Where to Build Trump’s Wall?

CAMBRIDGE – What do Huntsville (Alabama), Princeton (Indiana), Georgetown (Kentucky), Blue Springs (Mississippi), San Antonio (Texas), Buffalo (West Virginia), and Greer (South Carolina) have in common? They are the locations where Toyota and BMW built their manufacturing plants in the United States. None is in the US Rust Belt – the tract of industrial towns stretching from Michigan to eastern Pennsylvania – where much of the car industry and its suppliers were traditionally located.

Evidently, the US Rust Belt’s decline was not the exclusive doing of China and Mexico. It was also caused by the auto industry’s geographic spread into other regions of the US, out of the clusters in which it had originally been concentrated. And this shift resulted not so much because GM moved its plants, but because it lost market share to Toyota, Nissan, Honda, Hyundai, BMW, and Mercedes-Benz.

Of course, pointing this out does not reduce the pain for those affected. But it does change the policy implications – and the lessons from the US example are relevant worldwide.

Two approaches have been pursued so far to help communities affected by this phenomenon. The first is embodied in the US Trade Adjustment Assistance (TAA) program, which provides workers affected by international competition with financial support for retraining, job search, relocation, income maintenance, and health insurance. The second approach is to provide trade protection to affected industries, as US President Donald Trump has promised to do.

Neither approach is likely to help the Rust Belt. Any economy’s success is very much affected by the performance of that sliver of activities that can sell their output to outsiders. And what is true for countries is also true for states, cities, and towns, provided we redefine what we mean by selling to “outsiders.” These “export” activities have an outsize and amplified impact on the growth of the local economy as a whole.

Every geographic area must buy products it does not make and pay for them by selling to outsiders some of the output that it does make. But outsiders have the option of buying from others. So, these “export” activities face a level of competition that the local grocer, coffee shop, or barber does not.

Moreover, the income brought into the community by the “exporters” creates a large multiplier effect. When a mine shuts down, the result is not just unemployed miners. The grocer, coffee shop, and barber go out of business, and everybody leaves, turning the place into a ghost town.

The disruption can be caused not only by an industrial closure. Once upon a time, there were many relatively small department-store chains and other retailers with headquarters spread throughout the US and outlets in a few towns. These headquarters brought income into their town by providing back-office services to their network of stores.

But consolidation in the retail industry, driven in part by Walmart and Amazon, dealt a deathblow to many of these companies. The impact on the local communities where these retailers were headquartered was as devastating as a mine closure: the “export” activity ceased and towns shrank by a multiple of each “export job” lost. Video rentals, bookstore chains, pharmacies, home improvement stores, electronics and camera shops, catalog stores, and more: all went the way of the horse and buggy. At the start of 2017, Walmart had 5,332 stores in the US. It is headquartered in Bentonville, Arkansas, where it employs more than 18,000 workers.

Clearly, trade protection does not help if Detroit is competing with Blue Springs, Mississippi. Nor do import tariffs help those left unemployed by the bankruptcy of Blockbuster Video, Borders Books, CompUSA, Circuit City, Payless, or Virgin Megastores. In the meantime, employment at Amazon grew by 47% over the past year, to 341,000 people. But with Amazon employment concentrated in California, Texas, and Washington, the geography of those jobs is very different from that of those it is replacing.

As with the geographic relocation of US manufacturing jobs, TAA is not a solution for this kind of ailment. After all, whereas TAA targets individuals directly impacted by foreign competition, much of the competition faced by local economies is not coming from abroad, and many of the jobs being lost are not in the industries directly affected by outside competition, but in the surrounding economy. Facilitating individuals’ relocation does nothing for those left behind in shrinking towns.

With industry after industry disrupted by technological change, much of this pain is hard to avoid. But interventions at the individual level must be complemented with assistance at the level of local economies. The goal should be clear: as a town’s “export” industries are disrupted, new “export” activities must take their place, lest the town shrink and become impoverished. This highlights the need for what UK Prime Minister Theresa May has called a Modern Industrial Strategy, aimed at “delivering jobs and economic growth to every community and corner of the country” to “ensure [that] free trade and globalization work for all.”

To achieve this, a new set of place-based policies will be needed. The point is not to prop up dying industries, but to increase the birth rate and reduce the infant-mortality rate of firms in industries that can take their place, especially those that can sell to “outsiders,” reconnecting each location with external and increasingly global markets.

In their recent book The Smartest Places on Earth, Antoine van Agtmael and Fred Bakker document how this is already happening in parts of the US Rust Belt, where many towns – such as Akron, Ohio, or Albany, New York – have reinvented themselves. These places are not only recovering; we know from how they voted last November that they are also not buying into Trump’s wall-building agenda.