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The Peninsula

Misconceptions About Trade Dominate the First Presidential Debate

Published September 27, 2016
Category: South Korea

By Phil Eskeland

Last night’s debate between former Secretary of State Hillary Clinton and businessman Donald Trump highlights trade as a top tier political issue in the upcoming U.S. presidential election.  In past general election presidential debates, trade was barely mentioned.  This time, trade was front and center.

With recent polling showing more Americans, particularly Republicans, souring on international trade, it was no surprise that GOP nominee Donald Trump immediately launched into a diatribe against trade, blaming past trade agreements for the reason why U.S. companies like Ford and Carrier are moving some production to Mexico and other nations during the first question on how to achieve prosperity.  In the debate, Trump’s solution to stem offshoring is to reduce taxes on businesses from 35 percent to 15 percent as a way to incentivize U.S. companies to build and expand operations in the United States, along with renegotiating our trade deals.  Later on, when the debate moderator pressed Donald Trump on how he would bring back industries that have left the United States, he responded by saying he would impose a new tax on products being brought back into this country on companies that have moved operations overseas.  While Hillary Clinton recognized the importance of trade, her response primarily focused on criticizing all of Trump’s tax plan as “trumped-up trickle-down.”  She also said she would appoint a “special prosecutor” to enforce current trade deals.  Donald Trump also pressed Hillary Clinton for her reversal on the Trans-Pacific Partnership (TPP) because she had previously said it set the “gold standard” in trade agreements when she was Secretary of State.  She responded that she opposed the TPP once the agreement was finally negotiated and the terms were specifically laid out.

Unfortunately, neither candidate expressed the complete set of facts about trade.  First, a study conducted by the non-partisan U.S. International Trade Commission, which has the mission of enforcing our nation’s “fair trade” laws, concluded U.S. trade agreements that have entered into force since 1984 resulted in net positive benefits to the United States:  exports have increased by 3.6 percent; the economy grew  by 0.2 percent; employment grew by 0.1 percent; wages grew by 0.3 percent; and the U.S. trade balance improved by $87.5 billion.  In other words, without these trade agreements, our economy and jobs would have suffered.

Second, the Reshoring Initiative documented in a study released last March that “the bleeding of manufacturing jobs to offshore has stopped.”  As compared to the 2000-2003 annual average, new offshoring in 2015 decreased by 75 percent while U.S. companies bringing back production to the U.S. (otherwise known as “reshoring”) and new Foreign Direct Investment (FDI) by overseas firms increased by 400 percent.  So, while opponents of trade may cite one or two examples of a U.S. company that is moving production overseas, statistics show that the trend is in the opposite direction.  For example, a 1.5 million square foot state-of-the-art facility in Clarksville, Tennessee, built by an $800 million investment from Hankook Tire of Korea, will soon be making tires for the U.S. market later this year, employing about 1,600 Americans.

What are the reasons for the reversal in this offshoring trend?  Many analysts focus on falling energy costs in the U.S., resulting in lower production and transportation costs; the growing desire for companies to be closer to their customers, to prevent supply chain interruptions; and a stronger U.S. dollar.  But one additional factor that often gets overlooked is that starting in 2010, the domestic manufacturing tax deduction (Section 199 of the Internal Revenue Service code) was finally fully phased-in.  Section 199 replaced another tax incentive for U.S. exporters that was ruled illegal by the World Trade Organization (WTO) in 2002.  This reshoring incentive provides all companies a 9 percent tax deduction on all their U.S. domestic production.  The deduction is estimated to be economically equivalent to a 3 percentage point reduction in a company’s tax rate for operations in America.  Thus, the more production that takes place in the U.S., the greater the tax incentive for the company.

Does the positive news about trade mean that globalization works for every American?  Regrettably, no.  That’s why the U.S. government offers trade adjustment assistance to workers and companies to train them to transition out of an import-sensitive industry into another line of business.  Plus, for those workers over the age of 50 who earn less than $50,000 a year in their new job after they lost their previous employment due to imports, they are eligible to receive a $10,000 wage supplement for up to two years.  The key is to make sure that those few who are injured by imports are helped while not turning off the benefits of globalization to the overall U.S. economy.  The U.S. should not erect various protectionist barriers that contravene the rules of trade that were first established under U.S. leadership in the post-World War II international economic framework.

Unfortunately, the debate last night shed more heat than light on this emotionally-charged issue of trade.  Hopefully, in future debates, the complete facts about international trade and the role of trade agreements, along with information about how to help those adjust out of an import-sensitive job, will become part of the public discourse.  If we really want to keep production in America, let’s not raise the price of imported goods to U.S. consumers who are already on a tight budget.  Let’s discuss increasing the domestic manufacturing tax deduction.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

Photo from Dirk Dallas’ photostream on flickr Creative Commmons.

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