AFI Association of Food Industries

AFI Serving the U.S. Food Import Sector

2020: Trump Economic Policy As It Relates to the Global Economy 

Wilbur Ross
U.S. Secretary of Commerce

This article contains excerpts from a February 2020 speech by U.S. Secretary of Commerce Wilbur Ross. 

We are incorrectly blamed for global economic problems. From the late 1980s through the early 2000s, global merchandise export growth was usually double that of world GDP growth. But during four of the past five years, goods trade growth lagged global GDP growth. Globalization had gotten out of control. It takes 200 suppliers in 43 countries on six continents to make an iPhone.

Global trade growth likely turned negative in 2019 while GDP increased by nearly 3 percent, their first move in opposite directions. A contraction of auto exports accounted for 30 percent of the world trade slowdown. Another reason is that intermediate product exports have declined from 54 percent of the total in 2008 to 52 percent now.

Developing countries had increased their share of value-added international trade from 31 percent in 2005 to 39 percent in 2015. But their share of global trade will likely decrease in coming years — due in part to higher wages and shipping rates, and partly due to the Fourth Industrial Revolution, or 4IR. 4IR is the expanded analytical capability generated by the 5G and the Internet of Things and it is ushering in a new age of productivity, efficiency, customization, and sustainability.  As a result, exports peaked as a percentage of GDP at 26 percent in 2008.  

These shifts may not adversely affect global GDP, but they could redistribute it to more developed countries. For example, the textile and apparel industry employs about 125 million people globally, mostly in less-developed countries, and a total that is more than the combined totals of the automobile and electronics industries. But that industry and others are susceptible to the rapid adoption of 4IR digital technologies.

The EU — the world’s largest goods exporter — made about 34 percent of global goods exports in 2018. By comparison, the United States was just 8.8 percent. But the United States was the world’s biggest importer, at $2.5 trillion worth of goods in 2018 — 50 percent more than its exports and 15 percent of world imports. 

In 2018, the U.S. goods trade deficit reached an unsustainable $887 billion. The United States runs deficits with 97 trading partners, of which China, followed by the EU, Mexico, Japan, and Vietnam are the largest. These five account for 92 percent of the U.S. trade deficit.

Free-trade folklore says countries export what they do best; import what they do worst; and internally produce and consume the rest.  But that is not how trade really works. The five markets I mentioned, and others, have tariff and non-tariff import barriers and they subsidize exports. The U.S. is the least protectionist major country. Therefore, our trade policy issues are: How much of the $887 billion goods deficit is artificial and how do we reduce these artificial deficits? To answer these questions, we must study history.

Right after World War II, the United States had recurring trade surpluses. The U.S. economy was so strong that its leaders decided to help Europe and Asia’s fragile economies recover with direct aid like the Marshall Plan and with trade concessions to help them export to our market. These concessions were made permanent via GATT and the WTO. They remain in effect today, even for export powerhouses like China, Germany and Japan. It took 25 years for these policies to shift the United States from trade surpluses to deficits. Now, many countries, including China, have a positive balance of trade solely because their surpluses with United States exceed their deficits with the rest of the world. Without their U.S. surpluses, they could not buy as much as they do from everyone else. 

Almost half the U.S. merchandise trade deficit is with China, partly because wages are lower there and partly because we let them into the WTO on the theory that they would obey global trade rules. Unfortunately, China disobeyed the rules; and the WTO has no real enforcement mechanisms. Therefore, the United States had to defend itself. We have 450 WTO-compliant trade actions in force against foreign exporters.  Almost half of them involve China. And just this week, the U.S. government subjected currency undervaluation to countervailable duties. Artificial devaluation subsidizes exports but will now be less useful to countries using it to provide their exporters with a price advantage.

But piecemeal trade enforcement using anti-dumping and countervailing duty laws is expensive and slow because it requires extensive and detailed analysis of long-term market and pricing data. Once a case is eventually decided, exporters get around enforcement by using slight product modifications or illegal transshipments through ports in other countries.

If you doubt the impact of China’s WTO entry, then consider that before China’s admission into the WTO, its GDP grew slowly. But think about what happened after 2001! Its GDP soared, increasing from $1.3 trillion to $14.3 trillion. The only change since 2001 was its membership in the WTO, not its inherent competitive advantage.

Another U.S. mistake was the North America Free Trade Agreement. Before NAFTA in 1993, the U.S. had a trade surplus with Mexico of $5 billion in 1992. But after NAFTA’s first year, that trade surplus had become a $16 billion trade deficit in goods. It is now over $100 billion annually. The cumulative U.S. trade deficit with Mexico post NAFTA exceeds $1.2 trillion, a huge number!

President Trump campaigned against such artificial trade deficits. No country can afford permanent, huge trade deficits — no more than a family can afford increasing credit-card debt year after year because of excess spending. The U.S. cumulative 10-year trade deficit in goods is $7.7 trillion, and cost millions of good jobs. 

Some economists claim our deficit comes from a savings rate lower than other countries. But that doesn’t explain the impacts of NAFTA, China’s WTO accession, other countries’ protectionist practices, or the preferential trade treatment accorded 90 percent of WTO members. It doesn’t explain the fact that China can airmail a package to a customer in the United States for far less than it costs for a shorter distance within the U.S. It doesn’t explain the impact of subsidized export financing by countries. In short, the low U.S. savings theory — at best — only partially explains the U.S. trade deficit.

President Trump’s stated objective is to eliminate foreign export subsidies and all tariff and non-tariff trade barriers. Why then is he imposing some tariffs and threatening others? Tariffs are his only tool to offset the historic unilateral concessions I described and to motivate trading partners to negotiate away some of their artificial advantages. Without tariffs and the threat of additional tariffs, countries would remain with trade barriers lopsided in their favor. For example, the U.S. tariff on imported autos is 2.5 percent, but Europe’s tariff on U.S.-made autos is 10 percent. China’s is much higher.

Similar ratios are true for other industries. They would give up that differential only if the cost of not doing so would be even worse, namely, higher — or additional — U.S. tariffs. The fact is that Trump’s tariff-tactics work, as his Phase One trade deal with China proves.  

China has committed to buy $200 billion more goods from U.S. producers over the next two years. This would reduce the U.S. deficit by an average of $100 billion per year and add one-half percentage point to U.S. GDP. More importantly, China agreed to end forced technology transfers and show more respect for intellectual property rights. In return, the U.S. agreed not to impose tariffs scheduled for Dec. 15, 2019 and to reduce the October tariffs. The United States retained $72.5 billion of tariffs on some $370 billion of Chinese goods, pending further negotiations. Tariff threats also facilitated the USMCA; the renegotiation of the pact with Korea; and two new agreements with Japan.

Further shifts in global supply chains are occurring due to new U.S. policies regarding regulations and taxes. Deregulation of shale gas and oil has moved the United States from being a substantial net importer to a net exporter of fuels. It also has created a much larger export business for petrochemicals.

In total, the U.S. government has cut eight regulations for every new one imposed. This makes it easier and cheaper to do business in the U.S. The U.S. also went from being one of the highest business tax countries to one of the lowest.

The most important U.S. tax reform was allowing an immediate 100 percent write-off of capital expenditures, cutting the effective cost of investment by 21 percent.  Nothing improves rate of return better than lower initial investment. The new U.S. corporate tax code is so effective that one foreign minister considered filing a WTO complaint over the tax plan being an unfair trade practice.

Beyond these policy changes, the shift in global supply chains will be further impacted by the digital technologies of the Fourth Industrial Revolution. Historically, production location decisions sought large pools of low-cost unskilled and low-skilled workers. Now, almost every day, another breakthrough in robotics is announced. Some machines even can fold garments and insert them into packages. Others can pick up dissimilar components and place them in precise locations error-free over and over.

The substitution of capital equipment and software for labor will intensify. But the radical transformation of the global production system is just beginning. Korea is a leader in automation technologies but still only has 710 robots per 10,000 workers. In the U.S., there are only 200 robots per 10,000 workers and our wages are higher than Korea’s.  We and China both also need robots to offset bad demographic trends.

Manufacturing is 68 percent of U.S. goods exports, and McKinsey & Co. believes 4IR will increase U.S. manufacturing exports by 14-20 percent by 2025. McKinsey also projects that 42 percent of ALL occupations are at least 50 percent automatable. And it is not just robots.

4IR, the Internet of Things and capturing and analyzing vast amounts of real-time data will greatly improve efficiency. Examples abound. 3D printing uses less material, less energy and less labor. AI-empowered production reduces the time between product design and full production. AI also reduces the need for inventory, labor and its related costs. 

Meanwhile, other factors are changing global supply-chain dynamics. Growing cost pressures on low-wage, highly polluted countries hurt their competitive advantage. Sustainability is increasingly important to both consumers and global executives and environmental concerns are influencing supply-chain decisions. Manufacturing consumes 54 percent of world energy and emits 20 percent of the CO2. I doubt the developed world will continue paying twice for improving the environment: first through higher domestic costs and, second, through job displacement by countries with lower environmental standards. One sign of this change is the new maritime industry fuel rules effective this year. Ocean-going vessels must either use more expensive, lower-sulfur fuels or invest capital to reduce pollution from existing bunker fuels. Some countries are considering a carbon tax on imports to offset the disparity in environmental laws and enforcement.

As one can clearly see, Fourth Industrial Revolution technologies and sustainability will do more to transform the 20 trillion dollars in global trade than U.S. tariffs on a few hundred billion dollars of goods ever could. It will disrupt those economies that lack highly trained workers.

Association of Food Industries: Serving the U.S. Food Import Trade Since 1906
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