Sunday, August 18, 2019

Trump's Bizarre Trade Policy: Will It Destroy Global Trade?

Foreign Affairs magazine has an important essay out by Chad P. Bown and Douglas A. Irwin, "Trump’s Assault on the Global Trading System".

Below are some key snippets, though I hasten to add that all trade "agreements" are crony trade agreements. You don't need agreements for free trade, you just open the borders to free trade. That said, crony trade is better than no trade and Trump is making moves to shrink the trade that is already on-going. His anti-trade agreement posture does not come from a perspective of wanting more trade but even less trade. His position thus also upsets the perspective of the managed (crony) trade globalists, as reflected in the some of the points made in the important FA essay:

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...

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”)...

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...

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...

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...

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...

Nowhere has the Trump administration left a greater mark on U.S. trade policy than with China. In early 2018, it released a lengthy report documenting a litany of concerns with Chinese trade practices...

Many observers assumed that the Trump administration simply wanted to get a better deal from China. But what constituted a better deal was always vague. If the primary concern was the bilateral trade deficit, China could be pressured to go on a massive spending spree, buying up U.S. soybeans and energy products. If it was intellectual property theft, China might be persuaded to change a few laws and commit to international norms.

It has become clear, however, that the administration does not want a permanent deal, or at least any deal with an explicit path forward that the Chinese government might accept. Even if Trump and Chinese President Xi Jinping come to some superficial agreement, it is unlikely to be more than a temporary truce in what is now a permanent trade war. The administration’s goal seems to be nothing less than the immediate and complete transformation of the Chinese economy or bust—with bust the most likely outcome...

There were hints from the beginning that the administration was never searching for a deal that would truly end the trade war. In 2017, Navarro outlined the administration’s view that trade with China threatened U.S. national security. He also let slip that he wanted to rip up the supply chains that bound the United States and China together. At the time, some dismissed him as a rogue eccentric. Now, the United States is on the cusp of slapping tariffs on all imports from China—the first step toward Navarro’s goal...

 This is not protectionism in the sense of trying to help a domestic industry in its struggle against imports. The goal is much broader and more significant: the economic decoupling of the United States and China. That would mark a historic fragmentation of the world economy. It would represent, in the words of former Treasury Secretary Henry Paulson, the falling of an “economic iron curtain” between the world’s two largest economies. Such a separation would have foreign policy and national security implications well beyond the economic consequences.

In some respects, the rupture is already happening. Students and scientists from China are no longer as welcome in the United States as they once were. China’s already meager investments in the U.S. economy are now under heightened scrutiny from national security agencies. The administration is tightening up export controls, curtailing how and with whom Americans can share their inventions, especially in cutting-edge areas such as artificial intelligence, advanced computing, and additive manufacturing. That will not stop China from gaining better technology, however; German, Japanese, and South Korean firms will simply fill the void. Going it alone will put the U.S. economy at even more of a disadvantage...

Trump denies that his strategy has costs. China, he says, is paying the tariffs. “I am very happy with over $100 Billion a year in Tariffs filling U.S. coffers,” he tweeted in May. This is nonsense: research shows that firms pass on the cost of the tariffs to American consumers. And U.S. exporters—mainly farmers facing the loss of markets due to China’s retaliation—are paying the price, as well. So, too, are American taxpayers, now on the hook for tens of billions of dollars needed to bail out the reeling agricultural sector.

Whether Trump appreciates these costs isn’t clear, but it’s evident that economic considerations aren’t driving policy. The president’s willingness to look past stock market slumps and continue to push China shows that he is willing to pay an economic price—whatever he says in public. For someone whose reelection depends on maintaining a strong economy, that is a bold gamble...

If Trump becomes a one-term president, the next administration will have an opportunity to reverse many of its predecessor’s trade policies—eliminating the steel and aluminum tariffs, repairing relationships with the United States’ NAFTA partners, joining the CPTPP, and improving the WTO. That would not only help restore U.S. credibility on the world stage but also enable other countries to lift their retaliatory duties on U.S. exports, helping suffering farmers. If Trump wins reelection and continues down the path of economic nationalism, however, the prospect of continued, and perhaps intensified, trade conflict is likely to destroy the world trading system. That would do incalculable damage to the world economy...

[T]he period of global capitalism may be coming to an end. What many thought was the new normal may turn out to have been a brief aberration.


  1. Trump doesn’t have to appreciate the cost of the tariffs, as long as his followers support them and believe his lies about them, he is good to go. The farmers I know do not blame The Great Orange for their silos being full of rotting foods, they blame the Chinese, and they feel like they are somehow following in the footsteps of their parents and grandparents who “sacrificed” domestically during WW2 for the good of future generations.
    They believe he is doing it for the good of America and thats all he needs them to think.

  2. So what have we gained with China other than supporting communist liars and thieves? The intellectual property issue is a big deal. I thought libertarians cared about contracts and 'rule of law'?

    1. No one wants to talk about it Lab. I wonder how well it would be received if we played the game the way China does?

    2. “Rule of Law” is a pretty ambiguous term to say the least.
      I suppose everyone I know has or uses something made in China. China has been importing tons of food goods from US farmers, Alaskan commercial fisherman have been doing well selling their sea catch to China, China is a monster in energy consumption, the US would be a lot better off negotiating natural gas sales to China than making the people who live here pay for Trumps tariffs. There is literally billions of $$ waiting to be had in that industry, and that would mean huge numbers of jobs in America to make it happen. Jobs that pay a lot more than making or selling shoes. But people just want to whine about China “taking” jobs, which is stupid,(comparative advantage) instead of looking at ways Americans could grow amazing wealth by trading with them.
      But, let’s bitch about them making shoes that used to be made in ‘merica, instead of getting rid of idiotic wealth destroying regulations(socialism?) that hold back the immense resources that America has an over abundance of that we could be shipping over to them. And they are ready to buy.
      Jobs that pay 5 times that of making shoes or shorts or whatever kind of trinkets Americans buy from them.
      I don’t worry so much about the commie thieves over there, there is a whole Congress of them right in Washington.

  3. He will hopefully destroy globalist trade

    1. Nah, he wouldn’t want to hurt friends and family.

  4. "crony trade is better than no trade"

    That depends on the details and the effect it has on an individual. Could be one's business or it could be something only tangentially related.

    For instance in the 1990s the Clinton administration in an effort to promote crony trade decided pallets from China didn't need to be treated for insects. So the US ended up with these invasive insects that attack trees. The ash trees in the neighborhood I grew up in were all killed. Including the one I transplanted when I was a kid. Some more wealthy towns still have ash trees but it must be costing tax dollars to prevent the bug from getting a foothold. Is the loss of Ash trees or the cost of saving them better than not having crony trade? Depends on your POV.

    Crony trade is complex with many details and facets and each one of those facets could have an adverse effect for someone that outweighs the benefits. Now many be one could say the country is better off in the whole without a lot of ash trees and all the other bad effects for cheaper stuff made in China. Maybe. But because of the complexity that goes beyond simple economic value its a subjective judgment.

    1. I can see your point there JJM, but I think for the most part “crony trade is better than no trade” is correct, because this will allow some actual free trade in the long term to squeeze in, where “no trade” is just that.
      I hate crony trade deals, but, a lot of people benefit from the jobs that come from it a lot of time where they would have no job otherwise.

  5. Consider the source of this dumb article... The source wants Trump eliminated. I mean this magazine is published by the CFR... Are you seriously posting it as if it has any merit?
    'Will it destroy global trade?'

    Here's a tip, if the headline has a '?', its complete bullshit.
    I think the litmus test I've been using still applies. If the powers that be hate someone, I should like them. At this time, they hate Trump, therefore...