THE US president is keen to selling hope to his citizens that the disruptions in trade and investments caused by tariff shocks would ultimately bring new manufacturing jobs to the US. The key argument is, tariff shocks are meant to forcing US trading partners recalibrate their exchange rate such that they would be paying to sell their products in the US market. Manufacturers would be arm twisted to open facilities in the US instead of producing elsewhere and exporting to the US market. It is also based on the assumption that increased tariff would not hurt US consumers because exporting countries would be forced to depreciate their currency and hence would not increase inflation in the US economy.

The US faces erosion of the middle class since 1980s with a secular decline of the real wages particularly for the blue-collar workers and those involved in low-skilled service jobs. At the macro level the trend share of US in the world GDP has been declining for a longer time period with episodes of rise and since 1980s US faced massive deindustrialisation leading to loss of jobs which further exacerbated with the entry of China into the WTO. But since dollar continues to be the reserve currency and the demand for dollar denominated assets is price inelastic, the country must maintain large current account deficit which together with declining growth rate makes it difficult for the US to sustain dollar as the reserve currency. Therefore, the economy faces a structural crisis but at the same time wants to maintain its hegemony upon the global financial architecture. In this context the US establishment basically calls for a redefining of the global architecture of trade and finance linking to security issues in view of categorising countries once again as friends and foes. This is about invoking a new cold war and a fresh endeavour to mobilising economies against China, the country they identify as the key challenger. The current disruption can be seen as a preparatory phase of this new world order which US wants to impose upon the world.

HOLLOWING OUT OF MANUFACTURING

The decline of manufacturing in the US was primarily driven by the new international division of labour effected by the neoliberal regime that opened new opportunities for productive capital to invest in the Global South where labour is cheap and natural resources are easily accessible. Production shifted from Global North and particularly manufacturing was relocated to developing countries while US emerged as the financial centre of the world. The relocation of production however didn’t shift the share of profits to the developing world but remained concentrated in the hands of MNCs rooted in advanced economies. In fact, after the relocation through global production network, even if more than eighty per cent of the workers involved in manufacturing were from the Global South but more than 60 per cent of value added was accumulated in Global North. Hence the narrative President Trump is keen to advocate that the developing countries benefitted out of globalisation is ridiculous. In fact, studies show that since 1960 the total quantum of wealth simply transferred or looted from the developing world through unequal exchange amounts to 9 per cent of the GDP of the Global South.

But this is true that blue collar jobs with high school education and white-collar repetitive jobs in the services which defined the middle class of the US had been shrinking since 1980s. It is important to note that the second industrial revolution was a boon to the US economy as it could create many office and managerial jobs which could socially contain the displacement caused by machines in factories during the first industrial revolution. The US workers experienced a consistent rise in their real wages, the middle class grew and the share of wages and profit in value added remained stable. Since 1980s, this social stability was largely jeopardised because of two reasons: firstly, the automation wave followed by increased pace of robotisation and secondly huge increase in imports from China particularly since China entered the WTO.

China emerged as the manufacturing hub of the world primarily by augmenting its capabilities that grew out of growing domestic purchasing power, faster growth in productivity, strategic intervention of the State in building technological capabilities that made China globally competitive. Both US consumers and manufacturers became heavily dependent on Chinese final products and intermediate components necessary for their production networks. In the previous Trump regime, the trade war was initiated to isolate China from European market and to facilitate and force producers to relocate production facilities away from China. But this turned out to be difficult primarily because of huge costs involved in such relocation particularly in an increasingly uncertain geopolitical environment. Also, it is not easy to recreate the intricate dense networks of component suppliers which are cumulatively built over the years.

True that automation since 1980s and heavy reliance on manufacturing imports have resulted in a hollowing out of US blue collar factory workers and low-skilled white-collar office jobs causing massive discontent within the working people, but the idea of bringing back jobs in manufacturing to US through slapping tariffs on exporting countries is a pipe dream. High tariffs slapped on exporting countries would increase the price of imports. Assuming that the effect of tariff could be passed on to the tariffed country because they would depreciate their currency equivalently to sell their product and hence such high tariffs would be neutralised having no negative impact on the US consumers is nothing but a delusion. Either the US consumers would be paying more because of the high tariffs or would be simply deprived of access to those products. Building industries overnight that would substitute such consumption goods is not an easy task.

RESHORING AND JOB CREATION

The reshoring of manufacturing may happen to some extent in the case of high-end manufacturing that is increasingly dependent on robots. US produces mother board of the computer, and the entire process is done by robots. It may happen that some of the high-end manufacturing which is no longer dependent on human labour and hence low-wage advantage seizes to exist for the producer may be reshored to the US. Such production processes require highly skilled educated workers and would increase the share of manufacturing in US GDP if reshored but would not create jobs for the low and medium skilled high school educated working people.

Secondly, automation and robotisation is creating a skill polarisation which is linked to rising inequality in incomes. Such a process has increased demand for college educated skilled workers, managers, engineers, programmers and skilled technicians on the one hand and on the other hand created demand for services those are relatively low paid and require human interaction such as janitors, cleaners, care work, massage parlours or gym trainers. The faster pace of technology growth without adequate jobs for high school educated workers is the crucial problem US labour market is currently facing. The frontiers of manufacturing have increasingly moved towards capital-biased technology hence even if production is reshored very little new jobs would be added for the median worker.

Thirdly, the dependence on Chinese imports for US is huge spanning from smartphones, laptop, other consumer electronics, air conditioner, electric fans to food processors, video game consoles, dolls, tricycles and such fifty product groups with each having import value more than one billion dollar. These goods could not be produced immediately in the US. Hence in the end, high tariffs on Chinese goods would either increase the cost of living of the US consumers and in the extreme case punish them by making these goods inaccessible due to high tariffs. Cost driven inflation together with declining growth rates due to contraction in demand is looming large. High tariffs in the end would hasten the setting in of another phase of stagnation in the US economy with its obvious negative consequences on the world economy as well.