Will Trump Tariff Solar Panels at the Cost of American Service Jobs?

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One of President Trump’s main promises on the campaign trail was to crack down on free trade in the name of protecting American businesses, particularly the manufacturing sector. Despite the charged rhetoric during his campaign, President Trump has been a relatively traditional Republican when it comes to trade policy, outside of withdrawing from the Trans-Pacific Partnership (TPP). Last month, however, the Trump administration announced the imposition of new tariffs on imported solar panels and washing machines, a move designed to protect domestic manufacturers against a market flooded with cheap foreign goods, mainly from Asia. The tariffs on solar panels, which start at 30 percent and decline by 5 percent each year until 2021, have particularly profound implications for the expanding market of solar panels and solar energy.

As the cost of producing and installing photovoltaic solar cells has fallen drastically, the market for solar energy has grown rapidly, transforming the idea of widespread adoption of solar energy from an environmentalist’s pipe dream to a practical source of power. According to Bloomberg’s New Energy Finance Team, the price of solar energy has fallen from $350 per megawatt hour in 2009 to about $100 in 2018, with some projections estimating that average solar costs will fall below those of coal in the next decade. The International Energy Agency reported that 2016 saw solar grow faster than any other source of energy, with most of the activity coming from China, whose governmental support has enabled its producers to capture almost half of the entire market.

In many ways, China is on the forefront of the solar energy boom; the country alone added more solar capacity this past year than the total energy capacity of Germany and is responsible for driving much of the innovation that has caused the price of solar energy to fall so drastically. However, Chinese dominance in the solar sector has not been a blessing to American manufacturers struggling to compete with low-cost Chinese panels. Two companies, Suniva and SolarWorld Americas, complained to the White House and the International Trade Commission that they could not compete with the cheap photovoltaic cells imported from China without government intervention to “restore fair competition in the U.S. market.”

The complaints made by Suniva and SolarWorld are not unfounded. Suniva, a Chinese-owned company based in Georgia, filed for Chapter 11 bankruptcy last spring as a direct result of the influx of foreign panels. The International Trade Commission recommended a tariff of 35 percent on imported solar panels, and the Trump administration delivered with last month’s decision. Domestic producers of solar cells, such as Suniva, SolarWorld, First Solar and Tesla, stand to win as they will be able to sell their panels tariff-free and face less competition from their Chinese rivals. The possible benefits that these firms may receive from the tariff were reflected in their stock prices, as both SolarWorld AG’s and First Solar’s stock prices jumped shortly after the decision was made public. There is also no doubt that the creditors of struggling U.S. solar manufacturing firms have a positive view of the tariff, as the value of their investments will appreciate as a result. As far the U.S. solar manufacturing sector is concerned, the tariff does what it is supposed to do.

Proponents of the tariff overlook one crucial fact about the solar industry in America: the vast majority of jobs in the solar industry are not in manufacturing. In 2016, there were about 260,000 people employed in the solar industry (twice that of coal), but only 38,000 of those jobs were in manufacturing (14 percent) and only 2,000 were involved in the direct production of solar cells. Most of the jobs in solar are involved in the development and installation of residential and utility-level solar projects. The Bureau of Labor projects growth of 105 percent in the number of solar installers in the next 10 years, which would make it one of the fastest growing occupations in the country. The tariff will restrict the supply of panels available in the United States and thus raise their prices; in turn, higher panel prices will lead to fewer installations, forcing layoffs. The Solar Energy Industries Association estimates that as many as 23,000 jobs could be lost as a result of the tariff, and Green Tech Media estimates that the tariff could reduce solar installations by as much as 11 percent, setting the United States back in the adoption of clean energy. While some proponents of the tariff may point to the fact that Chinese companies like Jinko Solar have announced plans to build factories in America, the relatively few jobs that these highly automated factories would produce likely wouldn’t make up for the loss of jobs caused by the tariff itself.

Considering the net job loss that will result from this trade decision, it is hard to justify the implementation of the tariff. This decision seems to not result from economic analysis alone, but rather from a desire to maintain congruence between campaign trail rhetoric and public policy. President Trump promised to bring manufacturing jobs back to the United States, and this tariff might do just that – albeit relatively few. The fact that the tariff might slow the adoption of solar energy and bolster other forms of energy may also be a deliberate strategy to play to his base of support. “America First” intentions aside, the tariff’s economic ramifications will harm the livelihoods of many Americans, which should be the preeminent consideration on any policymaker’s mind.     

    

Renegotiating NAFTA May Harm College-Educated African Americans

NAFTA Article Photo

Introduction

A key promise of Donald Trump’s presidential campaign – the renegotiation of the North American Free Trade Agreement (NAFTA) – is well under way, with a fifth round of trilateral talks held last month. It is no secret that President Trump has been highly critical of the trade deal, as he has taken to Twitter to slam Canada and Mexico for being “difficult” during the negotiations and suggested that his administration will “probably end up terminating NAFTA at some point.”

Proponents of free trade assert that it leads to cheaper foreign goods, additional income in the pockets of consumers, and an increase in overall economic well-being. In fact, economists tend to favor the concept of trade liberalization, with a 2007 survey finding that 83 percent of members of the American Economic Association agreed with the notion that the United States should eliminate its remaining trade barriers. Despite such a widespread consensus among economists, the American public remains divided on the virtues of free trade: a recent survey from the Pew Research Center found that 52 percent of Americans believe that free trade agreements are good for the United States, with 40 percent disagreeing.

This article investigates the differential labor-market effects of NAFTA by linking the wages, industries and geographic locations of impacted workers to changes in tariffs induced by trade liberalization. I find that African American workers experience drastic effects due to trade liberalization, while there is little evidence of a differential impact for Native American workers. In my main regression specification, individual characteristics including age, race, marital status, ability to speak English, educational attainment, worker industry tariffs and Mexican comparative advantage account for about a quarter of the variation in wage levels. Furthermore, I find that trade liberalization has stronger negative effects for less-educated workers, who tend to be employed in industries with higher initial, pre-NAFTA tariffs.

Background

As a general matter, there are deep distinctions in economic security among white, Hispanic and African American families: on average, white families have approximately ten times the wealth of Hispanic families and 13 times the wealth of African American families. Additionally, research by Amitabh Chandra finds very slow rates of wage convergence between white and African American male workers from 1950 to 1990, with African American male workers earning approximately 75 percent of what their white counterparts do, when excluding non-workers. Such large racial discrepancies in earnings introduce the possibility of endogeneity when attempting to quantify the labor-market effects of NAFTA; in other words, it is difficult to disentangle the effects of NAFTA attributable to race from the effects of other underlying factors that also influence wages. Therefore, it is important to take any prima facie relationship between race and NAFTA with a grain of salt.

Economists John McLaren and Shushanik Hakobyan have explored the local labor-market effects of NAFTA, finding evidence of substantially lower wage growth among low-education workers in areas most vulnerable to trade liberalization. Moreover, they find evidence of a “multiplier effect,” with liberalization putting significant downward pressure on wages across all industries in NAFTA-vulnerable regions. Finally, in their seminal 2013 paper, David Autor, David Dorn and Gordon Hanson find significant evidence of downward pressure on American workers’ wages as the share of Chinese imports increased.

Data and Methodology

The dataset used in my analysis incorporates publicly available U.S. Census information from 1990 and 2000, maintained through the IPUMS project of the Minnesota Population Center. The U.S. Census divides the country into 543 similarly-sized, overlapping regions determined primarily through economic integration called Consistent Public Use Microdata Areas (ConsPUMAs). The U.S. Census also defines 89 traded-goods industries. Table 1 includes summary statistics for the sample workforce for 1990 and 2000.

Table1

While most of the above measurables are fairly stable over time, there are some differences to note. First, the workforce was more diverse in 2000 than it was in 1990, as the proportion of the country identifying as “white” dropped by approximately 5.3 percentage points. Second, there is a perceptible difference in educational attainment levels, with a slightly larger proportion of workers having a college degree in 2000.

For each industry, I designated τ to be the average tariff that the United States levies on Mexican imports in that industry, similar to McLaren and Hakobyan’s convention. However, since vulnerability to NAFTA is only important if Mexico has a comparative advantage in the production of a particular good, I use a weighted-average tariff for each ConsPUMA that incorporates Mexico’s revealed comparative advantage (i.e., the share of Mexico’s world exports of a particular good relative to the share of Mexico’s world exports across all goods). The change in the weighted-average tariff from 1990 to 2000 for each ConsPUMA c is given by locΔτc.

For the purposes of estimation, I use what is known as the LASSO, or least absolute shrinkage and selection operator, to penalize the inclusion of additional, irrelevant variables to my model. The following is the preliminary model specification, prior to LASSO feature selection:

Model

The dependent variable in the model, log(wi), is the natural logarithm of worker i’s wages in 2000. The independent variables include educ, which measures the maximum educational attainment of each worker; border, which applies to those geographical areas along the border between the United States and Mexico; and X, a set of personal characteristics intrinsic to worker i, such as sex, race, age, marital status and ability to speak English. The two other independent variables, minwage and chnm, represent the state-level minimum wage and the employment-adjusted share of Chinese imports in the worker’s industry, respectively. In my analysis, the parameters of interest are β4 and β5, which measure the geographical impact of NAFTA on wages, disaggregated by race.

Results

The results of my analysis are included in Table 2. I find that African American workers with a college education likely benefited from trade liberalization resulting from NAFTA. This may be due to higher-than-average growth in the proportion of African Americans with a college degree relative to the rest of the workforce between 1990 and 2000. Additionally, college-educated African Americans were typically employed in industries that had fewer trade protections, and thus saw tariffs decline by less on average. This is an important point because industries that are less protected are more likely to benefit from economic integration and a higher demand for exports. Hence, in these industries one would expect less outsourcing of labor to low-wage countries, ultimately benefiting the worker.

I also find that NAFTA had a roughly uniform effect on Native American workers, as there is no statistically significant evidence of a slope change, which indicates that the effects of NAFTA on Native American workers are independent of other factors like educational attainment or industry-specific tariff reductions. This likely reflects the fact that college-educated Native American workers are more prevalent in higher-protected industries that saw larger declines in tariffs, on average. When coupled with the negative wage shock for Native Americans, the result is likely a mixed, insignificant effect of NAFTA on the wages of Native American workers. Furthermore, I conclude that the change in the share of Chinese imports in a worker’s industry, while indeed placing downward pressure on a worker’s wages, has effects that are separate and distinguishable from those caused by NAFTA’s trade liberalization.

Table2

Conclusion

From my findings, I conclude that while trade liberalization had no significant impact on the wages of Native American workers, college-educated African American workers greatly benefited from trade liberalization policies resulting from NAFTA. This likely results from the fact that college-educated workers are concentrated in industries that are less protected from Mexican competition, giving employers little incentive to outsource their jobs. However, the wage growth seen by African American workers who did benefit from NAFTA was slower than that of their white counterparts – further evidence of the persistent wage gap between white and African American workers in the United States.

Moreover, my findings suggest that President Trump’s desire to renegotiate NAFTA may reverse key gains made among urban, college-educated African Americans while failing to actually bring back blue-collar manufacturing jobs. In addition, while it may be the case that trade liberalization depressed wages for less-educated workers, American workers – including racial minorities – are becoming more educated. Thus, free, unrestricted access to Canadian and Mexican markets for professional services may benefit minorities with higher levels of educational attainment and help narrow the massive income disparity between racial groups in this country.

Filling the breach: Exploring China’s role in post-TPP Asia

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This month, U.S. Secretary of State Rex Tillerson met with top Chinese officials to pave the way for talks between the two countries’ leaders. Chinese economic policies in the Pacific will surely be discussed, especially as China exploits the demise of the Trans-Pacific Partnership (TPP) to assert itself as a powerful influence on trade policy in Asia. As the talks near, China’s new trade agreements with other Asian countries will offer valuable insight into how China has sought to expand its economic influence and upset Asia’s political landscape in the process. Amid rising tensions in Asia, the leaders of the United States and China must both recognize the futility of their attempts to use trade agreements as tools to dominate political developments in the Pacific region. Furthermore, while these two superpowers compete unsuccessfully for regional power, it will be the economic prosperity of other Pacific nations that suffers.

Discussions of Asia without the TPP may come as a surprise to some, especially considering the Obama administration’s strong support for the agreement. However, carried into office by the surging tide of populism, President Donald Trump has quickly acted to reverse any pro-globalization policies promoted by the previous administration. Without ratification from the United States, the TPP cannot go into effect, removing any possibility of the trade deal further integrating the economies of Asia and the United States. When President Trump put an end to the agreement, critics speculated that in response to U.S. actions, China would step in as the new economic leader in the Pacific region through trade deals excluding the United States. At the time of Trump’s withdrawal from the TPP, China had not yet enacted any such agreements, leaving its future role in the region unclear.

However, it did not take long for China to adjust to the United States’ withdrawal from the TPP and champion new international trade policy in the Pacific. After the TPP’s demise, many countries in Asia turned to the Regional Comprehensive Economic Partnership (RCEP) as the primary trade agreement, intended to promote freer trade between the many Pacific nations involved. Glaring differences between the RCEP and the TPP include the RCEP’s inclusion of China, as well as the absence of the United States despite its position as a major trading partner with many of the nations involved in the RCEP. Although negotiations among the 16 participating countries are ongoing, the RCEP agreement primarily focuses on lower tariffs, without any rules on environmental and labor protections. The trade deal will further integrate the economies of the participating countries, allowing for supply chains unhindered by expensive tariffs.

Cast in the role of outside observer to the RCEP because of its own political motivations, the United States loses out on a powerful tool for exerting its economic power to influence political and social issues in Asia. Under President Obama, the United States offered the economic benefits of lower tariffs to encourage developing nations in Asia to adopt stronger environmental and labor standards. Under the RCEP, it is unlikely that such protections would be enacted on the scale that the TPP proposed. After all, for many manufacturing-based economies in Asia, the lack of these safeguards allows their firms to produce at lower prices than many competitors can. Through the RCEP, China seeks to provide the Pacific region with the benefits of lower tariffs, without taking away the low-cost manufacturing advantage of these nations. In doing so, it hopes to assert itself as a powerful influence in the region and improve ties with other Asian countries, even as it pursues aggressive, expansionist policies in the South China Sea.

If China wishes to continue as the dominant economic force in Asia, however, it must also accept the detrimental economic effects of its politically motivated exclusion of the United States from the RCEP. Exports to the United States make up 18 percent of China’s total exports. As such, China would gain a great deal from free trade with the United States, though China would have to weigh this against regional influence lost to the United States. Furthermore, if China continues to exclude the United States from its trade agreements in the Pacific, increased tensions between the two countries could drive Trump to pursue protectionist policies. This would prove highly detrimental to the Chinese economy, threatening its ability to sell products abroad at lower prices than U.S. competitors can.

Most significantly, though, the politicized absence of the United States from Pacific trade agreements endangers the economic well-being of other Asian countries. Manufacturing-dependent economies like Malaysia and Vietnam looked to the TPP to provide access to U.S. markets like textiles, where these countries could sell their products at low prices. However, Chinese markets already have access to cheap manufactured goods produced domestically. Thus, trade deals with China would be unlikely to benefit other Asian economies to the degree that free access to U.S. markets would. Because of this, China would be less able to exert its economic leverage in pursuit of political influence in Asia, and developing economies in the region would suffer.

As talks between the leaders of the United States and China draw near, both countries must recognize the unintended consequences of trade policy as a tool for political influence. The allure of unfettered access to American markets will continue to divide the loyalties of Asian nations, even as China entices them with promises of freer trade within the region. As issues with the TPP and RCEP demonstrate, neither nation will secure uncontested political influence in the Pacific region through heavily politicized trade agreements. Instead, both the United States and China should focus on creating trade agreements to optimize economic growth in the numerous developing nations of the Pacific region through freer trade. If the United States and China cooperate on trade policy to achieve this goal, both they and many others in the Pacific region will benefit. Neither country should allow political machinations to stand in the way of economic progress.