Interrogating Trumponomics

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The 2016 US election effectively amounted to a referendum on trade and immigration policies. Despite his populist rhetoric, Donald Trump is fundamentally pro-business. Much like Ronald Reagan’s 1980 campaign, Trump successfully fused an energetic white nationalism with a spiritual American traditionalism. And as Reagan ushered in the era of neoliberalism in the aftermath of the deep structural crisis of Keynesianism, one wonders if Trump channels the undercurrent of nativism to fuse government and private industry into a much more stringent alliance.

Just how Trump’s economic plan translates into actual policies – at the moment it is a mix of tax cuts, trade tariffs, deregulation, and fiscal spending – is not immediately apparent, at least until the new administration officially takes the reigns of the Republic. But we do know enough from Trump’s campaign pledges to discern what could be in store.

The Point of No Return

Over the course of the past 18 months, Trump has suggested pulling out of NAFTA, reneging on the Trans-Pacific Partnership, and sparking a trade war with Mexico and “currency manipulating” China. Will this be sufficient to bring back jobs and return to the glory days of US manufacturing?

First, it is necessary to clarify Trump’s “globalization thesis,” which sees trade rigging (otherwise “free trade” deals) as the overriding factor why US manufacturing was gutted for low-cost Chinese and Mexican labor. On the contrary, American manufacturing was just another victim to a global trend that has seen widespread deindustrialization – including in Mexico and China. Since NAFTA went into effect, US workers employed in manufacturing fell from 15% in 1994 to less than 10% today, while Mexico saw its manufacturing employment share plummet from 20% to 15%.

Between 1995 and 2000, China also deindustrialized, losing more than 10 million manufacturing jobs. According to a study published in the Annual Review of Economics, competition from China led to the loss of 985,000 manufacturing jobs in the US between 1999 and 2011, which happens to be less than a fifth of the absolute loss of manufacturing jobs over that period. To Keynesian guru Paul Krugman, such a relatively smaller share of long-term manufacturing decline due to foreign competition indicated “America’s shift away from manufacturing doesn’t have much to do with trade, and even less to do with trade policy.”

The era of an industrial-led global growth strategy is long over. These manufacturing jobs are not returning, largely due to the success of efficiency in the sector. Indeed, manufacturing output in the US had reached an all-time high in 2015.

Technology is the main culprit. As a report by the Economic Policy Institute clearly states: “Eighty percent of lost jobs were not replaced by workers in China, but by machines and automation.” This makes sense. After all, under capitalism, increased productivity of labor is realized through mechanization, which reduces labor costs. This tendency for capital to automate the labor process in order to increase efficiency ties into a “capital bias” in technology that explains labor’s wage stagnation in relation to this increased productivity in the advanced capitalist economies.

Globalization acutely reflects this tendency. An essential counteracting strategy for capital’s falling profitability between the mid-1960s up to the early 1980s, it was primarily pursued through neoliberal policies designed to discipline labor and boost profits in the advanced capitalist countries by attacking benefits and pensions, crushing trade unions, privatizing public sector assets, and the financialization of everyday life. All of which have culminated in staggering levels of inequality unseen following the postwar consensus.

The loss of manufacturing jobs, then, has been primarily due to the inherent pressure on US capital to lower its labor costs through automation or sourcing cheap overseas labor, as opposed to any sinister foreign trade dealings. Trump’s rhetoric notwithstanding, he is unlikely to challenge such an arrangement because to do so would threaten the profitability of American capital, which is highly integrated into and dependent on global value chains.

Sparring with a Dragon

During his campaign Trump made it a point to single out China, raising the specter of an impending trade war between the world’s two largest economies. From the perspective of long-term US strategic interests, an anti-Chinese political stance might make sense, insofar as it coincided with domestic ire where China was a symbolic placeholder to channel popular anxieties towards. The premise of Trump’s China-bashing rhetoric is largely that the US continues to control the levers of the global economy, and so proposals to slap tariffs of upwards of 40% on Chinese imports will aim to level the playing field.

However, such an assumption is misguided when you take into account that China has access to numerous export markets, while US corporations remain heavily invested in PRC-based supply chains and dependent on 1.4 billion Chinese consumers. Bottom line: the US would stand to lose much more than Chinese manufacturers in the long haul.

Furthermore, in an economic war of attrition, China is more than ready to go head-to-head in a trade war rooted in economic nationalism. In boasting a centralized economic apparatus with the luxury of tapping into considerable state resources to cushion the impact on exporters, China is braced to play the long game in a trade war with the US, which would face severe political repercussions from its domestic producers.

Additionally, Trump has already given Beijing a leg up by pledging to kill the TPP – a deal that President Obama locked China out of to combat its rising hegemony in the Pacific. As the TPP is withdrawn until whatever form it returns in next, China can continue to pursue its Asia-wide trade deals without any pushback. Increasingly, it is China that looks to become the central pillar upon which globalization will rest on in the coming years.

The strengthening dollar – which has hit a 13-year high – and weakening yuan reflect a divergence that both sides would want to avoid spiraling out of control. China doesn’t want an excessively weak yuan, as it would prompt savers and firms to move cash abroad, while the US would prefer to avoid an unrestrained dollar that harms exporters. Much then hinges on how well the dollar’s appreciation is managed.

To put a lid on the dollars gains, it has been suggested by some that a potential “Trump Tower Accord” modeled on the 1985 Plaza Accord – an agreement which devalued the dollar and pushed the yen and Deutsche mark sharply upward – would “bring some coordination into the international financial system to avoid the unnecessary negative shocks and uncertainty of uncoordinated policies.”

Preliminary Impressions

In the aftermath of Trump’s victory, the stock markets did not slump; in fact, they rose substantially along with a strengthened dollar. As a result, financial markets are forestalling faster growth in the US, a perception that is boosting the dollar’s exchange rate against other currencies, including the renminbi, and triggering capital flight from the emerging economies in the process. Anticipating economic acceleration, Janet Yellen, the US Federal Reserve’s chairwoman, was encouraged to raise interest rates with the aim of controlling credit and inflation.

It seems that finance capital – which was squarely behind Clinton during the election – has received enough positive signals from Trump’s plans for cutting corporate taxes, reducing banking regulations, and executing infrastructure projects to generate jobs and boost investment. However, much of the optimism reflected in the markets, while temporarily buoyant, is likely to be wishful thinking.

The tax cuts proposed will benefit the top 1% of income earners, and there is no evidence that any previous cuts in corporate tax rates created new jobs and raised growth in a sustainable manner. What occurs instead, are increased profits at labor’s expense and an upsurge in financial speculation, as evidenced by Bush Jr.’s 2004 cuts.

Furthermore, in cutting the tax rate for companies that hold massive overseas cash reserves (some $2.6 trillion stashed away in offshore tax havens) will only incentivize them to use the tax “amnesty” on repatriated cash to buy back their own shares or pay out dividends to shareholders, driving up their own stock prices.

Trump’s fiscal stimulus will pivot around infrastructure spending, which he has proposed to dedicate up to $1 trillion investment for projects around the country. However, to consider it a public investment is a misnomer. Instead, the funds for his plan would come from private sources, which would obtain incentives and equity in return for raising the money and building the projects.

Similar policies of tax cuts, public spending, and quantitative easing under “Abenomics” have previously failed in Japan. Indeed, if these policies are implemented as planned, Trumponomics might well be the latest iteration of a (neo)Keynesian tonic for the global economy to emerge from the cataclysm of the Great Recession. At present, high corporate debt along with a weak business investment climate and sluggish world trade do not look like a recipe for sustained economic recovery in 2017. Trump’s ‘beggar thy neighbor’ policies and the retreat to economic nationalism will not offer panaceas to combat these structural maladies.

Amar Diwakar is a freelance writer and research consultant for Global Risk Intelligence. He has an MSc in International Politics from SOAS and blogs at Splintered Eye.