It is best to begin the trade debate with some facts. About 10 percent of Indiana’s economy is directly linked to exported goods, while another 4.5 percent is tied to foreign investment. All told, maybe 700,000 to 750,000 Hoosier jobs are connected to the export of goods and the pull of capital from overseas. That is more than one in five Hoosier jobs.
Indiana is currently enjoying the longest stretch of manufacturing job growth since we kept annual data in the 1960s. While Indiana has lost a third of its factory jobs since the early ‘70s, the primary culprit is productivity growth, not trade. Nearly nine of every 10 lost factory jobs succumbed to automation.
Productivity growth and, yes, foreign trade creates far more jobs than it kills. To illustrate this, let us transport our modern, 2018 selves back to 1818. Back then, the average American of 1818 scraped by on maybe $500 worth of goods and services per year in inflation-adjusted dollars. Today, GDP per capita is more than $55,000 per year.
Were Americans content to enjoy the 1818 living standards, it would require only 5 million Americans to supply those needs for all of us today. Instead, 175 million Americans work, producing 100 times the value of goods each year on a per-worker basis. Between 1818 and 2018, technology essentially killed every existing job and created every new one.
The economic role of trade through this breathtaking period of human achievement was to increase productivity by moving production to where it was most efficient. During times of collapsing trade, productivity growth also slowed. Maybe the worst period was in the dark days of the Great Depression when a trade war broke out, amplifying the deeply painful impact of the worldwide depression. And that brings us to today’s discussions on trade.
There is no such thing as a perfect trade deal, though the Commerce Clause of our Constitution comes about as close as any to the ideal. Trade deals, like NAFTA, CAFTA or TPP simply reduce the barriers to trade, such as tariffs. Because the U.S. has long enjoyed relatively few limits on imports, these trade deals improve our ability to export far more than our ability to import. For that reason, American manufacturing employment rose for almost a decade following NAFTA. Of course, NAFTA didn’t help unions, which is important to note only in understanding one source of misinformation about trade.
Today the United States has threatened to impose tariffs on steel and aluminum, pulled out of the TPP and is trying to renegotiate NAFTA. I would like to give the president a benefit of the doubt surrounding his motives for these changes. Perhaps this is only a negotiating strategy to reduce foreign trade barriers, but neither he nor anyone in his administration is saying anything of the kind. Instead, his rhetoric is all about ending trade and bringing back American jobs. Shockingly, this language has even infected the once-rational candidates all down the ticket.
To be clear, the end of trade will not increase employment in the U.S. On the contrary, the real risk is of huge job losses in a trade war. Let me say it plainly. If global trade shrinks by even 25 percent, Indiana will plunge into a downturn far deeper than the Great Recession of 2007-2009.
Simply the suggestion of steel and aluminum tariffs have already driven up prices and dampened the demand for manufacturing goods. The effect will likely build into the summer. Farmers face higher prices for equipment and a lower expected yield for their crops. This will cut profits at machinery dealerships, grain elevators and banks. Few farmers will risk a big equipment loan this year.
The price of new construction, dependent as it is on steel and aluminum, will falter. Even with consumers wanting to buy homes, we will see a construction lag. Car prices will inch up, and of course, that will cause a slowing of auto purchases. Just the risk of a trade war has already offset most of the benefits of the Tax Cuts and Jobs Act. We are in a grave economic moment, but one thing differs from today’s risks and previous recessions.
Hoosiers were passive observers to the last several recessions. We played no meaningful role in the many causes of previous downturns from oil price spikes, to financial shenanigans and home building bubbles. This time is different. If U.S. policies result in a trade war that deals us a crushing economic blow, we have no one but ourselves to blame.
Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].