Trade policy cannot fix America’s inequality problem

One policy instrument, one policy target. Or at least no more targets than there are instruments. Economists have known this for a long time: the great Dutch scholar Jan Tinbergen, joint winner of the first economics Nobel Prize, pointed it out more than half a century ago.

But try telling that to US trade policymakers. The number of targets grows ever longer but the range of trade instruments is struggling to expand, and some are marked “Do Not Touch”. In particular, the idea that tariffs can materially impact income inequality and revive the manufacturing industry — not the same thing, as we will see — is highly unrealistic.

Give the Biden administration credit: reversing some of the income inequality that’s risen since the 1970s is an excellent idea. But its “worker centric” trade policy won’t do it. This is especially true when trade policy is also supposed to be hitting a bunch of other mainly laudable targets. These include but are not necessarily limited to: economic growth, supply chain resilience (including “ally-shoring” with like-minded countries), extending the US’s geopolitical reach (particularly in Asia), improving environmental and labour standards in trading partners, isolating Russia through sanctions and even, for the real old-school trade types, creating export opportunities for American companies.

Meanwhile, the administration (and Congress) has chosen to deprive itself of one of its most powerful tools: the bargaining power that comes from granting access to the massive US domestic market through preferential trade agreements (PTAs). The Biden administration isn’t going back into the CPTPP deal, designed to shape the Asia-Pacific economy into an American model, for the foreseeable future, and there is widespread scepticism — including in Congress — that the voluntary Indo-Pacific economic framework it is pushing is a good substitute.

Where the US already has PTAs as a lever, it’s not been shy about using them without much regard for trading partners’ sovereignty. It’s a good thing to have independent unions at Mexican auto plants, as the US has strongly encouraged via the US-Mexico-Canada agreement. But reducing low-cost Mexican competition in autos really isn’t going to do much for large-scale income inequality in the US, where many car workers, especially in unionised plants, are relatively well-paid.

And as I’ve noted before, the continuing obsession with steel is the most obvious case of a worker-centric policy being centred on some workers more than others. The administration is still being difficult about steel and aluminium imports, despite the effect of higher input costs on downstream industries.

Steel workers are also paid above average for the US workforce. Unless you have the wildly implausible belief that yet more trade protection will create vast new employment in a job-shedding, capital-intensive industry, prioritising steel producers redistributes income upwards to a limited number of people. There’s already one US political party catering for white men with above-average incomes: to have two seems to be overdoing it.

The best news for a while in the US labour movement was the successful organisation of an Amazon warehouse in Staten Island, New York (notably by a recently-created union with a distinctly non-traditional leadership). Organising the private service sector — unions are typically concentrated in manufacturing and public services — is the great prize for labour movements in advanced countries. But Amazon is a dependent on cheap imports, and service industries in general are more likely to be in the non-traded sector or are otherwise in effect unreachable by trade policy. The US can’t protect its way to prosperity in a post-industrial economy.

The first meeting of the US-EU Trade and Technology Council (TTC) in September was held in Pittsburgh, Pennsylvania, precisely because it’s a great example of a city that has moved on from a steelmaking past to excel in medicine, financial services and higher education. None of those is much affected by trade policy (though large-scale imports of foreign doctors would do US healthcare a lot of good). The TTC, whose second meeting starts in Paris this weekend, is designed to discuss regulation of tech and other new sectors. This is all fine, but again, with only non-binding agreements devoid of market access to offer, the US will struggle to export its regulations abroad.

This is also a particularly bad time to be keeping consumer goods tariffs in place. Noting that workers are also consumers who benefit from cheap imports is the kind of thing that traditionally gets economists booed offstage as theorists of the metropolitan elite, but right now the trade-off is particularly clear. Low and middle-income American households are suffering from soaring prices. Cutting the Trump-era tariffs that remain on imports of goods such as bikes and clothing from China won’t solve this problem on its own, but as Treasury secretary Janet Yellen has repeatedly observed, it will certainly help. The administration is actively discussing the proposal: free-trade reality has come up against protectionist ideology.

You can see why the administration has alighted on trade policy as a lever. It doesn’t have a surfeit of other options. Attempting redistribution and economic renaissance via public spending, a much better idea, is encountering wrong-headed resistance on Capitol Hill. Unfortunately, there doesn’t seem much appetite for another big expansion of public healthcare coverage. Education policy is largely reserved to the states.

But that’s not a reason for putting yet more targets in the field which the US’s dwindling quiver of trade policy arrows is supposed to hit. Blaming trade and globalisation for a wide variety of America’s ills is an old habit, and one that the administration should try to shake.

[email protected]

Sign up to the Trade Secrets newsletter, published every Monday