Trumponomics Explained

Trump’s main economic policy is based on redefining the US’s trading relationship with China. Trump has proposed slapping a 45 percent tariff on Chinese imports if China doesn’t stop undercutting US manufacturers through export subsidies, currency manipulation, intellectual property theft and lax worker safety and environmental regulations. He also seeks to punish US companies who have moved jobs offshore with 35 percent tariffs on their goods. His aim is to reduce the enormous $365-billion trade deficit with China and retain US jobs – but would it work?

Most economists warn against perturbing free trade and the free market. But Steve Keen, Professor of Economics at Kingston University, UK, is critical of the prevailing “neoclassical” school of economics. We asked for his thoughts on free trade and Trumponomics…

Is free trade good for everyone?

The conventional economic argument for free trade is that if everyone specialized in what they’re best at, then everyone will produce more of everything and everyone will benefit. This goes back to the economist, David Ricardo, who in the early 19th century argued that, even if Portugal could produce both cloth and wine with less labor than England, both countries would benefit from trade with each other, because England would specialize in cloth, Portugal in wine, and more of both would be produced.

Leaving aside the concept of “English wine”, this theory doesn’t work in the real world because it rests on a whole range of, frankly, bizarre assumptions – the most bizarre of all being that you can turn a piece of capital from producing any good, to producing any other good, without losing any productive capacity in the process. In other words, the theory works as long as you can turn a wine press into a spinning jenny without losing any productive capacity, which is obviously absurd. In the real world, some capital is destroyed by the opening up of trade, but this is never considered by economists. This could explain why trade liberalization has been shown to frequently reduce material welfare rather than increase it (1).

What would Trump’s tariffs mean for US businesses?

For anybody who has production located off-shore, particularly if they’re in China, their costs of exports will increase by 45 percent – which is pretty heavy. At that level of change, companies will have to ask whether it’s worth their while investing in countries that now facing a 35% tariff for exports back to America. That is the device that Trump wants to use to push American firms back on-shore.

How will Trump’s tariffs impact the US economy as a whole?

I don’t think these tariffs will have the damaging impact that most people are expecting, but the 45 percent tariff on Chinese imports would throw the whole international World Trade Organization system into chaos – making it difficult to implement. One thing that Trump might be able to do is to force American multinationals to relocate production back home– thereby treating it is as a domestic impulse rather than one allying to international production in general.

Why his Trump accused China of currency manipulation?

America has certainly been deindustrialized by the shift in production to China. (Of course mainstream economics argues this isn’t true, which is one of the best reasons for thinking it is). China has a surplus with America that is something of the order of 5 to 10 percent. What that would normally mean is excess demand for the renminbi and under demand for American dollars. But when the Central Bank of China gets American dollars accumulating in their reserves, they buy American bonds with them – this prevents the renminbi from being driven up and the dollar from being driven down. If the Chinese weren’t doing this their currency would be much higher, which is why people call it currency manipulation.

But the American currency is always going to be overvalued to some degree because it’s seen as a safe haven as the established currency of international trade. One intriguing sideline is that the governor of the Central Bank of China is one of the main people arguing for bringing in what Keynes called the “bancor”, which would be a supranational currency for international trade to replace the American dollar. If that happened, the American dollar would fall – so Trump would be better off joining hands with the Chinese central bank governor if he wants to bolster American exports.

You expressed support for Bernie Sanders in the primaries – what are your thoughts on Hillary Clinton?

Clinton stands for business as usual – a continuation of what you’ve already seen from the Bush, Bill Clinton and even the Reagan administration before that. Clinton is basically pro globalization. Trump and Sanders are both appealing to working class and middle class Americans, who have seen the guts ripped out of their cities and their industries over the last 30 or 40 years because of globalization. My analogy for globalization is castor oil. Advocates of castor oil used to say “you’re not going to like the taste, but it’s good for you”. The US working class is now saying “we’ve been drinking this globalization castor oil stuff for 40 years. It tastes vile, and it’s been vile for us.”