobs in lots of other, “downstream” industries like autos. Most studies of the 2002 steel tariffs say that they cost jobs on net. So yes, steel workers get a little, but at what cost to other workers?
I live very near a HUGE rusted-out steel plant, Bethlehem Steel in Steelton, Pa. I came here 44 years ago and it had already started its long sad road to its present obsolescence. Trump described this phenomenon in his rollout. He then had union workers talk about the production reductions to 20 percent from the heyday of domestic steel production.
What source of funding could possibly come in and want to turn this 3.5-mile row of rusted barned eyesore around? Billions of dollars of investment would be necessary. The ideas of “Making America Great Again” seem to be based in recreating the economy of the ’50s, ’60s and ’70s. This and the return of coal to the high ridges of Pennsylvania seem a distant memory. Is revitalization of these old industries even a possibility? Aren’t the jobs from the Rust Belt too expensive to get back? Or would another community’s landscape be blighted instead? — CC, New Cumberland, Pa.
PK: There’s no way to bring back all those steel plants and steel jobs, even if we stopped all imports. Partly that’s because a modern economy doesn’t use that much steel, partly because we can produce steel using many fewer workers, partly because old-fashioned open-hearth plants have been replaced by mini-mills that use scrap metal and aren’t in the same places. So this is all a fantasy.
What is your critique of the anti-trade argument made by the Warren-Sanders wing of the Democratic Party: that free trade has been bad for the (proverbial) American worker and has been a significant contributor to America’s rising income and wealth inequality? Is the answer simply that the benefits of free trade — lower prices generally — are diffuse and therefore underappreciated, whereas the costs — worker dislocation in particular sectors — are concentrated and thus easier to highlight? How much of America’s increase in income inequality over the past half-century do you attribute to free trade?
How should we deal with the deindustrialization and loss of community that free trade has been causing? If tariffs are not the answer, what policies would you recommend? — L Marcus, New York
PK: There’s some truth to the argument that growing trade has contributed to rising inequality; if imports of manufactures from developing countries were still as low as they were in, say, 1970, real wages of blue-collar workers would probably be a few percent higher than they are.
But the level of protectionism it would take to get those few percent back would have lots of ugly side consequences. If we want to help U.D. workers — and we do — there are better ways.
You may remember Bernie Sanders using Denmark as an example. It’s a good one: much better wages, a much stronger social safety net, a mostly unionized work force. But Denmark is as open to world trade as we are. It’s domestic policies — from taxing and spending decisions to pro-labor policies in the service sector — that make the difference. Universal health care and the right to organize matter a lot more for workers than trade policy.
Why does the president of the United States have the authority to make decisions (such as imposing tariffs) that have significant impacts on the economy, trade, relationships with allies, etc. — with impunity, and with no input from Congress? What path should Congress be taking to restrict his powers.— Ricky, Saint Paul, Minn.
PK: Actually, Congress voluntarily limited its own role, to protect itself from special-interest politics: it votes big trade deals up or down on a single vote, then stays out of it. But given the realities of trade tensions, the system needs some “escape valves” — ways to provide temporary relief in hard cases. That’s why the president has certain ways he can impose tariffs: if there’s a finding that an industry has been injured by an import surge, if national security is at stake, if foreigners pursue unfair practices.
However, these powers aren’t supposed to be used arbitrarily: there’s supposed to be an independent study of the issue, and the president acts on the basis of that study. What’s happening with Trump is an abuse of the process: the Commerce Department came up with an obviously bogus national security rationale for tariffs Trump wanted to impose for other reasons.
So we have a process that gives presidents some discretion, for pretty good reasons — but one that assumes that said presidents will act honestly and responsibly. It falls apart when you’re dealing with someone like Trump.
Will we be able to undo this after this administration is voted out? Or does this have far too many long-term effects? — Stephanie Minister, Hingham, Mass.
PK: President Oprah Winfrey, or whoever, can undo these tariffs with a stroke of the pen. However, we might get into a full-scale trade war before that happens, and in any case the U.S. has already lost its reputation as a reliable negotiating partner.
My question is: What role does free trade play in income inequality, and the concentration of wealth in a global economy?
I have little doubt that trade creates value. On average everyone ends up wealthier with free trade — better allocation of resources.
Rarely do I see the unequal distribution of the value created by trade addressed. Sure, blue-collar workers all enjoy lower prices on apparel at Walmart with low-cost textiles from China, but some worker lost a $25/hour job in a U.S. textile mill, and the Walmart saving doesn’t offset the $15/hour job for that displaced worker. The downside of free trade is concentrated onto a relatively small group of people.
I also believe that financiers and the capital class keep a large part of the savings when U.S. jobs are sent offshore, and individual workers with limited geographical scope pay a price.
To me the question isn’t IF trade creates wealth, but for whom is the wealth created. — Tom Stoltz, Detroit
PK: There’s been a lot of work on this question over the years. Back in 1995 I estimated that trade widened the gap between college and non-college workers by 3 percent, and that number has surely risen since, though maybe only a couple of points. By the way, the downside affects a lot of people, not just a small group.
We also think that the surge in imports between 2000 and 2007 displaced something like a million workers. Most of those workers eventually found other jobs, but many faced wage cuts and some communities got hurt badly.
So this isn’t a subject economists have been ignoring. You just want to ask what’s the best way to help workers, and tariffs are rarely the answer.
Is a perennial (and rising) trade deficit desirable and even sustainable in the very long run? Much of our debt is now owned by other countries (see China and Japan for example). Are we not giving away ownership of our of national wealth to our trading partners? I am in favor of free trade but I was always puzzled by the decades-long rising trade deficit. Germany, for example, a Western democracy, manages to have a trade surplus (with the help of the euro of course, but they still make goods people want even outside the eurozone). I have read explanations that the privilege of having a reserve currency has a price, which is maintaining trade surpluses, and this in turn allows for lower interest rates and higher growth. Sounds interesting but still can we make the case that the rising debt is sustainable for the long run? What is your view? — Costa Glaretas
PK: Basically, we have persistent trade deficits because we have low savings and remain an attractive place for foreigners to invest. And as a result, the U.S., which was a creditor country before we began running persistent deficits since 1980, is now a net debtor.
But you want to keep some perspective. Our “net international investment position” — overseas assets less liabilities — is about -45 percent of G.D.P., which isn’t that big a number, all things considered. For example, it’s less than 10 percent of our national wealth.
And the idea that this gives foreigners a lot of power over America has it backward. On the contrary, in a way it makes them our hostages: China has a lot of money tied up in America. Suppose they tried to pull it out: the worst that could happen would be a fall in the dollar, which would be good for U.S. manufacturing and inflict a capital loss on our creditors.
Lot of things worry me; our foreign debt, not so much.
Perhaps something else is going on. For example, steel and aluminum are key industries in Pittsburgh (home of Alcoa). Could the need to stop a string of Democratic midterm victories play a role in the timing and choice of targets for these tariffs? — Peter, San Mateo, Calif.
PK: Quite possibly. We know that’s why Bush imposed steel tariffs in 2002. But I think this is mostly Trump trying to look tough. At a guess, Stormy Daniels had a bigger impact than PA-18.
Clearly, global trade is too complicated for Donald Trump to fathom. But Paul Krugman? No. Not too complicated. So: pretend you are in his position, but with your knowledge and insight. What would you do regarding trade? Top three plays/passes. — Jack, Nashville
PK: Basically, U.S. trade policy is O.K. The old days of lots of manufacturing jobs aren’t coming back whatever we do, and trying to save a few of them by ripping up trade rules would have lots of nasty side effects.
I was against TPP, but not because I want a return to protectionism: the trouble with TPP was that it wasn’t about trade at all, it was mainly about intellectual property (e.g. pharma patents) and dispute settlement (giving corporations more power).
What we need is a renewed commitment to universal health care, much more investment in infrastructure, policies to help families and a return to policies that empower unions, especially in the service sector. Defining trade as the problem is just a way to duck real solutions.
What are the worst-case repercussions of these tariffs when our trade partners retaliate? — Donald Ferruzzi, Centereach, N.Y.
PK: In the short run, there’s a huge amount of disruption: we’d eventually gain jobs in import-competing industries, but we’d immediately lose a lot of jobs both in export sectors (including farming) and in industries that are currently part of global supply chains, like autos and electronics. So we’d be talking about millions of immediate losers, even if some would eventually gain.
In the longer run, the economy would just be less efficient: instead of concentrating on stuff we’re especially good at, we’d be doing a lot of labor-intensive stuff for ourselves. I haven’t seen a good estimate of just how much poorer, but it would surely be worse than Brexit, which typical estimates say will make Britain about 2 percent poorer.
We’re not talking the end of the world or even a major depression here. Just a big short-term mess and a longer-term drag on economic growth.
What part do disparate wages and benefits paid to workers by the various trading nations play in trade policy, if any? If Country A can, because of low wages, produce a product at half or less the cost of Country B, how can trade, without tariffs, ever be fair? — abigail49, Ga.
PK: What you need to ask is why wages are so much lower in some countries than they are here. The answer is that they have much lower overall productivity — globally, the relationship between productivity and average wages is pretty close to one-for-one. So when you look at low-wage countries, they have a big cost advantage in sectors like clothing where their productivity isn’t too much lower than ours, but a big cost disadvantage in higher-tech sectors.
Remember, Germany, which runs the world’s biggest trade surplus, actually pays substantially higher wages than we do.
Just a thought from a U.S. contractor:
At Home Depot and Lowe’s it’s essentially impossible to find a steel hand tool (hammer, saw, chisel, screwdriver, etc.) or electric tool that is NOT made in China, Taiwan or Mexico. In addition, the quality of that foreign steel is clearly inferior, subject to fast oxidation (rusting) or actual fracture. Although the few American-made tools available are somewhat more expensive, those of us who want something to last buy American — IF you can find it. It’s a sad state of affairs that we can’t compete with the imports even though our production quality is far superior to foreign steel. Will the tariffs fix this? No clue. — LJM, Cape Cod, Mass.
PK: If people are buying inferior foreign products, isn’t that their choice? Maybe they care more about low prices than quality. It’s kind of like buying fresh but expensive local produce: I prefer it, but I’m affluent enough to make that choice. Many people aren’t.
I’m interested in the analysis of the mechanics of such decisions worldwide, especially for third world economies, rather than the important political conflicts among nations that you mentioned in your excellent article. — Wail Fahmi Bedawi
PK: It all depends on how widespread the trade conflict gets. I often focus on the example of Bangladesh, where people used to predict mass deaths from starvation due to overpopulation, but it’s currently keeping its head above water and even achieving significant growth (from a very low base) thanks to open world markets that let it export lots of clothing. If we do have a full-scale trade war, the impact on places like Bangladesh will be devastating if not deadly.
How much damage should we expect these tariffs to do to the economy and the markets? Will they affect some regions of the U.S. more than others? I’m a public employee and I’m wondering about state tax receipts. — UCB Parent, Calif.
PK: By themselves, the steel and aluminum tariffs aren’t that big a deal. Consumers won’t notice them much; some auto plants, etc., that might have opened will be canceled, but I don’t expect to see any existing plants closed. Revenue effects will also be small.
But if this turns into tit-for-tat, with Europe retaliating and Trump retaliating back, who knows?
Questions: 1) How will the tariffs affect E.U. countries? Will they weaken the NATO alliance?
2) What impact will the tariffs have on England going into Brexit?
3) Will the TPP countries fare better for their new trade agreement?
4) Which countries are likely to fare better because of Trump’s tariffs?
Mary M, Raleigh, N.C.
PK: This is all pretty small stuff so far: the E.U. is as big an economy as ours is, so it’s marginal there as here. I don’t think it affects the Brexit calculus at all. If Canada doesn’t get a sustained exemption, it’s a bigger deal: they’re a fairly small economy that supplies most of our aluminum imports.
For now, the bigger impact is on foreign relations: now nobody trusts us, and China and Russia are the big winners from that distrust.
How is it that so many economists of all political stripes agree that protective tariffs are bad? Up until the Smoot-Hawley tariff debacle of the 1930s, weren’t tariffs a fairly common economic policy prescription? Did the Great Depression unfairly give tariffs a bad name or did the field of economics just advance beyond tariffs as part of the economic policy tool kit? — Jason Williams Washington, D.C.
PK: Actually, economists were overwhelmingly against Smoot-Hawley. There has always been a minority view supporting tariffs under certain circumstances — usually for economic development. But the failure of import-substituting industrialization in Latin America and India largely discredited that view.
Please respond to Daniel McCarthy’s Op-Ed point-for-point. His arguments are very convincing but counter to yours. Someone is drinking cool aid here and without an authentic debate it’s impossible to know which position is less self-serving. — Michael, Chicago
PK: Many readers asked a version of this question. McCarthy’s whole article is premised on the notion that protectionism can bring back a manufacturing-centered economy. I couldn’t find any facts at all about trade in his article, certainly no numbers.
And if you actually do look at the numbers, you immediately realize that his whole premise is wrong: we could shut down trade completely and manufacturing would still employ less than 10 percent of the work force.
So I’m not sure what to argue with. He didn’t do his homework.
Dr. Krugman, assuming a reasonable fair and level playing field, wouldn’t a worldwide free-trade agreement benefit all of humanity? It would seem that products and services would be produced by the best and the most efficient and/or the closest in proximity to resources whether human or earth born.
The E.U. is moving ahead with the TTP. Will this cripple U.S. trade in Asia? — Steve, Seattle
PK: TPP won’t make that much difference to trade, since it wasn’t mostly about trade (it was about intellectual property and dispute settlement). I’m less worried about the U.S. loss of trade than our loss of influence: we’re a less and less credible negotiating partner.
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