Much has been written about the harm that President Donald Trump’s trade wars will do to American farmers, manufacturers, and their employees. That is all true. But the real losers in this "America First" initiative will be American consumers. If President Trump follows through on his threats, U.S. consumers will see rapid rises in the prices of everything from T-shirts to automobiles to new homes.
Ever since President Ronald Reagan and Paul Volcker’s Federal Reserve tamed the great inflation of the late 1970s – when prices and interest rates skyrocketed to 18 to 20 percent per year – American consumers have enjoyed 35 years of low inflation and low interest rates. Beyond the Federal Reserve Bank’s skillful monetary management, two major factors have driven this favorable economic scenario: globalization and technology.
Let’s start with technology. Moore’s Law, which predicted the doubling of computer power every two years, has enabled today’s consumers to benefit from exponential increases in computing power. The capability of a typical smart phone far exceeds the capability of the supercomputers of the 1980s—and the cost of such power has fallen tremendously too. Similarly, advances in integrated circuits have increased electronic capabilities while lowering the cost of everything from television sets to pacemakers. Meanwhile, the tech industry has created millions of new jobs.
On the globalization front, relatively free trade has enabled consumers to purchase myriad products at much lower prices. Go to a Walmart and look at a sample of products and where they are made: China, Indonesia, Mexico, Korea, and the like. Stop by Best Buy and see where the television sets, mobile phones, laptop computers and watches are produced. These imports have drastically cut the cost of consumer goods for American consumers. This has given American consumers a much higher standard of living in a time of limited wage growth. In turn, consumer purchases have fueled the growth of the American economy.
The combination of technology and globalization has also had a negative impact on certain labor-intensive industries like textiles, steel, and shoes. But these industries are not bringing their manufacturing jobs back to America. The solution for these dislocations does not lie in trade wars, but rather in retraining the American workforce for jobs of the future that require new and greater skills.
Trump’s trade war threatens to reverse this favorable 35-year interest-inflation moderation.