And Why Decoupling From China Will Change Everything
Donald Trump has been true to his word. After excoriating free trade while campaigning for the U.S. presidency, he has made economic nationalism a centerpiece of his agenda in office. His administration has pulled out of some trade deals, including the Trans-Pacific Partnership (TPP), and renegotiated others, including the North American Free Trade Agreement (NAFTA) and the U.S.-Korea Free Trade Agreement. Many of Trump’s actions, such as the tariffs he has imposed on steel and aluminum, amount to overt protectionism and have hurt the U.S. economy. Others have had less obvious, but no less damaging, effects. By flouting international trade rules, the administration has diminished the country’s standing in the world and led other governments to consider using the same tools to limit trade arbitrarily. It has taken deliberate steps to weaken the World Trade Organization (WTO)—some of which will permanently damage the multilateral trading system. And in its boldest move, it is trying to use trade policy to decouple the U.S. and Chinese economies.
A future U.S. administration that wants to chart a more traditional course on trade will be able to undo some of the damage and start repairing the United States’ tattered reputation as a reliable trading partner. In some respects, however, there will be no going back. The Trump administration’s attacks on the WTO and the expansive legal rationalizations it has given for many of its protectionist actions threaten to pull apart the unified global trading system. And on China, it has become clear that the administration is bent on severing, not fixing, the relationship. The separation of the world’s two largest economies would trigger a global realignment. Other countries would be forced to choose between rival trade blocs. Even if Trump loses reelection in 2020, global trade will never be the same.
The first two years of the Trump administration featured pitched battles between the so-called globalists (represented by Gary Cohn, then the director of the National Economic Council) and the nationalists (represented by the Trump advisers Steve Bannon and Peter Navarro). The president was instinctively a nationalist, but the globalists hoped to contain his impulses and encourage his attention-seeking need to strike flashy deals. They managed to slow the rollout of some new tariffs and prevent Trump from precipitously withdrawing from trade agreements.
But by mid-2018, the leading globalists had left the administration, and the nationalists—the president among them—were in command. Trump has a highly distorted view of international trade and international negotiations. Viewing trade as a zero-sum, win-lose game, he stresses one-time deals over ongoing relationships, enjoys the leverage created by tariffs, and relies on brinkmanship, escalation, and public threats over diplomacy. The president has made clear that he likes tariffs (“trade wars are good, and easy to win”) and that he wants more of them (“I am a Tariff Man”).
Even if Trump loses reelection in 2020, global trade will never be the same.
Although the thrust of U.S. policy over the past 70 years has been to pursue agreements to open up trade and reduce barriers, every president has for political purposes used protectionist measures to help certain industries. President Ronald Reagan, for example, capped imports to protect the automotive and steel industries during what was then the worst U.S. recession since the Great Depression. Trump, however, has enjoyed a period of strong economic growth, low unemployment, and a virtual absence of protectionist pressure from industry or labor. And yet his administration has imposed more tariffs than most of its predecessors.
Take steel. Although there is nothing unusual about steel (along with aluminum) receiving government protection—the industry maintains a permanent presence in Washington and has been an on-again, off-again beneficiary of trade restrictions since the Johnson administration—the scope of the protection provided and the manner in which the Trump administration gave it last year were unusual. In order to avoid administrative review by independent agencies such as the nonpartisan, quasi-judicial U.S. International Trade Commission, the White House dusted off Section 232 of the Trade Expansion Act of 1962. This Cold War statute gives the president the authority to impose restrictions on imports if the Commerce Department finds that they threaten to harm a domestic industry the government deems vital to national security.
The Trump administration’s national security case was weak. More than 70 percent of the steel consumed in the United States was produced domestically, the imported share was stable, and there was no threat of a surge. Most imports came from Canada, Germany, Japan, Mexico, and other allies, with only a small fraction coming from China and Russia, thanks to antidumping duties already in place on those countries. The number of jobs in the U.S. steel industry had been shrinking, but this was due more to advances in technology than falling production or imports. In the 1980s, for example, it took ten man-hours to produce a ton of steel; today, it takes just over one man-hour. Even the Defense Department was skeptical about the national security motivation.
Prior administrations refrained from invoking the national security rationale for fear that it could become an unchecked protectionist loophole and that other countries would abuse it. In a sign that those fears may come true, the Trump administration recently stood alongside Russia to argue that merely invoking national security is enough to defeat any WTO challenge to a trade barrier. This runs counter to 75 years of practice, as well as to what U.S. negotiators argued when they created the global trading system in the 1940s.
The Trump administration dismissed all those concerns. The president and leading officials desperately wanted to help the steel and aluminum industries. (It did not hurt that Wilbur Ross, the commerce secretary, and Robert Lighthizer, the U.S. trade representative, both used to work for the steel industry.) The administration also believed that its willingness to impose economic self-harm in the form of higher steel and aluminum prices for domestic manufacturers would send a strong signal to other countries about its commitment to economic nationalism.
Trump also went so far as to impose tariffs on steel and aluminum imports from Canada, something that even the domestic industry and labor unions opposed. Over the last 30 years, the U.S. steel and aluminum industries had transformed to become North American industries, with raw steel and aluminum flowing freely back and forth between Canadian and U.S. plants. The same union represents workers on both sides of the border. In addition to lacking an economic rationale, targeting Canada alienated a key ally and seemed to make no political sense, either.
The administration also miscalculated the foreign blowback against the tariffs. “I don’t believe there’s any country in the world that will retaliate for the simple reason that we are the biggest and most lucrative market in the world,” Navarro, the president’s hawkish trade adviser, told Fox News in 2018, apparently unaware that other countries have trade hawks, too. Canada, China, Mexico, the European Union, and others all hit back hard, largely by slapping tariffs on U.S. agricultural exports. In effect, the administration jeopardized the welfare of 3.2 million American farmers to help 140,000 U.S. steelworkers, a remarkable move given Trump’s electoral reliance on Midwestern farm states.
Foreign governments fear that the United States is willing to abandon established trade norms.
If the aim was to fire a shot across the bow of U.S. trading partners, the tariffs worked. Foreign governments were suddenly on alert that the United States was willing to abandon the established norms of trade policy. The White House has insisted that “economic security is national security.” Yet defining security so broadly opens the door to unrestricted protectionism. And so when, in mid-2018, the Trump administration made yet another national security case for tariffs, this time on automobiles—imports of which dwarf those of steel and aluminum combined by a factor of seven—the fear abroad reached a new level. Although the administration recently announced that it was delaying any new auto tariffs, the threat remains. The consequences of imposing such a large tax on a major household item, in the sure knowledge that there would be swift and heavy foreign retaliation, may be staying the administration’s hand.
The president’s enthusiasm for tariff threats has even spilled over to issues beyond trade. In May, Trump suddenly demanded that Mexico stop the flow of immigrants into the United States or risk facing new, across-the-board tariffs of 25 percent. As long as Trump is in office, no country—even one that has just negotiated a trade agreement with the United States—can be confident that it won’t be a target.
On the 2016 campaign trail, Trump complained that NAFTA was “the worst trade deal ever,” a theme he has continued in office. His advisers talked him out of simply withdrawing from the agreement, but Trump insisted on renegotiating it and proceeded to make the renegotiation process needlessly contentious. The administration made odd demands of Canada and Mexico, including that the deal should result in balanced trade and include a sunset clause that could terminate the agreement after five years, thus eliminating the benefits of reduced uncertainty.
The three countries finally reached a new agreement last September. Unimaginatively called the United States–Mexico–Canada Agreement(USMCA), it is hardly a major rewrite of NAFTA. It preserves NAFTA’s requirement of duty-free access, would slightly open up Canadian dairy markets to U.S. farmers, and incorporates a host of new provisions from the TPP.
The renegotiation was in some ways an unnecessary exercise. NAFTA was a sound agreement—no one in the administration could identify what made it such a terrible deal—and many of its shortcomings had been fixed in the TPP, from which Trump withdrew the United States in 2017. But the contrast between the hostile rhetoric Trump heaped on NAFTA and the soft reality of the USMCA illuminates the president’s approach to trade. Trump just doesn’t like certain outcomes, including trade deficits and the loss of certain industries. But instead of addressing their underlying causes, which have little to do with specific trade agreements, he opts for managed trade, substituting government intervention for market forces, or new rules—a requirement that a greater proportion of a vehicle be made in the United States for it to enter Mexico duty free, for example—that try to force his preferred outcome. The goal is not to free up trade further but to constrain trade according to Trump’s whims.
The USMCA is currently stalled in Congress, partly because the administration did not cultivate congressional support for the renegotiation in the first place. But if the USMCA ultimately dies, neither Canada nor Mexico will miss it. Both felt the need to sign the deal simply to get past the uncertainty created by Trump’s threats to withdraw from NAFTA, as well as to forestall the chance that he would impose auto tariffs.
Both Japan and the EU also begrudgingly signed up for trade talks with the administration, in large part to delay Trump’s auto tariffs for as long as possible. Of the two, Japan is more likely to agree to a deal—after all, it negotiated a trade agreement with the Obama administration as part of the TPP. The Europeans are less likely to do so, not only due to conflicts over agriculture but also because of Trump’s unpopularity across Europe. But the Europeans hope that by agreeing to talk, they can put off Trump’s auto tariffs and perhaps run out the clock on the administration.
YOU’RE GONNA MISS ME WHEN I’M GONE
Acts of protectionism are acts of self-harm. But the Trump administration is also doing broader, and more permanent damage to the rules-based trading system. That system emerged from the ashes of the trade wars of the 1930s, when protectionism and economic depression fueled the rise of fascism and foreign governments made deals that cut U.S. commercial interests out of the world’s leading markets. In 1947, the United States responded by leading the negotiations to create the WTO’s predecessor, the General Agreement on Tariffs and Trade, which limited arbitrary government interference in trade and provided rules to manage trade conflicts. Under this system, trade barriers have gradually fallen, and growing trade has contributed to global economic prosperity.
The United States once led by example. No longer. Trump has threatened to leave the WTO, something his previous actions suggest is more than idle talk. He says the agreement is rigged against the United States. The administration denounces the WTO when the organization finds U.S. practices in violation of trade rules but largely ignores the equally many cases that it wins. Although the WTO’s dispute-settlement system needs reform, it has worked well to defuse trade conflict since it was established over two decades ago.
Trump’s attacks on the WTO go beyond rhetoric. The administration has blocked appointments to the WTO’s Appellate Body, which issues judgments on trade disputes; by December, if nothing changes, there will be too few judges to adjudicate any new cases. When that happens, a dispute-settlement system that countries big and small, rich and poor have relied on to prevent trade skirmishes from turning into trade wars will disappear. This is more than a withdrawal of U.S. leadership. It is the destruction of a system that has worked to keep the trade peace.
That is particularly unwelcome because so much of global trade has nothing to do with the United States. The system resolves conflicts between Colombia and Panama, Taiwan and Indonesia, Australia and the EU. Most disputes are settled without retaliation or escalation. The WTO has created a body of law that ensures more predictability in international commerce. The system it manages works to the benefit of the United States while freeing the country from having to police global commerce single-handedly.
The dispute-settlement system is not perfect. But rather than make constructive proposals for how to improve it, something Canada and others are now doing, the United States has disengaged. The Trump administration may end up destroying the old system without having drafted a blueprint for its successor.
To read the full article from Foreign Affairs, please click here.
CHAD P. BOWN is Reginald Jones Senior Fellow at the Peterson Institute for International Economics.
DOUGLAS A. IRWIN is John French Professor of Economics at Dartmouth College and the author of Clashing Over Commerce: A History of U.S. Trade Policy.