Shouldn't Democrats Applaud the Trade War and Ignore the Stock Market?

No! The trade war is going to hurt workers and financial markets matter.

[It’s live Q&A day again over at Contrarian, and I’m excited this week to be joined by the great Heather Long. Submit questions for us at submit@contrariannews.org and tune in at contrarian.substack.com.]

Since when are progressives so wound up about stock market losses? And don’t many on the left, or at least the labor left, want manufacturing jobs to come back to our shores? Wasn’t that a big part of the Biden agenda?

And if all that’s true, then why all the caterwauling about Trump’s trade war?!

I’ve been meaning to write about this for a number of reasons. First, let the record show that various colleagues and I were concerned about these issues long before the Trumpies got to town. I penned this oped worrying about the impact of dollar dominance on goods exports (though with hindsight I think it’s a bit over the top¹). And a year before that, Dean Baker and I pointed out that the trade deficit was not always and everywhere benign.

Third, while I’ve tried to be careful not to do so in my commentary, it’s easy, given the thoroughly wrongheadedness of the trade war and its even more feckless implementation, to forget that there’s a germ of truth in there somewhere. No, our trading partners are not ripping us off. And sweeping tariffs will hurt US families and businesses far more than they will help them (if you don’t believe that, listen to this moving Daily episode from yesterday—in fact, listen to it anyway; also, the pro-worker writer Rick Wartzman covers these points nicely here).

But it’s true that globalization has hurt many workers and their communities, and that most economists long ignored that fact, which is why I’m proud of those opeds. I didn’t get everything right, but I—and many others, especially those at the Economic Policy Institute—were trying to warn folks that if we didn’t take this damage more seriously, there would be a backlash.

We argued back then—and this started pre-NAFTA—that most trade economists at the time viewed people as consumers, full-stop, ignoring that they’re also workers. We pointed out that even standard trade theory predicted our lower-wage workers in tradeable sectors would get hurt, as they were a “scarce factor” relative to new trading partners like Mexico and China (this comes out of Stolper-Samuelson models).

The response was “as long as the winners from expanded trade make enough to compensate the losers, it’s worth pursuing.” Okay. But “can compensate” doesn’t mean “will compensate.” In fact, this country never—never—took trade adjustment at all seriously.

I go through all of this in greater detail in a speech I gave at EPI when I was at the CEA. It’s really very simple. Back when I was coming up in this debate, the problem was the advocates of expanded trade argued that it was all benefits, no costs. Now, the equally erroneous Trumpies argue that it’s all costs, no benefits.

The truth is that it’s both, and that the way forward must be both/and.

In other words, our policy in this space is best understood as “both-and.” BOTH increased domestic sourcing, from upstream extraction to final production, AND robust trade and investment flows, alongside heightened cooperation with our friends and allies with clear standards guiding those efforts.

The speech unpacks this, so give it a look.

But re that “both” part, didn’t I and that very same Dean Baker recently argue that Trump’s reindustrialization goal was a misguided fantasy? We did, but we also wrote this:

…spurring domestic [production] isn’t only possible; it’s already happening, supported by tax credits, subsidized loans and grants from the Inflation Reduction Act, the CHIPS Act and the Bipartisan Infrastructure Law. Factory construction more than doubled from 2019 to 2024 after adjusting for inflation.

Don’t believe me just watch:

Source: US Treasury

My point is that it is not only possible to be vehemently anti-Trump-trade-war and believe we’ve got work to do to help the people and places that have been hurt by globalization. It’s essential. It’s also at the intersection of good economics and good politics.²

The stock-market critique, on the other hand, is just silly. Everyone should care about a big sell off and high volatility in the stock market, and even more so, the bond market (which got Trump to blink last week). First, as I’ve shown in other posts, over 60% of middle-class people nearing retirement have savings invested in the market. Second, financial markets have been sending clear signals that the trade war is spooking investors, leading them to pull back on spending in ways that are demonstrably raising recession probabilities. And third, the decline in bond prices and the value of the dollar in international markets are potentially signs of a threat to America’s safe-haven status.

With the strong caveat that I’m an economist not a political strategist, I believe progressives should have zero compunction about fighting with all we’ve got against this deeply damaging trade war (and the same for pointing to the market reactions). Doing so does not by any means require us to give up on helping those hurt by globalization.

1. First, the piece underappreciates the benefits of the dollar as the dominant global currency, and second, it overstates the role of the dollar in trade outcomes. That said, it’s an early and imho correct take on the (Pettis) view that your trade balance isn’t solely your doing re the domestic savings/investment identity. Other countries can also influence your trade balance.

2. If it’s “good politics,” why was Biden’s economic agenda, which very explicitly included and elevated these industrial-policy successes, so damn unpopular. One big reason is that the spike in the price level over this same period was just an insurmountable source of angst and economic stress for people.