Trump's Election: Built On Protectionism?

Summary:

• President Trump has consistently opposed free trade since 2011 and recently appointed a Secretary of Trade who also supports tariffs. Survey data indicates Trump’s anti free trade position is strongly shared by his political base. 

• Research suggests that President Trump’s Electoral College margin came from areas of the country where Chinese imports had increased 50% or more. These areas included key swing states that had traditionally supported the Democratic party. 

• Although industry is declining in the US, its employees still represent a significant pool of voters. The speed with which President Trump is pursuing opposition to free trade suggests he understands this issue’s continuing importance to his political base. 

• In capitalizing on opposition to free trade to gain political power, Trump is reusing a strategy the Republican Party employed in the early 1900s to woo votes from disenfranchised workers. In that case, however, the disenfranchised workers were farmers. 

• While support for protectionism today is highest in lower income households, sadly those households may pay the highest price for tariffs directly and indirectly through higher prices and interest rates. These costs will be born with little prospect of changing the long running evolution of the US economy away from industrial employment.

Trump And His Supporters On Free Trade  

Americans’ views on trade have been differentiated for some time. A Pew Research Center poll in November, 2010 showed that those who felt they were “Hurt” by trade were more likely to have only a High School degree or less, be on the low end of family income, and classify themselves as politically independent.

Figure 1: November, 2010 Pew Research Center Poll

Pew did not publish 2010 results by race, Union membership, or sex. However analyzing their dataset, those hurt by trade were also overwhelmingly white -- consistent (along with education in Figure 1) with the widely reported demographics of Trump's gain in vote share. What also should have troubled Democrats was the high percentage of traditionally Democratic Union members who believed they were hurt by trade. Finally, a significant percentage of those hurt by trade were Independent voters whose votes were up for grabs.

Table 1: November 2010 Pew Research Center Poll: Composition of Those Who Believe There Personal Finances Are Hurt By Trade

	Male as % Hurt	Union Hurt as % Union	White as % Hurt	Independent as % Hurt
Northeast	45%	58%	84%	42%
Midwest	49%	67%	79%	40%
South	47%	67%	73%	38%
West	57%	30%	68%	44%

Trump was able to capture these anti-trade voters in 2016. Trump’s long standing protectionist views are evidenced by the Washington Times editorial Robert Lighthizer wrote supporting Trump in 2011 that outlined a "conservative" rationale for protectionism. On January 3rd, 2017, Donald Trump named Robert Lighthizer as the US Trade Representative.

Pew Research Center’s March, 2016 poll results reproduced in Figure 2 showed the distinctive support Donald Trump received from those opposed to trade.[1] Trump’s position not only separated him from Democratic candidates, it also distinguished him from other Republican candidates like John Kasich who has generally been more supportive of free trade.

Figure 2: March 2016 Pew Research Center Poll

A research study done after the election provides the strongest evidence that Trump's protectionist appeal won the election. It documents a strong relationship between:

“...the change in the county-level Republican two-party vote share between 2000 and 2016 to the growth in local labor markets’ exposure to Chinese import penetration. We find a robust positive effect of rising import competition on Republican vote share gains. The magnitude of the Republican gains is non-trivial. A counterfactual study of closely contested states suggests that Michigan, Wisconsin, and Pennsylvania would have elected the Democrat instead of the Republican candidate if, ceteris paribus, the growth in Chinese import penetration had been 50 percent lower than the actual growth during the period of analysis. The Democrat candidate would also have obtained a majority in the electoral college in this counterfactual scenario. These results add to previous research that documents negative impacts of import competition on employment and earnings in trade-exposed local labor markets (Autor, Dorn and Hanson, 2013; Acemoglu et al. 2016) and a decreased likelihood that moderate politicians win congressional elections in such locations (Autor, Dorn, Hanson and Majlesi, 2016).”[2]

Bernie Sanders, and to a lesser extent Hilary Clinton, also opposed expanding free trade. But Trump’s more vehement anti-trade stance appears to have successfully attracted independent and traditionally Democratic voters that were critical in a closely contested election. In capitalizing on trade, Trump borrowed a strategy from the Republican playbook of the 1920s.

Why Has Trade Become A Political Issue Now?

Figures 3 and 4 show that industrial employment began to decline in the 1950s and its share of output began declining in the 1960s.   

Figure 3: Labor Shares

Figure 4: Shares of Output

Free trade was easier to support as long as industrial employment was growing. Once it began to decline due to growing global trade, however, the pain felt by those who lost jobs began to build an important political base. While those in “Services” -- somewhat more immune to global competition -- make up the vast majority of employees and voters, those not employed in service businesses still comprise a significant voting block.

It seems to have taken over 50 years for global trade-induced employment pressure and cumulative job losses in industry to build up enough to become a significant political force. While seemingly a long time, it also took a long time to build opposition to trade in the early 1900s.

Nearly two thirds of those employed in 1840 were involved in Agriculture. Rapid advances in farming technology and the rapid growth of higher value-added industry caused agricultural employment to drop so that 50 years later in 1890, agricultural employment had dropped by almost half. Even with those declines, farmers still comprised a sizable voting block that demanded political support.

In 1916 the government formed the regional farm-loan banks to support farmers. Through the first World War, farmers saw strong demand for their crops. When agricultural demand collapsed after the First World War, Republicans responded with the Fordney-McCumber tariff of 1922 designed to support farmers. In 1929, Republican Herbert Hoover sought to gain support from farmers by refinancing the regional farm-loan banks in order to make it easier for farmers to obtain loans. Soon thereafter the Smoot-Hawley tariff of 1929 was enacted (which was originally only intended to benefit farmers but was extended to manufacturers as well).  

As Figure 3 shows, neither the Fordney-McCumber or Smoot-Hawley tariffs had any observable effect on the persistent decline in agricultural employment and output share. The Fordney-McCumber tariff did succeed in increasing the cost of living for all Americans: “For example, the food costs increased 16.5% in Chicago and 9.4% in New York. Clothing prices rose by 5.5% in Buffalo, New York, and 10.2% in Chicago.”  It even raised costs for farmers: American Farm Bureau statistics indicated farmers ultimately lost more than $300 million annually as a result of the tariff.

The volume of imports following the Smoot-Hawley tariff fell by approximately 40%, although Smoot-Hawley itself may have only accounted for a quarter of that drop (the rest was caused by the Great Depression). Even at the time, critics of Smoot-Hawley believed it increased nationalism around the world. Smoot-Hawley is believed by many to be one of the contributing economic causes of World War II. After WWII, in an effort not to recreate the economic conditions that lead to the war, countries around the world committed to international organizations that encouraged free trade.

Protectionism's Costs

There are (at least) four mechanisms by which protectionism hurts every American consumer: 1) the direct cost of tariffs, 2) the upward price pressure from quotas, 3) the increased cost of debt because interest rates rise with inflation and 4) job losses for those associated directly or indirectly with exports.

Direct cost of tariffs: While support for protectionism is higher in lower income households, sadly those households may pay the highest price for tariffs. A Centre for Economic Policy Research analysis shown in Figure 5 indicates that lower income households pay a higher percentage of their income in net tariffs (even before considering tariffs’ impact on raising prices) than wealthy households.

Figure 5: CEPR Analysis Of Tariff Burden By Household Income Decile

Upward price pressure from quotas: Quotas generally increase the cost of living as domestic producers raise prices because they face less price competition. These increased costs act as an invisible tax (unlike tariffs which are measured) on all American consumers. A specific example of protectionism's burden on consumers is the approximately $3 billion/year Americans pay in higher sugar costs because of government import quotas designed to benefit US sugar companies.[3]

Figure 6: US vs. Global Sugar Prices

Increased debt costs: Greater cost inflation also puts upward pressure on interest rates. This is yet another separate invisible tax by which protectionism adversely impacts poorer households because they hold more debt proportional to their income.

Figure 7: The Relationship Between Inflation And Interest Rates

Job Losses For Those Involved In Exporting: Estimates are that 7% of the roughly 124 million US employees are involved in exports and 4 million jobs could be lost directly and indirectly as a result of increased protectionism.

It is quite likely Americans will not get much in return for paying the costs associated with protectionism. As was the case for agriculture in the 1920s, tariffs are unlikely to reverse the much stronger global economic forces that have driven the secular employment change in America away from industry and towards "knowledge-based" services.

An Election Won "At The Margin"

Trump's election is an excellent example, however, of how political outcomes can be determined -- at the margin -- by a group with coherent economic interests that seek benefits from the government. The group that swung the 2016 Presidential election towards Trump was defined by their common experience of job loss due to imports. They rallied to Trump because he claims he can improve their specific situation. It happens to be also true that this group is disproportionately white, and less educated (which makes their jobs more vulnerable to trade).

Increased protectionism would likely harm a significant number of US households. If that harm occurs, the future will reveal whether those harmed by protectionism prove to be an important new voting block on the margin.

Transparent and reproducible: Table 1 and Figure 6 are the only original figures produced from data downloaded from the Pew Research Center and the USDA respectively. Those figures can be generated by using the free, publicly-available R program and the R code available in “globalTrade.R” on github to analyze the publicly available data obtainable from the link in footnote 1.

[1] November, 2010 Pew data used can be downloaded here; USDA data from here.
[2] Bold emphasis is mine.
[3] US sugar prices would be even higher, except manufacturers that use sugar have substituted away from sugar to high fructose corn syrup, and in some cases moved some operations outside the US to be closer to overseas sugar producers.