A common narrative we hear from the news media this election cycle is that Donald Trump has become popular by tapping into anti-trade sentiment among blue collar workers “on the losing side of trade globalization.” The basic premises of this narrative are that (1) trade has harmed a large segment of the U.S. population and (2) those people are voting for Trump. But neither one of those premises is true.

The narrative has been fueled by a paper released earlier this year by economist David Autor, David Dorn, and Gordon Hanson titled “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.” The paper has gotten a lot of attention from people on all sides of the trade policy debate.

The key finding of the paper is best summarized by this sentence from the abstract: “At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.” The idea is that trade with China has been so disruptive that many people who lost their jobs due to increased imports from China have not been able to find new work. 

Last week, the Wall Street Journal posted a long article tying the picture painted by the Autor, et al. paper to “disillusionment with globalization” and ultimately support for Donald Trump. 

What happened with Chinese imports is an example of how much of the conventional wisdom about economics that held sway in the late 1990s, including the role of trade, technology and central banking, has since slowly unraveled.

The aftershocks are sowing deep-seated political discontent this election year. Disillusionment with globalization has fed one of the most unconventional political seasons in modern history, with Bernie Sanders and especially Donald Trump tapping into potent anti-free-trade sentiment.

It’s understandable that journalists would be attracted to the idea that Trump’s rise fits into broader storylines about economic change and inequality. But there are a number of reasons why the narrative just doesn’t make sense. 

For one thing, trade isn’t actually the main driver behind the decrease in manufacturing employment, which began in 1979, long before China became a major U.S. trading partner. Part of the decline is due to trade but the vast majority is due to technological improvements that have enabled greater efficiency and automation. That’s why even as manufacturing employment has decreased, manufacturing output has continued to rise and is now at an all-time high. 

Also, many of the places where a decrease in manufacturing employment can be tied to competition from Chinese imports are actually doing quite well economically. If some places affected by trade are doing well and some are doing poorly, that should give us a hint that trade (or other drivers of creative destruction and growth) is not itself responsible for a community’s inability to absorb economic shock. 

My colleague Scott Lincicome has done an excellent job of explaining how the “China shock” is really a story about the lack of labor dynamism in the U.S. economy. Government policies, many of which differ from state to state, can significantly impact the likelihood that people will find new work after their job becomes obsolete. Policies that reduce dynamism in the labor market—minimum wage laws, protectionist occupational licensing, various taxes and regulations—make it more difficult for businesses and workers to match up after economic disruption.

So, the first premise of the narrative—that trade is responsible for economic decline in many American communities—is false. 

But maybe people are supporting Trump because they falsely blame trade for their troubles. A new study using extensive survey data from Gallup blows that theory away. As the Washington Post reports:

Economic distress and anxiety across working-class white America have become a widely discussed explanation for the success of Donald Trump. It seems to make sense. Trump’s most fervent supporters tend to be white men without college degrees. This same group has suffered economically in our increasingly globalized world, as machines have replaced workers in factories and labor has shifted overseas. Trump has promised to curtail trade and other perceived threats to American workers, including immigrants.

Yet a major new analysis from Gallup, based on 87,000 interviews the polling company conducted over the past year, suggests this narrative is not complete. According to this new analysis, those who view Trump favorably have not been disproportionately affected by foreign trade or immigration, compared to people with unfavorable views of the Republican presidential nominee. The results suggest that his supporters, on average, do not have lower incomes than other Americans, nor are they more likely to be unemployed.

The study found that although Trump supporters may live in the sorts of places people consider to be harmed by trade, those supporters personally enjoy above-average economic performance. So the second premise of the narrative—that people’s economic troubles are leading them to support Trump—also appears to be false. 

Let’s recap:

America’s manufacturing sector is thriving. Manufacturing employment has continued to decrease, because America has a modern, developed economy where we make more things than ever before using less labor and people have better employment options than working on a factory floor. However, as manufacturing jobs disappear (due mostly to increased automation) some people have struggled to find new work (due to various economic and policy realities unrelated to trade).

The Gallup analysis shows that this group of people is, in any event, not the demographic most represented among Trump supporters. 

So, the question remains: “Why has Trump been able to gain support by falsely blaming trade with China for an economic decline his supporters have not experienced?”

The Gallup analysis has an interesting theory based on their data:

The evidence is in favor of contact theory is quite clear. Racial isolation and lack of exposure to Hispanic immigrants raise the likelihood of Trump support. Meanwhile, Trump support falls as exposure to trade and immigration increases, which is the opposite of the predicted relationship.

The idea is that Trump supporters are opposed to trade and immigration, not because they have had bad experiences with them, but because they have had very little experience with them.

It’s worth remembering that, although Donald Trump has been particularly vociferous in his condemnation of trade, there’s nothing especially new about the public’s willingness to buy into anti-trade rhetoric during an election or for politicians to take advantage of that.

Politicians are excellent at deflecting the blame for their own failed policies onto people or institutions that voters already mistrust. That may be foreigners (especially foreign governments) or corporations (especially multinational corporations). The success of Trump’s anti-trade message is most likely due to his willingness to take advantage of some people’s distrust of things that are foreign. He will have the most success among people for whom trade and immigration are most foreign. Much the same can be said of the popularity of Sen. Bernie Sanders’s brand of populist trade-bashing among the anti-corporate Left.

Trying to tie support for trade to economic factors is going to lead you to bad results, because all Americans benefit immensely from open trade. Trade has made Donald Trump’s supporters wealthier, and taxing imports for the sake of economic nationalism won’t help them, even if they used to work in a factory.

Billionaire investor Wilbur Ross, a supporter of Donald Trump, made the following comment in a letter to the Wall Street Journal (Aug 15): “It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

In reality, the last sentence –beginning with “Therefore”– does not follow from the first.

Mr. Ross is alluding to the demand side of National Income Accounts, wherein Y=C+I+G+ (N‑X). That is, National Income (Y) equals spending on Consumption (C) plus Investment (I) plus Government (G) plus Net Exports (Imports N minus Exports X). 

Taking such accounting too literally, a reduction in imports may appear to be mathematically equal to an increase in overall real GDP. But that is dangerously incorrect, as the 1930s should have taught us.

The accounting is true by definition (a tautology). But economics is about behavior, not accounting identities.

If trade deficits “weaken our economy,” as Mr. Ross asserts, then we should expect to see real GDP slow down when trade deficits get larger and see real GDP speed up when trade deficits get smaller or become surpluses. What the data show is much different – the exact opposite in fact. 

The graph compares net exports (N‑X) as a percentage of GDP with the annual growth of real GDP. What it clearly shows is that trade deficits fall in recessions and grow larger in periods of strong economic growth. Trade was in surplus during the recession of 1970 and 1975, and the trade deficit shrank to trivial size in the recessions of 1980–82 and 1990–91. Trade deficits were largest in 1983–89 and 1997–2000 when real GDP was growing by 4.4 percent a year. Trade deficits also expanded in 2003–2006, when real GDP was growing by 3.2 percent a year. As real GDP growth slowed to 2 percent from 2011 to 2015, the trade deficit stabilized near 2.9 percent of GDP.

The main reason trade deficits are inversely related economic growth, contrary to elementary accounting, is that U.S. industry needs more imported parts and raw materials when the economy expands, and consumers can afford more imported luxuries when their incomes and investments are rising. A secondary reason is that whenever the United States is growing faster than the economies of major trading partners (such as Japan, EU, Canada), their demand for U.S. exports is likely to lag our demand for their exports.

Does Y=C+I+G+(N‑X) imply that raising tariffs to increase the cost of imports to U.S. families and firms will somehow make their real incomes grow faster? Of course not. Paying more for less would make Americans poorer, not richer. If the price of widgets went up by 35 percent because of a tariff, fewer widgets would be sold and fewer Americans would be employed making them.

Imagine life in isolation, waking every morning before sunrise to make your own clothes, build and repair your meager shelter, hunt and harvest your own food, concoct rudimentary salves for what physically ails you, and attend to the upkeep of your brutish existence engaging in other difficult and tedious tasks. Forget leisure or luxuries; all of your time would be consumed trying to produce basic necessities merely to subsist.

Fortunately, that’s no longer the way most of humanity organizes its economic activities. We don’t attempt to make everything we need or want to consume, but instead specialize in a few, or a couple, or just one value-added endeavor – one profession. This specialization is possible because we accept and embrace the concept of cooperation in the form of exchange. We realize that by specializing, we can focus our efforts on what we do best, and produce more value than would be possible if we had to attend to the production of all of our needs and wants. Because we can exchange our output (monetized in the forms of wages and salaries) for the output of others, we don’t even have to know the first thing about hammering a nail, mixing mortar, making thread, yarn, and cloth, threading a needle, whittling an arrow to kill a deer, or any of the details of the incredibly complex processes and supply chains that generate the products and services we consume daily. Fortunately (but sadly, too), most of us never give it a second thought. 

If two people focusing their efforts on the tasks they do best and exchanging their daily surpluses enables both to consume more or better quality output, then it should readily follow that four people or eight or eighty or eight million participating in this cooperative economic relationship can lead to much higher volumes of output (wealth) and much greater consumption and savings (higher living standards). This is the purpose of exchange. It enables us to specialize. And when there are more participants in the market (more with whom to exchange) there is greater scope for more refined levels of specialization. That means greater opportunities to match individuals’ precise skills and faculties (or to cultivate then match those precise skills and faculties) with increasingly specialized tasks and professions created in response to the increasingly refined demands of societies as they produce even greater wealth and higher living standards. 

We’ve come a long way from exchanging cloth and wine. No longer are people’s choices restricted to being sober and clothed or naked and drunk. Today, we can almost have it all. Whereas once there were witchdoctors serving as generalist medical practitioners, today (in Washington, DC, I am told) there is burgeoning demand for the services of psychiatrists who specialize in treating the emotional and psychological adjustment costs associated with being an expat spouse of a foreign diplomat from Western Europe. It’s become that specialized. Imagine hearing: “Sorry, my specialty is in talking spouses of diplomats through their neuroses brought on by resettling in Washington from places like Stockholm, Amsterdam, Paris, or London. Since you’re from Warsaw, let me recommend a different specialist who focuses on treating Polish ex-pats with similar conditions.”

The purpose of exchange is to enable each of us to focus our productive efforts on what we do best. By specializing in an occupation — instead of allocating small portions of our time to the impossible task of producing each of the necessities and luxuries we wish to consume — and exchanging the monetized output we produce most efficiently for the goods and services we produce less efficiently, we are able to produce and consume more output than would be the case in the absence of specialization and trade. The larger the size of the market, the greater is the scope for specialization, exchange, and economic growth.

Free trade is the extension of free markets across political borders. Enlarging markets in this manner – to integrate more buyers, sellers, investors and workers – enables more refined specialization and economies of scales, which lead to greater wealth and higher living standards. When goods, services, capital, and labor flow freely across borders, Americans can take full advantage of the opportunities of the international marketplace.

The purpose of trade is to enable us to specialize; the purpose of specialization is to enable us to produce more; the purpose of producing more is to enable us to consume more. More and better consumption is the purpose of trade. Thus, the benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and innovation. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — the so-called terms of trade. When we transact at the local supermarket, we seek to maximize the value we obtain by getting the most for our dollars.

But when it comes to trading across borders or when our individual transactions are aggregated at the national level, we seem to forget these basic principles and assume the goal of exchange is to achieve a trade surplus. We forget that trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports. U.S. trade barriers hurt U.S. citizens, as consumers, taxpayers, workers, producers, and investors. Americans would be better off if we simply undertook our own reforms – on tariffs, regulations, and other artificial impediments to commerce – without regard for what other government’s do. Yet we don’t.

Although tariffs and other trade barriers have been reduced considerably since the end of the Second World War, U.S. policy continues to accommodate egregious amounts of protectionism. We have “Buy American” rules that restrict most government procurement spending to U.S. suppliers, ensuring that taxpayers get the smallest bang for their buck; heavily protected services industries, such as air transportation and shipping, that drive up the cost of everything; apparently interminable farm subsidies; quotas and high tariffs on imported sugar; high tariffs on basic consumer products, such as clothing and footwear; energy export restrictions; the market-distorting cronyism of the Export-Import bank; antidumping duties that strangle downstream industries and tax consumers; regulatory protectionism masquerading as public health and safety precautions; protectionist rules of origin and local content requirements that limit trade’s benefits; restrictions on foreign investment, and so on.

It is sad, but true, that Congress seems to have forgotten why we trade.

Even after twenty years, the North American Free Trade Agreement remains highly controversial. Donald Trump claims that NAFTA has “destroyed this country economically,” apparently unaware that the U.S. economy is still pretty fantastic. He has promised to pull out of the landmark free trade agreement between the United States, Mexico, and Canada unless he can renegotiate it. 

Hillary Clinton has also promised to renegotiate NAFTA. Trump has erroneously claimed that Clinton only came out against NAFTA after he made an issue of it. She made the same promise during her 2008 presidential campaign. Trumps also claims (much less erroneously) that Clinton will probably back out of any promise to renegotiate NAFTA after she’s elected.

If you ask the Obama administration, however, they’ll say they’ve already renegotiated NAFTA by creating the Trans-Pacific Partnership, which includes Canada and Mexico. The idea behind that claim is that the TPP includes stronger and more enforceable labor and environment rules than NAFTA. NAFTA’s critics on the Left have complained since its inception that NAFTA’s rules are inadequate. Obama’s claim to have fixed that “problem” through the TPP is a bit comical, even if nominally true, since those same critics also despise the TPP for largely the same reasons.

Clinton has raised the labor and environment complaint in her own condemnations of NAFTA, along with concern over investment rules and dispute settlement procedures.

Trump’s criticisms of NAFTA have been characteristically vague. He seems to be caught up in an economically misguided concern for bilateral trade deficits. Presumably, Trump would want to raise tariffs on goods from Mexico and somehow have Mexico agree to that within NAFTA.

The reason no one is going to renegotiate NAFTA is that Mexico and Canada are not interested. Most likely, their trade officials understand that U.S. elections bring out a lot of protectionist saber-rattling that gets lost in the shuffle once new Presidents get to work crafting and implementing their international economic policy, which presumably doesn’t involve impoverishing the United States and its neighbors. 

Two way trade between the United States and Mexico rounds out to about $1.4 billion per day. That figure includes well-established cross-border supply chains that enable integrated North American industries. The economic consequences of disrupting that trade are serious, and pulling out of NAFTA might actually accomplish all the horrible things Trump has blamed NAFTA for doing. 

India’s move to replace varying federal, state and interstate sales tax with a uniform Value Added Tax (VAT) makes a lot of sense (unlike Brazil which has high sales taxes and a 19% VAT). 

Yet India should take care not to let the 17.3% tax rate creep up, because VAT too is subject to the “Laffer Curve.”

As the graph shows (using 2013 OECD data) the VAT never brings in revenue higher than 10% GDP even in countries that mistakenly raised the VAT to 20% or more — 23% in Greece and Ireland, 25% in Scandanavian countries, 26% in Iceland, 27% in Hungary. New Zealand collected 9.7% of GDP with a 15% standard VAT, while countries with much higher VATs brought in less.

No tax fails to inflict economic damage, of course, which holds down the revenue collected from income and payroll taxes. A study by James Alm of Tulane University and Asmaa El-Ganainy of the IMF found “a one percentage point increase in the VAT rate leads to roughly a one percent reduction in the level of aggregate consumption in the short run and to a somewhat larger reduction in the long run.” Such a reduction in consumer spending means fewer jobs, wages and profits, so a higher VAT leads to lower revenue from taxes on personal income and profits – a fact borne out by Japan’s experience.

Here’s an exchange between David Sanger of the New York Times and Donald Trump:

SANGER: You’ve talked about building the wall of course. Would you amend or change Nafta?

TRUMP: Oh, without question.

SANGER: Tell us how.

TRUMP: Without question. Nafta ——

SANGER: Would you pull out of Nafta?

TRUMP: If I don’t get a change, I would pull out of Nafta in a split second. Nafta is signed by Bill Clinton, perhaps the worst trade deal ever signed in the history of this country. It’s the worst trade deal ever signed in the history of this country and one of the worst trade deals ever signed anywhere in the world. Nafta is a disaster. You have to understand, I just campaigned, as you probably read, and I won all these states, and one of the reasons was because of Nafta. Because Nafta has drained manufacturing out of New York State, out of Pennsylvania, out of Ohio, out of so many different places. It’s drained. And these companies have gone to Mexico, and they’ve gone, they’ve left with the jobs. David, I have statisticians, and I know, like if I went to Pennsylvania, I say, “Give me the statistics on what is going on with respect to manufacturing.” Numbers — 45, 55, 65, I have states that are so bad. New England. Look at New England, what happened. Nafta has been a disaster for this country. And a disaster for the worker and Nafta is one of the reasons that, you know, there are people that haven’t had a wage increase 18 years in real wages. Actually, they’re lower, some are working two jobs, working much harder, then making less and they’re older. It’s supposed to work the opposite. You’re making more, you’re making more I hope.

HABERMAN: What kind of change could you make in terms of Nafta without fully withdrawing from it? How could you?

TRUMP: You’ve got to be fair to the country. Everyone is leaving. Carrier just announced they’re leaving. Ford is building a massive plant. So I have a friend who builds plants and then I have to go. I have a friend who builds plants, that’s what he does, he’s the biggest in the world, he builds plants like automobile plants, computer plants, that’s all he does. He doesn’t build apartments, he doesn’t build office space, he builds plants. I said to him the other day, “How are you doing?” He goes, “Unbelievable.” Oh, great, that’s good, thinking about the United States, right, because he’s based in the United States. So I said, “Good, so the country is doing well.” He said, “No, no, not our country, you’ve got to see what I’m doing in Mexico.” He said: “The business there is unbelievable, the new plants we are building. People moving from the United States.” That’s what he does. One-story plants. You understand?

Sanger asked some very clear questions about how Trump would change or amend NAFTA, and as you can see from the rambling answers, Trump doesn’t have anything specific to offer in response. That may be because, in order to respond, he would need to have some idea of what’s in NAFTA, and it’s not at all clear that he does.

The Brexit vote last month came as a surprise to many people (including me), and there is still a lot of uncertainty — both legal and political — as to how the United Kingdom (UK) will proceed. In order for Brexit to go forward, the UK will have to invoke Article 50 of the Lisbon Treaty, and then enter into a complex negotiation with the European Union to establish a new UK-EU economic relationship.

As things move ahead, I will have more to say on the UK-EU negotiations, but for now I wanted to weigh in on the UK’s trading relationship with the rest of the world. There are questions about when the UK can actually begin any such trade negotiations, but putting that aside, I wanted to address two points: (1) With whom should the UK negotiate? And (2) what should the UK negotiate about in these trade agreements?

My long answer is here, in a new Free Trade Bulletin (a shorter, op-ed version is here), but here’s a quick summary.

In terms of negotiating partners, I would ask these questions: (1) Which countries have the most to offer in terms of a substantial economic relationship; (2) with which countries would the negotiations be the smoothest; and (3) which countries would involve the least external controversy in a trade negotiation. Weighing and balancing all of these factors, it seems to me that the best candidates for the initial set of trade negotiations would be Australia, Canada, New Zealand, and the United States; and perhaps developed countries such as South Korea and Japan. 

As to the substance of the negotiations (that is, what to negotiate about), I suggest the following:

— Push for zero tariffs on all products, with limited or no phase-out periods.

— With services liberalization, pick a couple substantial and uncontroversial sectors and focus on liberalizing those.

— Open up government procurement markets as much as possible.

— Rely on existing WTO trade rules for issues such as intellectual property and product standards, so as to avoid getting bogged down negotiating on complex regulatory issues.

– With some trading partners, exclusion of trade remedies — e.g., anti-dumping — may be possible. This may sound politically challenging, but it has happened before. For example, Australia and New Zealand have agreed not to take anti-dumping measures against each other, and perhaps these countries would consider doing the same for their trade with the UK.

Some people in a few of these potential trading partners are already pushing for trade deals, so there is a good chance something will go forward in the near future, although it looks as though the UK leaders may need to settle in and make some key decisions — such as when to invoke Article 50 — first.