Dumbing Down on Trade

Election-year protectionism spells bad news for real estate.

Hugh KelleyThere is precious little policy in common between the major-party presidential candidates in 2016. However, both seem to believe that multilateral trade agreements like NAFTA or the proposed Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP) are job-threatening pacts that should be repealed, revised or rejected in the interest of protecting U.S. workers in important manufacturing industries. Economists familiar with Gresham’s Law, “Bad money drives out good,” may be seeing a contemporary political equivalent: “Bad ideas—repeated loudly—drive out good in a populist election campaign.”

Protectionism has a long history in U.S. industrial policy. Most of the evidence suggests that nurturing promising startup industries may have a temporary benefit, but ultimately these need to stand on their own competitive strengths. When it comes to building walls around mature industries as a defense against global competition—well, that’s a loser’s strategy. From the devastating Smoot-Hawley Tariff regime of 1930, which deepened and spread the Great Depression, to more subtle measures like import quotas on goods ranging from textiles to steel and industry subsidies, most prominently for agriculture and energy, the economic lesson has been that protectionism is a blunt instrument that does more harm than good.

Most Americans, I think, would be surprised at the facts. As things stand, the U.S. already has more protectionist measures than any other country: twice as many as Russia; three times as many as China and Brazil; four times as many as Europe and Japan (according to a 2015 analysis of Global Trade Alert data by Credit Suisse). Yet this arsenal of defensive policies has not staved off the decline of manufacturing jobs to date, and it is unlikely that dumping the TPP—as both the Republican and Democratic candidates now suggest—will reverse that long-term job trend.

There are six states (California, Texas, New York, Illinois, Michigan and New Jersey) that have total trade volumes (imports plus exports) exceeding $150 billion annually. Another half-dozen states (Washington, Florida, Georgia, Ohio, Pennsylvania and Tennessee) each have trade volumes between $100 billion and $150 billion. More restrictive trade policies would slow a wide variety of industries in these states: aeronautical equipment, medical equipment and pharmaceuticals, energy products, semiconductors and integrated circuits, and agriculture.

Moreover, there are a dozen states that run a trade surplus—exports exceeding imports—where reducing trade would threaten a positive inflow of capital into the economy. These states, in order of the volume of their surplus, are Washington, Oregon, Louisiana, Iowa, Arizona, Nebraska, Alaska, West Virginia, New Mexico, North Dakota, South Dakota and Wyoming. Texas has a nearly perfect balance of trade, with $251.1 billion in exports and $251.5 billion in imports. These states account for 22.7 million jobs, and trade restrictions would hamper growth as other nations respond with tariffs and quotas of their own. Meanwhile, slower merchandise imports would put upward pressure on U.S. consumer prices, possibly leading to a return of “stagflation” (low to no growth, but upward price inflation at the same time).

The commercial real estate industry would run the risk of systemically lower demand, across the spectrum of property types, under a regime of more restrictive trade. In the high-trade-volume states, this would include slower job growth in both white-collar and blue-collar jobs. The prevalence of technology industries in those states would find lesser demand for office space occurring, but also a slowdown in production-oriented employment. A reduction of goods volume will impact transportation jobs, from ports to rail, air cargo to trucking. Demand for warehouse/distribution properties—the entire logistics chain—could be attenuated. The nascent recovery in wages would certainly be compromised, putting additional pressure on the retail property sector.

Thus, for real estate, there is virtually no upside to the anti-trade movement.

Blue-Collar Employment

That said, there is the sad reality that the combination of globalization, financialization and technological change has squeezed millions of households. College-educated workers have, on balance, a decent opportunity to cope with those macro-level forces. Those with a bachelor’s degree or higher had a 74 percent labor-force participation rate and an unemployment rate of just 2.5 percent as of July 2016. Those without any college education had a labor-force participation rate of 55 percent and an unemployment rate of 5.3 percent.

There should be no denying the pain implied by those differentials, but the answer is not in raising trade barriers. There is plenty of blue-collar work to be done. A positive approach would be to accelerate infrastructure improvements across the country, which would simultaneously remedy a huge economic inefficiency and put many to work. Real estate and related fields can be part of the solution, with a concerted effort to develop career paths whereby an entry-level job is not a dead end but the first step on an upward economic path.

And long term, a collaborative rather than confrontational effort linking labor, employers and government is needed. This was the collaboration forged to assist the Greatest Generation as it returned from World War II, and it brought decades-long benefit to the nation. Following the Global Financial Crisis, an approach of equal vision and commitment is needed. We should be playing offense, not defense, at this point. Political rhetoric notwithstanding.

Hugh F. Kelly, PhD, CRE, is a clinical professor of real estate with the NYU Schack Institute of Real Estate and served as the 2014 chair of the Counselors of Real Estate. He is the author, most recently, of 24-Hour Cities: Real Investment Performance, Not Just Promises, published by Routledge.

Originally appearing in our September 2016 issue of CPE.