President-elect Donald Trump has said he’ll renegotiate the North American Free Trade Agreement or will walk away from the 20-year old treaty that slashed tariffs on trade with Canada and Mexico. And he has promised not to sign the Trans-Pacific Partnership, which would reduce tariffs between the U.S. and 11 other Pacific Rim countries, including Canada, Australia and Japan.
Though many blame free trade for a loss of U.S. manufacturing jobs, others worry that ending the trade deals could bring about a new era in protectionism, triggering trade wars and risking a new recession in the U.S. “There is trade and goods, and then there’s the labor market, and they are in two parallel universes,” says Smith School finance professor Albert “Pete” Kyle. For the Trump administration, the challenge will be in how to bring back well-paying, blue-collar manufacturing jobs from places like Mexico and China, while maintaining strong trade ties globally.
Kyle is known for creating the “Kyle Model,” which provides a foundation for the modern theory of market microstructure
“We are going to have a debate in this country that we haven’t had,” Kyle said. “It’s been an intellectually dishonest debate so far, both from Republicans and Democrats over the years about the hidden costs of the cheap products that we get from exporting our jobs. And the hidden costs are that rural America and small-town America is collapsing and dying and the culture of the people is collapsing and dying along with it.”
He said he expects trade to fuel tension between the United States and “countries with whom we are not cooperating hand-in-glove politically and economically,” citing China as a key example.
Regulatory Reform?
With Trump in the White House and Republicans retaining control of the House of Representatives, experts say we are likely to see a reexamination of the regulatory environment, including the Dodd-Frank Wall Street Reform and Consumer Protection Act. And that might benefit small and midsized enterprises, says another UMD-Smith finance professor, Michael Faulkender.
“One argument about what’s been going on in the microeconomy is that higher degrees of regulation, higher levels of taxation, and more allocation of resources coming from government tend to benefit larger enterprises, to the detriment of small- and medium-sized enterprises,” says Faulkender, who will moderate a panel discussion about small and midsized enterprises as part of a Post-Election Policy and Market Outlook event hosted by UMD’s Center for Financial Policy and Ed Snider Center for Enterprise and Markets on Nov. 17, 2016 at the Reagan Building in Washington, D.C.
For small- and medium-sized enterprises, he says big banks generally aren’t the best source of capital. They rely more on local and community banks. But the increased regulation under Dodd-Frank has made lending more difficult.
Easing access to capital for small and midsized enterprises could have a big impact on the economy. Enterprises that are small, generally fewer than 100 employees, and midsized, generally between 100 and 500 employees, have traditionally been the source of growth out of economic downturns.
“Under Armour started small. Google started small. What enabled companies like those to fully realize their growth potential, partially, was the availability of capital so they could meet what, in economic parlance, we would call their efficient scale,” Faulkender says.
The notion of easing regulatory burdens on small banks has gained some bipartisan support. “It could actually move forward because it’s popular,” says UMD School of Public Policy professor Phillip L. Swagel, who also will moderate a panel discussion during the aforementioned event.
After several years of Dodd-Frank’s regulation, Faulkender says, “The question is: To what extent have some of those small- and medium-size enterprises who are sitting on those kinds of disruptive technologies been curtailed in their ability to fully realize their potential?”
He’ll pose that question to the panel. Along with this one: “To what extent might a change in the regulatory environment, a change in tax policies, a change in energy policy, a change in health care policy — all of those things that are now potentially doable, with unified government — to what extent might we be able to realize growth well in excess of what we’ve been able to realize in the past eight years?”
