Can Trump Bring Jobs Back to America?

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Music:

Fratto, The OC Jazz Collective, Wiesty – Chrono Trigger “Driftwood” http://ocremix.org/remix/OCR03412
AeroZ – Secret of Mana “An Angel’s Wish for the Forest” http://ocremix.org/remix/OCR03295

Script:

Well, can he? Probably not, at least not at meaningful scale. But I don’t think that’s the question we should be asking.

Welcome to Art and Finance! Now, anyone can understand business, economics, and finance!

Before we go any further in this video, I must disclose that I am from a very globalized background. The following is my opinion, but there is educational content in this video as well. Got it? Good. Let’s do this.

Donald Trump was elected as the 45th president of the US, on a platform to, among other things, bring jobs back to America. During the campaign, he’s proposed legislation that stands against free trade and outsourcing, such as slapping a 45% tariff on Chinese imports to the US. We can say that his economic platform for the US is protectionist, as opposed to pro-free trade. To be fair, though, a similar economic platform was championed by Bernie Sanders. By the way, you might have heard of the concept of fair trade, which we’ll address in a bit.

Going back to protectionism versus free trade, most economists across the political spectrum are in favor of free trade. Why is that? One of the bedrocks of macroeconomics is the concept of comparative advantage. Basically, country A specialises in, say, producing selfie sticks at good quality and low cost, while country B specialises in driverless cars at good quality and low cost. As a result, its both profitable and cheaper for country A and country B to trade selfie sticks and driverless cars. And so you have trade in physical goods, and also outsourcing, which is essentially trade in services. Each nation specializes and grows its economy.

There’s another important benefit to free trade that isn’t immediately felt. Trade is tied to geopolitics, in other words, international relations. Think about how the US opened up its markets to Japan and Germany after the second world war. Global trade, in general, grew in the postwar period. The basic idea was that, with more and more nations’ economic goals intertwined, the less chance there was for another world war. Keep in mind that protectionism was very high right before World War II.

Trade may also positively influence technological advancement, increasing our standard of living. Not only that, but life becomes nicer with more choices. You get to play Nintendo, travel the world and take Instagram photos, and eat the food that immigrants bring to your city. World peace, economic growth, higher living standards? In theory, then, international trade sounds perfect. IN THEORY.

As we all know, that’s not how it works out in reality. In the US, trade for cheaper goods and outsourcing of domestic manufacturing and services has created a struggling middle class. The idea among free traders was that as a country specialises in certain industries, new jobs would be created to offset jobs lost. That hasn’t been the case. Why?

One reason might be that existing initiatives to retrain the American workforce have yielded lukewarm results. The failure of retraining might be because society hasn’t placed a lot of focus on it.

So, wouldn’t it be easier to just bring back jobs to the US? Not so. The first obvious concern is a potential trade war, and, I won’t mince words on this, a potential real world war. Rampant protectionism can cause job losses on both ends, potentially leading to domestic and international instability.

Another concern is, even if manufacturing jobs are brought back to the US, will consumers actually spend? Mainstream economics tells us that wages grow as an economy grows. Such has been the case with the US. With growing labor costs, firms that don’t trade/outsource to minimize costs can do one of three things: 1) eat the costs and hurt their profitability, 2) pass on costs to consumers, or 3) some mix of both. If manufacturing labor is brought back to the US, how much are firms willing to lose profitability, or consumers willing to pay higher prices? Apple, with almost 30% operating margins, might be able to eat higher costs, but what about Walmart, which only generates less than 5% operating margins despite its globalized operation?

Rising wages and costs is not a US-only phenomenon. China is already feeling the effects of its own higher manufacturing wages, to the point where they are actually setting up factories in the US.

The question we should be asking, then, is not if Trump can bring manufacturing jobs back to America, but if he can generate new, equitable jobs. Going back to “fair trade”, which I mentioned earlier. I would say fair trade, depending on your definition, isn’t at all a new idea. The whole point of international negotiations on trade is to achieve an outcome that is optimal for all parties involved.

So, in that sense, at least ideally, multilateral trade negotiations are a form of achieving fair trade. I just don’t know if tariffs are the way to go about it, as tariffs have been known to sour international relations, and, again, we want to avoid another world war. The ideal situation, in my view, is that trading nations have explicit economic strategies and agree to optimal trade treaties. I scratch your back, you scratch mine. Then, we can all get together and sing kum ba yah, and feed the unicorns and flying pigs.

I hope you see that the issue of jobs is not just political, but also geopolitical, and, as with most things, rarely black and white. The unfortunate reality is that governments and politicians might promise simple answers to complex problems.

By the way, if you’re wondering why, despite all this, the stock market rallied after Trump’s election, it might be because investors are betting Trump will be walking back on his campaign promises.

Oh, and I forgot address the elephant in the room. Let’s talk about that, and a potential solution to our economic problems, worldwide, next week. See you then. (To be continued…)

Ramon Rodrigo Cuenca, CFA
Equities Analyst
Art and Finance

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