Earlier this month Sen. Marco Rubio (R‑Florida) took to X (formerly Twitter) to address criticisms—including from me—of recent opinion pieces he penned calling for the expanded use of industrial policy. I’m normally not one to respond to social media call-outs, but since a sitting senator called me out by name—and called me names—I’m compelled to reply. The following are Sen. Rubio’s postings along with my responses.

Sen. Rubio is selling the far-reaching nature of his argument a bit short. In both his National Affairs and Washington Post essays, the Florida senator did not merely express concern over China or note that efficient markets may not operate in the country’s undefined “best interests” but called for aggressive government intervention to rebuild a manufacturing sector he described as in a state of collapse.

Sen. Rubio argued the United States must rescue US manufacturing from this (fictitious) implosion and develop an industrial base “capable of ending our reliance on foreign markets for goods that are essential to maintaining a free and prosperous republic.” His agenda is aimed not just at severing US dependence on “essential” (a term again left undefined) goods from China but all foreign countries, including those of US allies. He proposes nothing less than a reordering of the US economy.

The consequences of such government intervention would be profound. As Sen. Rubio himself concedes, markets are efficient, and thus any departure from them would necessarily reduce efficiency with a commensurate decline in prosperity. This is not to be taken lightly and demands a compelling justification—one that Sen. Rubio struggles to supply.

As Sen. Rubio never precisely defines what “this” is—instead opting to speak in vague, general terms about the nature of the problem that allegedly confronts the country—it is unclear what his critics are supposed to offer a solution to. If, however, the concern he seeks to address is merely US dependence on China, then the accusation that Sen. Rubio’s critics have no policy prescriptions to offer is baseless.

A 2023 policy analysis from my colleagues Scott Lincicome and Clark Packard, for example, called for rejoining the Trans-Pacific Partnership (now the Comprehensive and Progressive Trans-Pacific Partnership) and concluding the stalled Transatlantic Trade and Investment Partnership to bolster trade with the European Union as well as Pacific Rim countries other than China.

Lincicome and I, meanwhile, authored a recent op-ed that called for reforming the Jones Act to allow the use of vessels from allied shipyards. Enabling US-flag carriers to purchase ships at dramatically lower prices than those of US shipyards would promote fleet modernization and reduce the carriers’ need to repair and upgrade their aging vessels in Chinese state-owned shipyards.

If Sen. Rubio wants Americans to do less business with China, he should advocate for measures that make it easier to trade with US friends and allies. Instead of taking away options from Americans, why not first strive to present them with better ones?

More fundamentally, discrete problems such as the reliance on China for particular sensitive products demand targeted, discrete solutions—not vastly expanded government meddling in the US economy.

According to one of the most oft-quoted papers on this topic, 2016’s “The China Shock” authored by economists David H. Autor, David Dorn, and Gordon H. Hanson, US job losses due to increased imports from China between 1999 (China was not admitted as a World Trade Organization [WTO] member until December 2001) and 2011 were a maximum of 2.4 million and most likely about half that number. 

At least a couple of things should be kept in mind when evaluating these numbers. First, in the context of a US economy that sees tens of millions of jobs lost (and gained!) annually, they are quite modest. In February of this year alone, for example, over 5 million Americans were separated from their jobs.

Second, the loss of jobs due to Chinese imports was accompanied by job gains elsewhere in the economy. That’s almost certainly not a coincidence. Savings from the purchase of Chinese products provided Americans with more money with which to spend or invest in the US economy. In addition, the dollars used to purchase those Chinese imports later returned to the United States due to Chinese purchases of US goods (goods exports to China rose from $13.1 billion in 1999 to $104.1 billion in 2011) or investments ranging from the purchase of US stocks and treasury bonds to greenfield investments.

This helps explain some findings that Cato’s Scott Lincicome recently highlighted in his weekly newsletter:

First there’s the question of what Chinese imports did to other US jobs in other places (i.e., not the jobs and communities hurt by the shock). Nicholas Bloom and colleagues, for example, concur with ADH that the China Shock caused US manufacturing job losses, especially for those without college degrees, but they add that the losses were fully offset by gains in service jobs in other regions. Several other studies (see this Lorenzo Caliendo and Fernando Parro paper for a review of the academic literature) have similarly found that a decline in US manufacturing jobs during the China Shock period was accompanied by increases in American service‐​sector jobs—and often well‐​paying ones at the same manufacturing companies. The results from another group of economists were even more positive: After accounting for the effects of Chinese imports throughout the supply chain, specific jobs were indeed lost, but overall US employment and wages increased, even in regions that experienced large manufacturing employment declines (contra ADH).

Finally, one should not be left with the impression that the surge in Chinese imports during the early part of this century was solely—or even mostly—due to China’s WTO membership. Much of the increase reflects the increased competitiveness of Chinese firms as China liberalized its economy and became more market-oriented. The story is as much, if not more, about China getting out of its own way as US reductions in barriers to Chinese imports.

At the very least Sen. Rubio’s diagnosis lacks context. While output has indeed stagnated over the past 15 years, it has done so at near-record levels. That performance is pretty good, particularly considering a) the increasingly services-oriented nature of the US economy as consumers spend greater portions of their paychecks on things like vacations and dining out than more stuff (how many washing machines, ovens, irons, etc. does one need?); b) the propensity of manufacturers to produce for their domestic market; and c) dematerialization that has seen fewer materials used to produce goods and even the disappearance of numerous items as they are supplanted by smaller multipurpose products (e.g., alarm clocks replaced by smartphones) or slip into the digital ether (DVDs, compact discs, newspapers, books, etc.).

Talk of declining manufacturing employment, meanwhile, is at odds with data showing the number of such jobs as having risen by over 900,000 since April 2009. While the increase has correlated with the decline in productivity that Sen. Rubio highlights, this further supports the notion the decline in manufacturing jobs since 1979 is more a story about productivity (e.g., automation) than trade. Sen. Rubio can express concern over declines in manufacturing productivity, and he can bemoan declines in manufacturing employment, but he can’t credibly do both given the clear tension that exists between them.

Lastly, the US share of the world market as an indicator of manufacturing vitality is a deeply flawed metric. As other countries become more developed—as we should wish for them to—they will account for a greater share of global production. Consider, for example, that even if US manufacturing value-added doubled over a certain period while international manufacturing value-added tripled, the US share would decline. Rising global prosperity is to be celebrated, and we shouldn’t be led astray by statistics that paint this trend as a cause for worry.

The claim that industrial policy critics believe it can “never work” is a strawman. More accurately, critics argue that it suffers from systemic flaws that make it less likely to succeed than market-based approaches. These flaws, such as the inevitable intrusion of political forces into government decisionmaking, mean that industrial policy failures (difficult to terminate as constituencies profiting from these policies lobby to maintain them) are bound to outnumber its successes (which are difficult to evaluate given the inability to know how a given industry would have fared absent industrial policy interventions). Given the likelihood of missteps occurring as a result of industrial policy, a high bar ought to be cleared—including a clear demonstration of a specific need that market forces aren’t meeting—before engaging in such policy adventurism.

Neither the moon landing nor NASA (cited in Sen. Rubio’s Washington Post op-ed), meanwhile, are the industrial policy trump cards that Sen. Rubio imagines them to be. In fact, they aren’t even examples of industrial policy, which is typically understood as government efforts to develop selected commercial industries in service of national economic goals in market-beating ways. The primary purpose of winning the space race was besting the Soviet Union in a high-stakes competition for global prestige, with any benefits to US industry a secondary concern.

If there are many cases of US industrial policy being successfully applied, why is it so difficult for Sen. Rubio to cite them?

“Doing nothing” is another strawman. First, industrial policy critics have proposed many policy reforms to boost the US manufacturing sector, address the China challenge, or otherwise jump-start the US economy. Second, government interventions may be warranted to meet specific challenges that face the country—particularly its national security. But Sen. Rubio fails to provide such specificity, instead speaking in vague terms about corporations and US adversaries that seek to “dictate the terms of our economy.” How can a challenge be addressed if it can’t even be spelled out? This inability to clearly articulate the challenges that Sen. Rubio insists demand attention, along with his numerous factual errors, is even more reason to resist calls for a more muscular industrial policy.

Furthermore, if “nationless corporations” are regarded by Sen. Rubio with such deep suspicion, why does he seek to empower them via industrial policy that their lobbyists will inevitably help shape? It’s worth noting, for example, that the primary beneficiaries of the Creating Helpful Incentives to Produce Semiconductors Act—Intel, Micron, TSMC, and Samsung—are all multinationals, the latter two of which are headquartered abroad. If these corporations are a malady, then providing them with government resources seems an odd cure indeed.

The context here is important. The Founders’ use of tariffs did not reflect a belief in industrial policy but rather a need to raise revenue. As economist Douglas Irwin wrote in his detailed history of US trade policy Clashing over Commerce:

During this period, the term free trade did not mean zero tariffs and the absence of any government restrictions on trade. It was generally understood that governments would need to tax trade for revenue purposes. Instead, free trade meant the freedom of a country’s merchants to trade anywhere they wanted without encountering discriminatory prohibitions or colonial preferences as long as they paid the required duties. Free trade could be more accurately characterized as open trade in which countries could impose import duties and regulate shipping but did so in a nondiscriminatory manner.

Economic historian Phil Magness, meanwhile, notes that decisions over which items to place tariffs on produced testy exchanges among legislators. Rather than considering the country’s economic welfare as a whole, these politicians—as they are wont to do—instead took a more narrow perspective focused on their constituents:

The new nation’s first foray into tariff policy began innocently enough on April 9, 1789, when Madison introduced a bill to the House of Representatives proposing specific duties on alcohol and applying a tax “on all other articles ___ per cent. on their value at the time and place of import.” Most expected a short debate, as indicated by Rep. Elias Boudinot of New Jersey, who followed Madison in suggesting “that the blanks be filled up in the manner they were recommended to be charged by Congress in 1783.” Rep. Thomas Fitzsimmons of Pennsylvania derailed the plan with a hastily drawn amendment to “encourage the productions of our country, and protect our infant manufactures.”

The proposal caught Madison, and most of Congress, off guard. “If the duties should be raised too high,” Madison warned in a letter, “the error will proceed as much from the popular ardor to throw the burden of revenue on trade as from the premature policy of stimulating manufactures.” And yet the allure of specialized rates swept through Congress, prompting requests from a succession of amendments seeking differentiated rates for favored goods from their home district or state. In his first major congressional action, Madison had unwittingly awakened the very same brand of factional politics he so eloquently diagnosed in The Federalist Papers. Except for slavery, tariffs became the most contentious federal policy issue of the 19th century and remained a source of continuous discord until the Great Depression.

Such dynamics should surprise only the grossly naïve. Furthermore, what reason is there to think that the same parochial interests that helped set tariff policy would not also influence the direction of Sen. Rubio’s envisioned industrial policy? Perhaps more fundamentally, why does Sen. Rubio think that trade policies adopted in the late 1700s offer useful lessons for economic policy in the 21st century?

Policies adopted by President Ronald Reagan are at least within living memory, but here Sen. Rubio succumbs to factual and logical errors. Reagan did not increase tariffs but instead implemented a voluntary export restraint (VER) that limited imports of Japanese vehicles. And it’s certainly nothing to emulate. As Scott Lincicome detailed in a 2022 blog post, the VER cost US consumers billions of dollars, much of which was funneled money into the pockets of Japanese automakers (who could raise their prices due to the VER’s constraint on supply). Rather than using the import restraint as an opportunity to retool and raise its game, meanwhile, the US auto industry frittered away the increased profits generated by the VER on items such as aircraft and bonuses for company executives.

The larger context is also worth bearing in mind. While tactically ceding free trade ground through adoption of the VER (eventually scrapped in 1994), Reagan also used his time in office to sign a free trade agreement with Canada—the foundation of the North American Free Trade Agreement—and helped launch the Uruguay Round of trade talks that eventually culminated in the establishment of the WTO. Reagan’s trade legacy is far more rooted in expanded liberalization than the kind of industrial policy Sen. Rubio now champions.

Sen. Rubio’s persistent use of the “free-market fundamentalist” pejorative—connoting an inflexible adherence to free markets regardless of circumstance—is disappointing. Not only is this portrayal of free marketers false, but Sen. Rubio almost certainly knows it is false. As he wrote in his National Affairs essay:

Regional conflicts in Ukraine and Gaza — in which the United States is not even a direct participant — have exposed the inadequacy of our industrial base. This problem is not easily amenable to market-based solutions (aside from purchasing more weapons and ammunition from countries with successful industrial policies, like South Korea). Just as there are no atheists in foxholes, when it comes to self-preservation, even hardened libertarians can concede that some amount of industrial policy is warranted. [Emphasis added] This is common ground that conservatives can use to make real progress.

Libertarians are indeed willing to sanction market interventions by government in response to specific national security concerns. What they are unwilling to do, however, is hand over power and taxpayer money willy-nilly in response to vaguely articulated and ill-supported notions that US manufacturing is not up to snuff. But one not be an ardent free marketer to oppose the expansive use of industrial policy. Indeed, the case against it is not rooted in ideology but in pragmatism and a recognition of how political processes distort even the best-intentioned initiatives.

Even if Sen. Rubio’s goals are noble, the end product of the industrial policy machinery he seeks to create almost certainly won’t be after special interests have their say.

The real questions that should be asked are of those who deny or are somehow blind to this reality. If anyone is to be labeled a fundamentalist, it seems a more useful descriptor of dogmatic adherence to industrial policy despite its demonstrated shortcomings.

Talk of alleged “deindustrialization” in a country that accounts for the second-largest share of global manufacturing output is odd if not outright false while claims of reduced resilience and cultural corruption are so nebulous and unspecific that they are difficult to respond to. Again, the inability to articulate the nature of the problem that Sen. Rubio demands the government be given fresh reserves of power and money to confront is a disturbingly recurrent theme.

That said, if Sen. Rubio is concerned about resilience it is unclear why he believes the answer lies in industrial policy. Far from undermining economic resilience, trade openness provides needed redundancies and alternative sourcing arrangements that help mitigate the impact of shocks such as the recent COVID-19 pandemic. Trade can also assist in the recovery process once these shocks subside. As a 2021 World Trade Organization report stated in its conclusion:

Trade can also better equip countries to deal with shocks. As a source of economic growth and productivity, it gives countries the technical, institutional and financial means to prepare for shocks. It also can help to ensure that critical services, such as weather forecasting, insurance, telecommunications, transportation, logistics and health services, as well as critical goods, are available in a timely manner before and after a shock hits. It can also enable countries to switch from domestic to external suppliers in case of domestic shortages, thereby making it possible to import essential goods quickly and more easily cope with shocks. In addition, trade contributes to economic recovery from shocks by improving allocative efficiency and unlocking scale effects, enabling the creation of export-related jobs and the importation of affordable necessary inputs, ultimately leading to better incomes and increased productivity and innovation.

A perfect example of the value of global supply chains—and the risk of overreliance on domestic ones—was seen during the 2022 baby formula crisis. During this crisis, recalls of formula as well as the shutdown of a US plant that produced formula over contamination concerns led to widespread shortages. These, however, were only the shortage’s proximate cause. Their persistence was due to US import barriers, consisting of both tariffs as well as strict nutritional, labeling, and other standards imposed by the Food and Drug Administration, that enabled US producers to control over 98 percent of the baby formula market. Had these barriers been lower, or removed entirely, foreign-produced supplies could have quickly eliminated the shortages.

The episode is a classic case of how severing Americans from global supply chains makes them more vulnerable and less resilient. The forced use of domestic production may seem like a wise exercise in self-reliance, but the reality is more akin to placing all of one’s eggs in a single basket.

Talk of cultural corruption, meanwhile, raises all sorts of questions. First, what does it mean? And whatever it is, does Sen. Rubio think it was caused by a decline in manufacturing employment? If so, this raises many questions. For example, what should be made of the approximately 1.5 million increase in manufacturing jobs since April 2010—is Sen. Rubio prepared to argue this has correlated with an improvement in American culture? Are productivity improvements—the leading cause of manufacturing job losses—to be regarded as a source of cultural corruption? And does Sen. Rubio think that industrial policy can fix this corruption? If so, his ambitions are grander (and frankly more concerning) than what his critics had perhaps first supposed.

Lastly, if deindustrialization has indeed wreaked such alleged havoc, what should be made of Sen. Rubio’s support for sugar protectionism that has encouraged US candy manufacturers to shift their production overseas? Is Sen. Rubio not complicit in fostering the very ills that he decries? If manufacturing is so vital, why does Sen. Rubio back policies that drive it away?

Sen. Rubio is correct that not everything is alright. The country faces numerous challenges ranging from runaway spending and massive budget deficits to counterproductive trade policies like the Jones Act, tariffs on imported steel, and sugar protectionism that have—among their other sins—all harmed US manufacturing. If the senator desires a conversation around US economic revitalization, these topics all offer excellent places to start.

In a recent piece titled “Climate Change and Globalization,” Charles Kenny argues that globalization can help reduce the negative effects of climate change and even help reduce CO2 emissions. The essay was one of twelve in the Cato series Defending Globalization: Society and Culture. Although we agree with the call for liberalized global trade, we disagree with many of the essay’s recommendations regarding climate policy and multilateral agreements.

First, let’s recognize some common ground. We greatly respect Dr. Kenny and value the open exchange of ideas. One of the authors of this blog post (Alex) read Kenny’s book The Plague Cycle and thought it was masterful. We also agree that free trade means: higher incomes, easier adaptation to a changing climate, and reduced costs of CO2-mitigating technologies (through the removal of tariffs that inflate the cost). All of these changes lessen the negative impacts of climate change.

However, Dr. Kenny goes further than free-market economists would suggest when it comes to mitigating the CO2 externality. He endorses the goal of “net zero” CO2 emissions and argues for a global cap-and-trade system to achieve it. Reading Dr. Kenny’s piece, we came away with the impression that CO2 is an unalloyed bad; in contrast, we see it as the result of the productive use of hydrocarbon energy, which represents over 80 percent of global primary energy use. We must avoid calls to swiftly move away from hydrocarbons simply because they (likely) introduce a negative externality—especially when the cost of such an energy transition isn’t well considered.

Source.

“Net Zero” CO2 Is Not a Desirable Goal

Under a Pigouvian approach to internalizing a negative externality, economists advocate for “pricing” (read: taxing) the externality rather than eliminating it at all costs. In other words, the textbook policy prescription—assuming we know the social cost of CO2 (SCC)—is to tax CO2 emissions at the SCC and then let emission levels fall where they may. Capping the quantity of CO2 emissions would only be an economically efficient policy in the unlikely scenario that the level of the cap happens to equal the quantity of emissions produced under an efficiently-priced SCC.

Based on real-world observations, the efficient level of CO2 emissions under a Pigouvian approach is not zero. Given the myriad productive uses of hydrocarbon-based energy and the demonstrated preference for the large and growing global consumption of it, the economically efficient level of CO2 emissions could be very high. Unfortunately, we may never know because the SCC—although indispensable in concept—is nearly impossible to nail down with any degree of scientific certainty. We do know, however, that low and moderate CO2 taxes like the one implemented in British Columbia have not significantly reduced CO2 emissions.

Kenny writes:

But efforts to put legally binding caps on carbon dioxide emissions or to create a global market for the right to emit carbon dioxide (a “cap and trade” regime) have floundered. That’s unfortunate: markets really are likely the most efficient way to reduce global emissions, and the failure to develop one has surely slowed progress toward a low‐​carbon global economy.

The level of CO2 tax implied by a “net zero” cap-and-trade system is inefficiently high under a Pigouvian framework. Specifically, a net zero policy is only economically efficient if the SCC matches the cost of CO2 removal. Presently, CO2 removal technologies cost multiple times more than even the EPA’s inflated estimate of the SCC. In other words, reasonable estimates of the CO2 externality do not justify the “net zero” emissions future envisioned by Dr. Kenny.

Industrial Policies and Global Treaties Are No Silver Bullet

Kenny rightly concludes that the economic cost of ending global trade, migration, tourism, business travel, and reducing “food miles” are not worth it because they would negligibly reduce emissions at enormous economic cost. The same analysis should be applied to subsidies for green energy projects. A good place to start would be to estimate the cost-effectiveness of CO2 reductions from the Inflation Reduction Act (IRA). How much will the IRA reduce CO2 emissions after spending $3 trillion by 2050, and is that reduction worth it?

He writes:

The US experience with the Inflation Reduction Act provides evidence of another key role that globalization is playing in the transition to a zero‐​carbon economy: providing the workforce. The act may create more than half a million jobs, concentrated in sectors that are already facing severe labor shortages, including agriculture, manufacturing, and construction.

Here, Kenny commits the “broken window fallacy.” Economic activity created via subsidies does not indicate an increase in economic activity overall. Likewise, jobs created by subsidies do not indicate an increase in jobs overall. There is a net cost to society when subsidies and other industrial policies distort markets. Whether the alleged environmental benefits of the IRA are worth the $3 trillion price tag is a question for policymakers to wrestle with, but framing the IRA as a net job creator runs afoul of economic reasoning.

Dr. Kenny’s article also pushes for selective liberalization of climate-friendly trade and migration to reduce GHG emissions:

Given that climate change is a global issue, this suggests there could be an important role for global agreements. In the case of the Montreal Protocol protecting the ozone layer, that involved legally binding restrictions on chlorofluorocarbon use as well as payments from richer to poorer countries to help them adopt new technologies. A recent extension of the protocol involved limits on the use of hydrofluorocarbons, another refrigerant that is a powerful greenhouse gas.

Pros and cons of decarbonization aside, global agreements like the Montreal Protocol are problematic because they lump together free trade and environmental protection elements with policies aimed at the global redistribution of wealth from rich to poor countries. Further, as a matter of political process, before we give multilateral climate agreements like the Paris Agreement the weight of a binding international treaty, they require Senate ratification (and the US Senate has not ratified the Paris Agreement).

Dr. Kenny’s proposals go further than internalizing the global CO2 externality and get into the realm of industrial policy, such as green skills partnerships and multilateral development banks (MDBs). He writes:

If we could guarantee low tariffs on green goods through a World Trade Organization agreement, agree to green skills partnerships that would help workers move to where they are needed to construct renewable energy infrastructure, and use multilateral development banks to help flood the zone with financing for zero‐​carbon investments, global links would help get us to global sustainability even faster.

We heartily agree that freeing the movement of capital, goods, and workers to move internationally to where they are most highly valued is important for myriad economic, ethical, and environmental reasons. But artificially increasing government investment in green technology using MDBs capitalized by taxpayers is particularly expensive (and of dubious value if the IRA and other laws are any guide). This approach simply ignores the problems with industrial policy that we’ve cataloged over the years.

Conclusion

Climate policy is more difficult and complicated than other areas of public policy, but the principles remain the same: individual liberty, limited government, free markets, and peace. Dr. Kenny’s article breaks with libertarian principles (and textbook insights from Pigouvian economics) by endorsing the goal of “net zero” CO2 emissions and embracing a set of global interventionist policies to achieve it.

Earlier today, the White House called on the US Trade Representative to “consider” tripling the existing Section 301 tariffs on Chinese steel. The administration says the tariffs are necessary because China unfairly subsidizes its high-emissions steel producers, which undercuts cleaner American steel producers and workers. Yet closer examination reveals the move to be far more about politics than unfair practices (despite the administration’s assertions to the contrary).

It is true that China subsidizes its domestic steel industry, but very little of that steel ends up in the United States due to our aggressive use of tariffs, i.e., more than five dozen trade remedies (antidumping and countervailing duties) measures, the Trump-Biden “national security” tariffs on most steel and aluminum imports, and the Section 301 tariffs on a wide range of Chinese imports. As Bloomberg notes, thanks to these measures China “accounted for just 600,000 metric tons of steel imports in 2023, […] out of a total US steel imports of 25.6 million tons”—or a mere 2.3 percent of all steel imported into the United States last year.

As shown in Figure 1, steel imports from China have declined substantially since 2014 as various tariffs proliferated.

Yet even this tiny import share overstates the role of Chinese steel in the US market. Per the Financial Times, they’re only “0.6 percent of total US steel demand.”

In one sense, this is good news: because old US protectionism has effectively rid the market of Chinese steel imports, any new tariffs will have little economic effect. On the other hand, this means that—as the FT’s Alan Beattie notes—new tariffs also won’t benefit the domestic steel industry as Biden claims. It’s just political pandering all the way down.

Furthermore, it’s a reminder that, by restricting Chinese and other metals imports, US tariffs imposed during the Trump and Biden years have and continue to hurt the US economy—harms detailed in a new essay from the Tax Foundation’s Erica York as part of our ongoing Defending Globalization project. As she documents, US metals tariffs not only mean higher prices for American manufacturers and, eventually, American consumers, but also reduced investment, exports, and economic growth—and heightened cronyism and political dysfunction along the way.

At one point, Joe Biden understood all of this.

In 2019, during an early speech in his presidential campaign, then-candidate Biden told an audience at the City University of New York, “President Trump may think he’s being tough on China. All that he’s delivered as a consequence of that is American farmers, manufacturers, and consumers losing and paying more. […] His economic decision-making is so shortsighted and as shortsighted as the rest of his foreign policy.” He was right of course, as Cato trade analysts have argued repeatedly over the years.

Yet once in office, President Biden maintained (and defended in court) virtually all of the tariffs he inherited from the Trump administration. As York noted on X (formerly Twitter), more trade war duties have been collected under the Biden administration than the Trump administration. As bad if not worse, Biden’s active defense of Trump-era tariffs has, as Scott Lincicome explained in a recent column, made it more likely that former President Trump will be able to impose the devastating 10 percent tariff on all imports and 60 percent tariff on all Chinese imports that he’s been promising on the campaign trail. Both are uncomfortable truths for a Biden campaign that intends to attack Trump’s tariff proposals as harming American consumers and the economy.

In its most recent polling of the public’s attitudes toward trade, Gallup found that more than 60 percent of Americans see foreign trade as an opportunity versus just 35 percent who view it as a threat. Despite this, the two candidates are vying to be seen by voters as the more protectionist in the race—regardless of the underlying facts or economics.

Voters can thus expect a heavy dose of protectionist rhetoric in the coming months from the Biden and Trump camps, which is one reason why Cato launched its Defending Globalization project last fall—to combat protectionist myths with fact-based, sober analysis.

Earlier this week, President Biden welcomed Japanese Prime Minister Kishida for an official visit and state dinner. As tensions in the Pacific mount, particularly with respect to China, Tokyo is an increasingly important ally for the United States. Indeed, the president and administration staffers emphasized the importance of upgrading the US-Japan alliance into a “global partnership” and both leaders announced measures for increased cooperation in defense, technological innovation, economic security, and diplomacy, among other areas.

Yet history has shown Washington’s international economic policies often belie its lofty rhetoric about the importance of the bilateral relationship with Japan, as domestic politics continue to triumph over sound policy. This self-defeating pattern hurts the United States both diplomatically and economically. Though by no means comprehensive, here’s a small sampling.

Nippon Steel

A significant “elephant in the room” during Prime Minister Kishida’s visit was the possible acquisition of US Steel by Japan’s Nippon Steel and the political opposition to the deal coming from multiple quarters in the US political system—and most notably from President Biden.

Indeed, the president recently stated that it was “vital” for US Steel “to remain an American steel company that is domestically owned and operated.” As our Cato colleague Scott Lincicome recently explained, Biden’s statement belies the fact that US Steel is a shell of its former self, and both industry experts and US steel-consuming manufacturers believe that the acquisition would benefit US Steel, the American workforce, and the broader manufacturing sector.

It also stands in sharp contrast with the reality—as Biden himself acknowledged during the visit—that Japan is the biggest source country for foreign investment in the United States and Japanese investments have resulted in jobs for nearly one million Americans. Such investments have also often benefited the US companies being acquired and their surrounding communities.

And insofar as Biden’s opposition to the steel deal is for national security purposes, it clashes with the state of US-Japan defense cooperation, which has been close for decades and, as stated during the visit, is planned to increase in the coming years. Indeed, Japan hosts US military personnel and Department of Defense (DOD) civilians and their families and acquires more than 90 percent of its defense imports from the US; Japanese investors have not been of concern to the Committee on Foreign Investment in the United States (CFIUS) (which is currently reviewing the Nippon-US Steel deal) since the 1980s; and Nippon Steel is no longer closely connected to the Japanese government. Twenty-three percent of the company is owned by non-Japanese entities.

In sum, most independent observers understand that Biden’s opposition is motivated by electoral politics—as is Donald Trump’s own opposition to the deal—and not economics or national security.

“National Security” Tariffs on Steel and Aluminum

In 2018, the Trump administration declared imported steel and aluminum from every country, including Japan, to be a “national security” threat to the United States and then imposed heavy tariffs (25 percent on steel and 10 percent on aluminum, respectively). It was obviously nonsense; imports from a country the United States is obligated to defend militarily poses zero national security risk. President Trump’s own Secretary of Defense noted that the military only required about three percent of domestic steel capacity. Not only did the tariffs hurt the United States economically, they hurt Washington’s standing in Japan. Eventually the Biden administration announced it had replaced the tariffs on imports from Japan with a tariff-rate quota, allowing a limited amount of steel and aluminum to enter the country without being subject to the 232 tariffs.

TPP

The Trans-Pacific Partnership (TPP) was envisioned as a comprehensive trade agreement that would deepen economic cooperation in the Pacific with a mind toward reorienting supply chains outside of China. There were 12 original signatories, but the United States and Japan were arguably the primary proponents of the agreement. The Japanese government faced intense domestic political opposition to the deal, but stuck its neck out because it understood the benefits of deeper economic integration with the United States and the Pacific region more generally, especially in light of China’s economic rise (and abusive trade and investment practices).

Washington, however, didn’t uphold its end of the bargain. TPP became a political hot potato during the 2016 presidential campaign with both major party candidates opposing the deal. Once in office, the Trump administration made an ill-advised decision to walk away from the agreement. This marked a turning point: the first time the United States failed to implement a trade agreement it negotiated and signed. At the behest of the Japanese government, the TPP was renamed the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and moved forward without the United States.

Though imperfect, CPTPP was a good deal economically and strategically. Today, American consumers face higher prices for products from CPTPP bloc countries than they would if Washington had embraced the agreement. Likewise, American producers face higher trade barriers than their competitors within the bloc. On top of that, Washington retreated from a vital standard-setting role by walking away from the deal—a loss of soft influence in an increasingly vital part of the world.

Washington’s about-face on the deal cost the United States some credibility with Tokyo. Japan continues to press the United States to return to the CPTPP. But, to date, Washington has shown no appetite to accept the political risks to do the responsible thing and rejoin.

Automotive Voluntary Export Restraints

As Dr. Douglas Irwin notes in his masterful, comprehensive history of US trade policy, Clashing Over Commerce, Japanese producers’ share of the US automotive market was about 1 percent as late as 1968. After the oil shock and attendant price spikes in 1973, American consumer preferences shifted and demand increased for smaller, more fuel-efficient cars (a segment largely controlled by Japanese producers; the Big Three at the time—Chrysler, Ford and GM—ceded that segment of the market). As a result, Japanese imports began to grow. Calls to restrict Japanese autos in the US started to proliferate around Washington in the late 1970s.

In the early 1980s, over the objections of OMB Director David Stockman, Treasury Secretary Don Regan, and Chairman of the Council of Economic Advisers Murray Weidenbaum, the Reagan administration pressured the Japanese to voluntarily limit its automotive exports to the United States by about 8 percent. The automotive voluntary export restraints (VERs) were agreed to by the Japanese government and its auto manufacturers because the alternative was a stiff tariff. The VERs were initially in place for three years. But then, facing reelection in 1984 and not wanting to alienate Midwestern auto workers, the Reagan administration once again pressured Japan to renew the VERs. In other words, like the Nippon deal, the automotive VERs were largely driven by short-term, domestic political concerns—at the expense of long-term geopolitical objectives and sound economics.

For Americans, it was estimated that the VERs increased the price American consumers paid for Japanese cars by about $1,000 at the time or more than $3,000 in today’s dollars—about 14 percent above what they would have paid without the VERs. Likewise, the increased prices for Japanese imports allowed domestic producers to raise their own prices.

A few years ago, our Cato colleague Scott Lincicome provided a detailed summary of the harms done by the VERs. Contrary to claims from certain protectionists, none of the results of the VERs were positive for the United States. Japan eventually dropped the VERs in 1994 after they were abolished by the Uruguay Round Agreements, which converted the General Agreement on Tariffs and Trade into today’s World Trade Organization.

Japan was largely compliant with Washington’s requests for VERs if for no other reason than their national security depended on the United States’ security guarantees—and they feared a heavy tariff would be even worse. But the VERs very clearly caused diplomatic frictions between Washington and Tokyo, on top of the self-defeating economic problems associated with the restraints.

Conclusion

In recent years, policymakers have increasingly talked about the concept of “friendshoring”—strengthening trade and investment ties with close allies—as a new paradigm to guide US international economic relations in light of intensifying competition with China and legitimate concerns over Beijing’s troublesome practices. Yet in a recent test case for its commitment to this new framework—Japanese-based Nippon Steel’s proposed acquisition of US Steel—Washington failed miserably. Indeed, the Biden administration’s opposition to the Nippon deal is not an outlier—it is the latest in a long line of international economic policy affronts to Japan.

If Washington is truly serious about confronting Chinese economic practices, it needs allies like Japan—and policy should reflect the seriousness of the challenge.

Writing in National Affairs, Senator Marco Rubio (R‑FL) recently made the case for a more vigorous—some might even say intrusive—government role in encouraging the development of US manufacturing. Such an effort, Rubio claims, is necessary to ensure the United States is not beholden to foreign actors for critical goods. While the importance of manufacturing to national security shouldn’t be discounted, realizing Rubio’s vision would entail a vast expansion of government power in pursuit of addressing a problem that is, at best, greatly overstated.

Perhaps more importantly, the essay suffers from errors of both fact and logic that call into question his premises and overall proposal. Here’s a closer look at eight myths that undergird the Florida senator’s call for robust industrial policy and the reality behind them.

Myth 1. U.S. manufacturing has crumbled. Rubio’s call for more muscular government intervention to rebuild domestic manufacturing implies the sector is in dire straits. Rubio twice references the “collapse of American manufacturing,” necessitating what he describes as a “serious effort to rebuild American industry.” But his entire premise is wrong. Domestic manufacturing is doing pretty well.

Whether measured in terms of value-added or output, US manufacturing is at or not far off from record highs. The United States accounts for a greater share of global manufacturing output than any country save China, with more output than Germany, India, Japan, and South Korea combined. US manufactured goods exports in 2022 totaled nearly $1.6 trillion, including tens of billions worth each of autos, medical instruments, integrated circuits, and aerospace. In 2021, the United States was the world’s fourth-largest steel producer, second-largest automaker, and largest aerospace exporter.

To be sure, American manufacturing has experienced a decline in employment even while output has increased. This mostly reflects productivity improvements—the sine qua non of rising living standards—that allow US firms to produce more with fewer workers. The US steel industry, for example, saw production rise by 8 percent from 1980 to 2017 even while steel employment over the same period declined by 79 percent (399,000 to 83,000).

American manufacturing may be many things, but a sector in collapse—or anything close—it is not.

Myth 2. Declines in manufacturing employment led to widespread social problems. Rubio’s inaccurate claims about manufacturing feed into another argument: that the sector’s alleged decimation is responsible for wider societal ills, such as declining marriage rates and childbearing. Even if one (very generously) grants that Rubio’s armchair theorizing accurately diagnoses falling manufacturing employment as a key driver of such trends, it’s unclear to what policy conclusions this leads.

Given that the primary explanations for declining manufacturing employment are productivity growth, and technology-related trends such as dematerialization rather than trade (notably, China Shock authors David Autor, David Dorn, and Gordon Hanson state in a 2017 paper that their analysis “does not imply that surging import competition from China over the last two decades has been the sole or primary driver” of the changing structure of marriage and childbirth), how does Rubio propose putting those genies back in their respective bottles? A reversion to productivity levels (and, necessarily, living standards) of past decades seems no kind of desirable (or workable) solution. Exactly what should come next, even assuming Rubio’s thesis is correct, is unclear.

Indeed, any notions that a manufacturing renaissance would reverse falling rates of childbearing, for instance, must reckon with the fact that China—by far the world’s leading manufacturing country—is struggling with its marriage and birth rates. The country is hardly alone, with birth rates falling around the world. And if a lack of manufacturing employment lies behind many societal ills, how is that reconciled with the nearly 600,000 manufacturing job openings that existed as of February? Such jobs are certainly out there for those with the desire and qualifications for them.

Myth 3. The Biden administration has gotten industrial policy wrong, but we can do it right. Rubio blasts the Biden administration for alleged missteps in its industrial policy efforts, arguing that they “reek of special‐​interest favoritism and progressive ideological capture” and have been self‐​sabotaged by “burdensome regulations, red tape, and activist mandates.” Maintaining that such outcomes are not an industrial policy inevitability, Rubio claims they can be remedied by “identify[ing] the Biden administration’s particular failures, which are not endemic to industrial policy broadly [emphasis added], and [correcting] them with conservative insights.”

But even if one grants that Rubio and his fellow Republicans possess unique gifts that allow them to deftly implement industrial policy and enjoy special immunity from activist forces—a proposition that warrants deep skepticism—such thinking is still fatally flawed. Unless Rubio has a plan to permanently exile Democrats from office, they are bound to spend significant amounts of time manipulating the industrial policy machinery that Rubio seeks to implement. The ship of state will inevitably be steered by people whose views and policy goals sharply contrast with those of Rubio and his fellow travelers. And what then?

Myth 4. Industrial policy has an easy and obvious limiting principle. One of Rubio’s rationales for industrial policy is the need to ensure the domestic production of “goods that are essential to maintaining a free and prosperous republic.” Hearkening back to the country’s earliest days, Rubio notes that Alexander Hamilton “favored using subsidies to foster domestic manufacturing and ‘render the United States, independent on foreign nations, for…essential supplies’” and highlights the use of a national arsenal to produce “small arms that made our nation less reliant on foreign powers for defense.”

This starts to sound pretty reasonable. Rubio doesn’t want to require that everything be American-made but rather just those items that are essential. However, even leaving aside that, as noted in the above table, US production of defense-related goods has expanded significantly since the 1990s, the Florida senator has a tellingly expansive view of what that entails. Among those sectors he places in this category are “mining, oil and gas, metallurgy, agriculture, chemistry, medicine, etc [emphasis added].” These are not bit players in the US economy, and it’s easy to see how other industries—after extensive lobbying, of course—could also find themselves deemed “essential.” In this regard, it’s worth recalling that Rubio has previously argued US sugar protectionism is a national security issue.

In reality, “essential” can mean almost anything and surely means different things to different people. Anyone with a modicum of ability to manipulate the levers of government would have a field day bending the term to their desired ends. Recall, for example, that the Trump administration deemed imports of low-value steel from close allies to threaten national security. No great imagination is required to envision Rubio’s industrial policy designs becoming a Trojan Horse for politicians of every stripe, including those with views antithetical to his own.

5. China’s economic might is the result of industrial policy and the United States must depart from market economics to address the country’s challenge. While fear of China animates much of Rubio’s call for industrial policy measures, he also evinces at least a certain grudging respect for the country’s accomplishments. As he states:

Our adversaries are implementing ambitious industrial strategies to take advantage of this moment. The phrases “Made in China 2025” and “Military‐​Civil Fusion” denote Beijing’s plan to use industrial dominance to displace and degrade the United States. Even if we dismiss Beijing propagandists’ exaggerated claims about this strategy’s success and account for the waste and corruption endemic to China’s communist system, it’s hard to argue with the results: While our industrial base has shrunk, China’s has grown many times over.

Indeed, our greatest adversary is now the world’s largest ship‐ and steel‐​making power by several orders of magnitude. It’s the world’s largest producer and exporter of cars. It seeks to become the number‐​one producer of microchips and aerospace technology as well, though it has been denied the top spot for now.

China’s economy and manufacturing sector have indeed grown by leaps and bounds in recent decades. Where Rubio errs, however, is in highlighting this impressive performance while failing to note its correlation with significant market liberalization. Centrally‐​planned Chinese attempts at industrialization under the Communist Party are nothing new, going at least as far back as the Great Leap Forward’s employment of millions of backyard furnaces to smelt steel. That didn’t work. Proving more fruitful has been the paring back of laws that inhibited the dynamism and innovation of private enterprise.

Regarding China’s primacy in areas such as automaking and shipbuilding, there is no doubt that the country’s government has firmly placed its thumb on the scale through the employment of export credits and other subsidies. But that’s far from the entire story. For example, China is—by some distance—the world’s largest auto market. Logically, it should also be home to a sizeable amount of automaking given the propensity of manufacturers to serve domestic markets.

Similarly, the world’s second-most populous country is not just a leading steel producer but also a massive consumer of it as well.

It’s also not a great surprise that China is a dominant shipbuilder given its success in related manufacturing sectors, such as steel (a key shipbuilding input). Even as far back as the 1980s predictions were being made that China would supplant South Korea as a shipbuilding leader.

None of this is to deny that certain policy measures may have benefitted particular industries. Perhaps they have even played a decisive role. But it should also be recognized that the story goes beyond industrial policy and that such policies have produced many downsides.

A 2019 study, for example, found that China’s shipbuilding industry received 550 billion renminbi (RMB)—approximately $80 billion at the time—in government support between 2006 and 2013, but that these subsidies generated only 145 billion RMB ($21 billion) of net profit for domestic producers. Furthermore, a large share of the subsidies (230 billion RMB/$33 billion) benefitted mostly non-Chinese global ship owners in the form of lower ship prices. These subsidies may have artificially expanded the size of China’s shipbuilding industry but at a significant economic cost.

Such costly adventures in industrial policy contribute to the corruption, debt, low productivity, malinvestment, overcapacity, youth unemployment, fading consumer, foreign investor confidence, and other economic and social problems facing China today. Notably, Rubio himself begrudgingly acknowledges China’s current economic challenges (“China may yet collapse under the weight of its own contradictions”) yet ignores industrial policy’s role in creating many of them.

More generally, there should be a great wariness about taking economic lessons from a country whose per capita GDP is roughly one‐​sixth that of the United States.

Myth 6. Deregulation is industrial policy too. One high point of Rubio’s essay is his recognition of the costs imposed by runaway red tape and his embrace of deregulation to boost US competitiveness. His insistence that “deregulation is industrial policy,” however, is misguided. As my colleague Scott Lincicome has documented, both advocates and critics agree that “industrial policy” has certain requisite elements, but these do not include broad (“horizontal”) policies such as corporate tax rate reductions or regulatory reform. In general, industrial policy entails governments targeting specific domestic manufacturing companies, industries, or products for special treatment (subsidies, tariff protection, etc.) to beat the market and achieve certain national objectives. If reforming, say, the National Environmental Policy Act were to fall under the banner of “industrial policy,” then the term would lose all meaning.

That said, any talk about US economic revitalization should certainly use deregulation as a starting point. Before dreaming up new laws and spending initiatives to implement industrial policy, legislators like Rubio should first examine what existing policies—including regulations—are holding US industries back.

Myth 7. Foreign “reliance” is always dangerous. Strongly implied in Rubio’s essay is the notion that turning to foreign sources to meet “vital” and “essential” US needs is inherently dangerous. True security, goes the thinking, can only be found in self‐​reliance. But this rests upon questionable logic. Canada and China are both foreign countries yet assigning them similar risk profiles would seem an obvious mistake.

Should Americans be concerned, for example, that Canada—a longtime NATO ally with whom the United States shares the world’s longest undefended border—is overwhelmingly the top source of imported aluminum? Probably not. Yet Rubio gives little indication of seeking to distinguish between different countries, instead relying on a vastly oversimplistic foreign-domestic dichotomy. Furthermore, it’s not apparent how great the risk is even for countries with whom the United States enjoys less than cordial relations.

As one 2023 paper found, even in those limited sectors where the United States finds itself dependent on non-friendly countries for critical items, experience during the COVID-19 pandemic suggested that “countries regarded as non-friendly alleviated rather than caused critical bottlenecks.”

Far from advancing US national security interests, policies rooted in US self-reliance often undermine it. Eschewing more efficient sourcing from US allies and partners means overpaying, in turn harming the US economy and—in the case of defense outlays—generating less bang for the national security buck. Furthermore, access to foreign goods from geographically diverse sources provides critical redundancies (as seen, for example, during 2022’s baby formula shortage). Far from strengthening the United States, blocking access to foreign products in many instances makes the country poorer and weaker.

Of course, this is not to suggest that risk should have no bearing on US sourcing decisions. Even if attractive from a cost perspective, the US military shouldn’t purchase naval vessels from Chinese shipyards. But neither should this mean that vast swathes of foreign goods should automatically be placed off-limits. Free and open trade—particularly with trusted partners and allies—should be the default position and a high bar placed on any deviation.

Myth 8. Government can “get out of the way” and still allow industrial policy to work its magic through private enterprise. Laudably, Rubio concedes that waste and abuse is an industrial policy inevitability. He argues, however, that it can be minimized by “thinking clearly about the incentives that public funding creates and establishing enforceable metrics.” As he elaborates:

We can do this without dictating to companies how to invest and compete in minute detail. Instead, our standards should focus on what companies must accomplish (i.e., meeting meaningful production benchmarks) and whom those accomplishments must benefit (i.e., the American people). Establishing clear expectations and rewards and then getting out of the way is the right tack here.

The problems here are obvious. For starters, production benchmarks—even “meaningful” ones—can mask real business successes or failures (e.g., productive companies that went years without making a profit) and can also be easily manipulated (e.g., “research” tax credits). Furthermore, if an industry policy initiative can continue by merely benefiting the “American people”—a subjective standard if there ever was one—then oversight would surely be problematic. No great difficulty is required to see how lobbyists and other self-interested parties could use such language to their advantage, or how politicians who’ve staked their reelection or legacies on the success of an industrial policy project could work to keep it going long after failure has become obvious. (Both problems, in fact, are common to U.S. industrial policies.)

Indeed, if this is the best standard that Rubio could construct in a piece advocating for industrial policy, what kind of language might we expect when such initiatives are hashed out in Washington backrooms?

Rubio wants to have his industrial policy cake and eat it too, effectively combining the federal government’s power and resources with private sector know-how and innovation—all with minimal waste. But doling out money to private sector actors with vague instructions to meet random benchmarks and benefit the “American people” is a standard ripe for exploitation—exploitation we’ve seen time and time again with US industrial policy. Conversely, strict oversight by an oft-plodding bureaucracy brings with it attendant downsides. Such tradeoffs cannot be avoided.

Summing up: Senator Rubio admits that waste and abuse are inevitable byproducts of industrial policy. He maintains, however, that they can be minimized provided that—as he wrote in a condensed version of his thesis published in the Washington Post last week—we “get industrial policy right.” But how can Rubio be trusted to get industrial policy right when his essay championing it gets so much wrong?

Among the research I commended in the 2024 Economic Report of the President (ERP) last week was a solid section on free trade’s “pro-poor bias,” i.e., that eliminating US government barriers to cross-border commerce disproportionately benefited Americans with lower incomes. This week, the Federal Reserve Bank of Minneapolis highlights a brand new paper showing much the same thing (emphasis mine):

In a Minneapolis Fed staff report, Monetary Advisor Michael Waugh models how lower trade costs play out for richer and poorer households (Staff Report 653, “Heterogeneous Agent Trade”). Waugh finds starkly different effects, with poor households (defined by their level of consumer spending) gaining much more as freer trade lowers prices.

The reason is not that poorer households buy a larger proportion of imported goods. Rather, it is their higher marginal utility of consumption: Falling prices provide more value to households with tighter budgets, as evidenced by their sensitivity to prices. Low-income households react more strongly as trade drives down the prices of imports and competing domestic goods. These households increase their consumption more as their buying power increases, and they are quicker to substitute new products in pursuit of savings.

Waugh finds that all US households benefit from a 10 percent reduction in US trade costs. But the poorest fifth of households experience a welfare gain more than 4.5 times larger than the richest.

Given the ample academic research cited in the ERP, these new findings, while welcome, are unsurprising. However, they do raise the following question related to the 2024 US presidential campaign: If an across-the-board 10 percent reduction in US trade costs generates outsized gains for America’s poor, what does an across-the-board 10 percent increase in those same costs—say, via the universal tariff proposed by Donald Trump—do?

For more on the benefits of free trade and the costs of protectionism, be sure to check out Cato’s ongoing Defending Globalization project or this 2022 Cato paper from me and Alfredo Carrillo Obregon. 

The Economic Report of the President (ERP), released annually by the Council of Economic Advisers, is always full of useful and interesting data, and the just-published 2024 edition is certainly no exception. The new ERP’s international trade chapter is particularly noteworthy, given the increasing hostility to open trade and investment in Washington and the often-erroneous protectionist narratives used to support it. In a welcome development, the ERP thoroughly punctures several of these narratives by summarizing what the actual economics literature says about international trade and investment in the United States today, mostly in line with (and in one case even citing) the essays we’ve published over the last year as part of Cato’s ongoing Defending Globalization project.

Below are ERP excerpts supporting six important trade and investment facts, with sources in parentheses and bolded emphasis mine.

Fact 1: Tariffs and trade agreements don’t drive the US trade deficit.

U.S. Trade Deficits Are Driven by Aggregate Saving and Investment Patterns 

Trade deficits can elicit negative attention if the presumption is that the GDP accounting identity (where negative net exports—exports minus imports—are subtracted from GDP) describes the totality of the relationship between trade and growth. Trade deficits are also sometimes associated with import competition, which has historically generated concentrated employment losses for certain groups of workers. However, the connections between trade deficits, economic growth, and employment are closely tied to broader macroeconomic conditions.  For example, when an economy is operating at full employment, a rising trade deficit can be a pressure-release valve, providing needed supplies of imported goods and services that help prevent overheating (Baker 2014). Moreover, imports complement domestic spending on American goods and services, so that their negative accounting impact on GDP is partially offset by the domestic value added generated, along with downward pressure on inflation. Trade, including via higher imports, can also boost the productivity of importing firms and the broader economy by supporting higher growth (CEA 2015a). Data support this view; the U.S. trade deficit tends to be countercyclical and is largest during periods of strong GDP growth because the same drivers of increased domestic demand (including savings and investment rates) also tend to fuel increased import demand (CEA 2015b).…

Overall trade balances. The fundamental drivers of a country’s overall trade balance are its relative saving and investment rates—both public and private (Ghosh and Ramakrishnan 2024). Countries with lower domestic saving than domestic investment (likely as a result of low domestic saving rates, high domestic investment rates due to attractive economic opportunities, or a combination of the two) tend to run trade deficits and accompanying current account deficits (where the current account balance is defined as the trade balance plus net foreign investment income plus net transfer payments from foreign income sources like worker remittances and foreign aid). The trade balance typically accounts for the bulk of the current account balance and is highly correlated with it, so, for expositional simplicity, we focus on the trade balance. Trade deficits are necessarily matched by capital and financial account surpluses (the net inflows of foreign lending necessary to finance the trade deficit)—as is the case with the United States. 

Fact 2: Foreign direct investment (FDI) is good; the United States is the world’s FDI leader; and there’s been no “giant sucking sound” of capital leaving the country.

The United States Leads in Global FDI Flows

The United States is the largest source of and destination for FDI flows globally. Over 20 percent of both U.S. FDI inflows and outflows in 2022 were targeted at cross-border manufacturing investments (OECD 2023b; BEA 2023b). In addition to providing another source of financing for domestic investments, FDI tends to increase wages and productivity in target firms (Hale and Xu 2016) and can also generate positive spillovers across U.S. firms within an industry (Keller and Yeaple 2009). Reflecting long-standing trends, the large majority of U.S. FDI flows are either destined for or originate from the country’s closest trading partners. For example, in 2022, Canada and countries in Europe accounted for 79 percent of inward U.S. FDI flows and 65 percent of outward U.S. FDI flows (BEA 2023c). 

Fact 3: Imports (and exports) benefit U.S. manufacturers, especially multinationals.

Multinational firms—themselves fueled by the information and communications revolution—have been particularly adept at taking advantage of cross-border input cost differentials. By establishing foreign affiliates through FDI, these firms can mediate trade with both foreign subsidiaries (within-firm trade) and unaffiliated firms (arm’s‑length trade) within [global value chains] (OECD 2018). Multinational firms accounted for, respectively, 65 percent and 60 percent of U.S. goods exports and imports on average between 1997 and 2017 (Kamal, McCloskey, and Ouyang 2022). And within-firm trade accounts for a large share of multinationals’ total trade flows: In 2022, one third (33.7 percent) of U.S. exports and almost half (46.6 percent) of U.S. imports by value were between multinational parent firms and their affiliates or related parties (U.S. Census Bureau 2022). The growth of trade within multinational firms (i.e., flows between parents and affiliates) underscores the highly fragmented nature of production.

Global supply chains’ prevalence in U.S. production can also be observed in the high share of intermediate goods or imported input trade in the United States (figure 5–10). Industrial supplies (e.g., lumber and steelmaking materials) and capital goods (e.g., drilling equipment)—typically, inputs into final goods—are highly positively correlated with [global value chain] trade and accounted on average for over half of imports between 1992 and 2022 (Hummels, Ishii, and Yi 2001; Baldwin and López-González 2014). The import share of industrial materials grew more than that of any other product group between 1992 through the onset of the global financial crisis in 2008, showcasing how multinationals’ FDI and the establishment of GVC linkages can support greater trade flows. 

Fact 4: Imports (including ones from China) also benefit American consumers, especially poorer ones.

Import competition from China was also accompanied by a substantial fall in U.S. consumer prices, with disproportionate benefits accruing to low- and middle-income households because they have higher shares of tradable goods like food and apparel in their consumption baskets (Fajgelbaum and Khandelwal 2016; Russ, Shambaugh, and Furman 2017). Causal estimates suggest that a 1‑percentage-point increase in Chinese import penetration led to a decline in consumer price inflation of 1 to 2 percentage points—largely reflecting indirect pro-competitive cost effects, where greater foreign competition induces domestic firms to lower markups and thus further drives down prices (Jaravel and Sager 2019). Considering the modeled impact of increased Chinese import penetration across U.S. geographic regions, Galle, Rodríguez-Clare, and Yi (2023) find that almost 90 percent of the U.S. population saw an increase in purchasing power, with those regions that saw purchasing power losses being spatially correlated with regions that also saw a loss in manufacturing employment from the China shock.

The results, showing that trade with China has benefited most Americans’ purchasing power, are consistent with a larger body of evidence on the benefits from trade with all countries—again, with disproportionate benefits accruing to lower-income households.³⁵ For example, the average U.S. household has been shown to gain 8 percent in purchasing power from trade compared with a counterfactual autarky (Fajgelbaum and Khandelwal 2016).36 However, the lowest-income U.S. households gain the most, at 69 percent (figure 5–13).

fn. 35: There is also a literature documenting welfare increases due to greater access to varieties of goods through trade (e.g., Broda and Weinstein 2006; Melitz and Trefler 2012). 

Fact 5: China—and Permanent Normal Trade Relations, in particular—didn’t cause most U.S. manufacturing job-losses, even during the “China Shock.”

Close to a fifth (16 percent) of the decline in manufacturing employment between 2000 and 2007 has been attributed to the rise in import competition from China (Caliendo, Dvorkin, and Parro 2019). Firms that reorganized activities away from the production of machinery, electronics, or transportation equipment and toward wholesale, professional services (including research and development), and management drove almost a third of the negative manufacturing employment decline between 1990 and 2015 (Bloom et al. 2019). Several factors have been analyzed to understand the surge in U.S. imports from China during this period, including the United States granting China permanent normal trade relations in 2000, China’s accession to the World Trade Organization in 2001, reduced trade and investment policy uncertainty associated with these policy actions, and China’s own trade and domestic reforms (e.g., tariff reductions and privatizations) (Lincicome and Anand 2023).

(For those interested, my Cato essay cited in the ERP excerpt above finds that, based on various economic studies, China’s own market-based reforms likely drove around two-thirds of the “China Shock,” with U.S. trade liberalization accounting for the rest.)

Fact 6: Today, U.S. companies engaged in trade are huge job creators.

[Global value chains] have created strong interconnections between exporting and importing—which are often performed by the same firms. Among goods traders, averaged over the period 1992–2021, firms that both export and import goods account for a plurality of total U.S. private sector employment (36 percent), followed by firms that only export goods (8 percent) and firms that only import goods (6 percent) (figure 5–16). The majority of employment at goods traders is by large firms (defined as those employing 500 or more workers); in contrast, the majority of employment at nontraders is by small firms (those employing fewer than 500 workers). Nevertheless, small firms directly engaged in the goods trade account for almost 10 percent of national employment.…

Goods traders’ contribution to net job creation has grown over recent years: During the 2001–7 period, goods traders accounted for only 10 percent of total net job creation; but between 2008 and 2019, that figure rose to 60 percent. Overall, goods traders were responsible for almost 40 percent of net job creation in the U.S. economy between 1992 and 2019 (Handley, Kamal, and Ouyang 2021).³⁸ These statistics underscore the changing nature of the U.S. production landscape, where both exports and imports support domestic jobs.

fn. 38: Handley, Kamal, and Ouyang (2021) document that vast majority of goods-traders’ contribution to net job creation is driven by the opening of new establishments, particularly, in services-providing sectors like wholesale, retail, business and professional services. These patterns hint at the complementarity between manufacturing and services activities as well as the sectoral diversity in job creation tied to trade participation.

In Washington today, the unfortunate consensus among many politicians and pundits is that trade and globalization have been an unmitigated disaster for America and the working class, regardless of the actual facts. It’s good to see that White House economists aren’t buying into this new consensus, though it’d of course be even better if their views were more reflected in U.S. policy too.

For more trade and globalization facts, check out the Defending Globalization essays here.