Dear Donald Trump,
You are running for US president with the slogan “Make America Great Again”. You are mobilizing poorly educated white Americans who used to have high, rising incomes in manufacturing jobs, but now feel stranded by automation and the offshoring of production. Such Americans have suffered stagnant wages for two decades, and long for a past when they were the world’s best-paid workers.
You blame US woes on currency manipulators and bad trade agreements. So you threaten China and Mexico with import duties of 45% and 35% respectively. You threaten to withdraw from global and regional trade agreements.
Will this make America great again? Sorry, the Peterson Institute of International Economics calculates that it could lead to a trade war that destroys four million US jobs. If you block Chinese and Mexican goods, alternatives will flood in from other lower-wage countries (like India, Vietnam and Thailand). The jobs that once shifted to China are now shifting to other low-wage countries as Chinese wages rise. They will not shift back to high-wage USA.
Back in the 1950s and 1960s, US steelworkers and auto workers were by far the most productive in the world, and so could demand high, rising wages. But today workers in developing countries have acquired skills that are almost as good, at a small fraction of US wages. Naturally, US wages are stagnating. The old skills are no longer scarce or high-paid: they are either obsolete or so abundant in developing countries that they merit much lower wages.
Mr Trump, what you call the era of “American greatness” was in fact a terribly unequal world, where developing countries had been kept poor and unskilled for centuries by colonialism. Before the industrial revolution, China and India accounted for over half of world GDP, but their share fell to barely 7% in the 20th century. This was partly because the industrial revolution came first to the colonial powers, partly because colonialism thwarted progress in the colonies.
In the 20th century, Europe was twice devastated by World Wars, letting the US forge ahead. US hegemony followed in the second half of the 20th century. Even US workers without college degrees had skills that were globally scarce, and so attracted high pay.
But then developing countries gained independence and started rising fast, acquiring skills that were once a white man’s monopoly. Japan was the first. Next came the four Asian tigers — Korea, Taiwan, Singapore and Hong Kong. And now all developing countries, notably China and India, have surged forward. Globalization plus market-friendly reforms have enabled them to grow much faster than the West for decades, catching up in skills and income.
This has greatly reduced global inequality. You may complain about inequality in the US caused by the offshoring of jobs that used to be high-paying. But that same phenomenon has improved global equality, by raising living standards in developing countries. The World Bank says the number of poor people globally more than halved from 1.75 billion in 1990 to just 702 million in 2015; the proportion of people in extreme poverty fell from 37% to 9.6%; and the world Gini coefficient (which measures inequality) fell from 75% to 62%.
In sum, globalization and pro-market reforms in developing countries have greatly raised global welfare. The flip side is that poorly educated white workers in the US can no longer flourish as in the era of white man’s hegemony. They need to get highly skilled to merit high wages. If not, they will be beaten by low-wage workers in poor countries who are as productive.
Mr Trump, beware of nostalgia. If you really want all those old manufacturing jobs to return to the US, you will have to lower US wages to third-world levels. I doubt whether even your supporters will view that as a return to American greatness.
The US is indeed a great country, but for completely different reasons. It has been the most welcoming country for immigrants in history. Half the startups in Silicon Valley are by people of Chinese or Indian origin. Many Nobel Prizes have been won by first or second-generation immigrants.
As long as the US has this warm-hearted approach, it will attract the best brains in the world, and stay world no. 1. If, however, you are racist and hostile to immigrants, you will cease to attract those whom you badly need to keep America great in the future.