Tag: trade

Ambiguities in U.S. Trade Laws Imperil Our Economy and Constitutional Order

In yesterday’s Investor’s Business Daily, Club for Growth President David McIntosh and I had a short piece on the perilous implications of President-elect Trump’s threats to unilaterally withdraw the United States from our trade agreements or impose punitive and wide-ranging tariffs on imports. The economic effects of Trump’s promises have been explored at length (see, e.g., this new one on NAFTA and Texas), but most trade law experts are just now digesting the legal issues. What we’re finding is, to use the technical term, a big mess that could have unforeseen economic and constitutional implications in the Age of Trump. As we note:

For almost a century, American trade policy has been formed and implemented by a successful “gentlemen’s agreement” between Congress and the president. Congress delegated to the president some of its Article I, Section 8 powers to “regulate Commerce with foreign nations” so that the president may efficiently execute our domestic trade laws. The president negotiates and signs FTAs with foreign countries, while Congress retains the ultimate constitutional authority over international trade, for example by approving or rejecting agreements or by amending US trade laws.

As a result of this compromise, the United States has entered into 14 Free Trade Agreements with 20 different countries and imposed targeted unilateral trade relief measures — all without significant conflict between Congress and the President.

The question now is whether Mr. Trump, as president, could and should single-handedly implement his trade agenda on Jan. 20, 2017 without any congressional action.

The IBD op-ed scratches the surface of these legal issues, but below are more details on just a few of the many ambiguities lurking in U.S. trade law—ambiguities that, if not properly clarified, could be exploited by a protectionist U.S. president against the original intent of the Congress that delegated their constitutional authority over trade policy under the (incorrect!) assumption that the president would always be the U.S. government’s biggest proponent of free trade.

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Protectionist Steel Interests Given Keys to Trump’s Trade Policy Kingdom

“Well we’re living here in Allentown
And they’re closing all the factories down
Out in Bethlehem they’re killing time
Filling out forms
Standing in line
Well our fathers fought the Second World War
Spent their weekends on the Jersey Shore
Met our mothers in the USO
Asked them to dance
Danced with them slow
And we’re living here in Allentown.”

– Billy Joel, “Allentown,” 1982

Nearly 35 years after the release of Billy Joel’s wistful lament about the decline of iconic Bethlehem Steel and the selfless virtues of America’s “Greatest Generation” along with it – the U.S. steel industry may be getting the last laugh. Yesterday, former Nucor Steel CEO Dan DiMicco and longtime Washington trade attorney Robert Lighthizer, who has devoted much of his professional career to building walls between foreign steel and the U.S. companies that want to buy it, were appointed heads of President-elect Trump’s “Landing Team” at the Office of the United States Trade Representative.

To those who have been holding out hope that Trump’s anti-trade campaign bluster would moderate before it could be converted to policy, the selection of DiMicco and Lighthizer is pretty devastating news. Neither has met a tariff he didn’t like or a trade agreement he did. To the non-political staff at USTR, the DiMicco/Lighthizer duo must feel like a real poke in the eye. After all, the mission of the agency is “to work toward opening markets throughout the world to create new opportunities and higher living standards.” The staff is generally committed to trade liberalism and good will among nations and their sensibilities are informed by foreign service backgrounds.  DiMicco and Lighthizer bring an enforcement and prosecution ethos to the USTR, which will send a lot of the existing staff to the exits, while ensuring that the agency’s budget is devoted primarily to bringing complaints against our trade partners, rather than negotiating new and better deals.

Of course, Trump mistakenly cites the U.S. trade deficit as evidence that the United States is losing at trade.  We are losing, he bellows, because our trade agreements are disastrous. And, they are disastrous, he reasons, because U.S. negotiators always get outsmarted by their crafty foreign counterparts. What better way not to get outsmarted than to appoint people who would take a wrecking ball to existing agreements instead of crafting new ones?

For reasons unsupported by facts, DiMicco abhors the North American Free Trade Agreement and wants it shredded.  He also wants the United States to withdraw from the Trans-Pacific Partnership – which, yesterday, became one of Trump’s Day One priorities. Trump has been outspoken about his intentions to declare China a currency manipulator and to respond with punitive unilateral measures. To the extent that Trump’s actions are constrained by U.S. treaty commitments under the World Trade Organization, Lighthizer has a long history of challenging the veracity of the WTO dispute settlement system, which he claims embodies an anti-American bias. He has long advocated for closer scrutiny and, if warranted, U.S. withdrawal from the WTO.

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Reality Will Curb Trump’s Protectionist Fantasies

I said there was no way Trump would last through the early primaries.  I belittled the prospect of Trump even attending the convention, much less accepting the Republican nomination.  And I was cavalier in my certainty that Trump would be making a concession speech early Tuesday night.  In other words, by Washington’s standards, I have established credibility on the subject. 

So you should feel reassured that I am less bearish about the direction of President Trump’s trade policy than I probably should be given candidate Trump’s bellicose campaign rhetoric.

The trade policies Trump outlined in broad strokes on the campaign trail would – to put it mildly – devastate the economy.  For example, Trump has said he would:

  • impose duties on 35 percent on imports from Mexico and 45 percent on imports from China;
  • impose special taxes on U.S. companies that incorporate foreign components or labor into their production or assembly operations;
  • tear up the North American Free Trade Agreement – or at least renegotiate what he calls “the worst trade deal ever negotiated,” and abandon the Trans-Pacific Partnership, which he calls a “rape of our country”; 
  • declare China a currency manipulator and impose countervailing duties to mitigate the export price advantages that practice allegedly bestows;
  • use tax policy, protectionism, and the threat of more protectionism to compel China, Mexico, and all of the other countries with whom the United States runs bilateral trade deficits to buy more from U.S. producers and sell less to U.S. consumers in order to achieve a state of balanced trade;
  • tax manufacturing companies that lay off workers.

The list of angry, knee-jerk, foolish ideas goes on and on. If you take candidate Trump at his word, U.S. trade policy is going to be an unmitigated disaster.

100 Days of Trump Trade Policy

Donald Trump is well known for his vociferous complaints about foreign trade.  Trump has also gained notoriety for offering very vague policy proposals, and trade is no exception.  This has left observers knowing that Trump wants to do something big on trade but without much sense of what, specifically, that will be.  Now that Trump is president-elect of the United States, that uncertainty is bound to vanish as Trump’s plans and intentions necessarily become more concrete.

For the moment, however, we are left to speculate based on Trump’s vague and bellicose announcements.  The most reliable indicator of Trump’s plans is probably Trump’s “100-day action plan to Make America Great Again” he produced in the closing weeks of his campaign.  That plan has reportedly been fleshed out a bit by his transition team.  The plan includes numerous executive actions and a list of legislative proposals. 

In one section, Trump lists “Seven actions to protect American workers,” four of which directly involve trade.  Let’s go through them one by one.

Renegotiate of Withdraw from NAFTA

It’s no secret Donald Trump really doesn’t like NAFTA.  He has said that NAFTA “destroyed our country.”  It’s safe to assume Trump means to act on this.  According to Politico, the longer version of Trump’s 100-day plan specifies that Trump will start renegotiating NAFTA on day one and withdraw from NAFTA “by day 200” if he hasn’t gotten what he wants yet.

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Shifting Gears to Contemplate Trump’s Trade Policies

Please excuse the haste, as I’ve spent the last week ignoring the “impossible,” focused instead on writing about the likely direction—including the copious double-talk and rhetorical pirouettes—of President Clinton’s trade policy. If you’re a sucker for transparency, congratulations! You’ll get that in spades from President Trump’s trade policy. It will be transparently awful—for a while, at least.

Having a Republican president and GOP control of both chambers of Congress was once the ideal formulation for successfully negotiating and ratifying trade agreements. That all changed when Donald Trump, an avowed critic of U.S. trade agreements, rose to the top of the party’s ticket. As of last night, there is no longer any realistic chance that the Trans-Pacific Partnership agreement will be ratified in the Lame Duck session of Congress; there is no chance that the TPP will be implemented over the next four years without the deal first being reopened and revised to reflect terms desired by President Trump; there is much greater scope for trade frictions, especially with China, to erupt into deleterious rounds of tit for tat protectionism; and there is the distinct risk that policies intended to punish U.S. companies for outsourcing will slow inward foreign direct investment (insourcing) and chase U.S. companies off-shore, altogether, depleting capital, driving up interest rates, and hamstringing prospects for growth.

But there is a silver lining, which is that the worldviews of presidents tend to be more outward, engaging, and accommodating than the worldviews of presidential candidates. After repeatedly pledging to force Canada and Mexico back to the table to renegotiate the North American Free Trade Agreement during his bid for the White House, President Obama phoned the Canadian prime minister and Mexican president within one week of his 2009 inauguration to reassure them that he had had a change of heart. 

President-elect Trump’s hardline, isolationist, nationalistic, protectionist proposals may be more difficult to walk back, especially if he fails to excommunicate some of his current advisors and branch out to obtain the counsel of economists and policy specialists who have a better understanding of international economics and the rules of global trade. If he is able to expand and diversify the pool of people advising him, there is a reasonable chance that President Trump’s actions will be less bellicose than his rhetoric has been. After all, as someone who wants to make America “great again,” President-elect Trump will want the policies implemented by his administration to help grow the economy. Trade agreements have succeeded in that regard and, in addition to the TPP, there are plenty of countries and regions willing to partner, including the European Union and the United Kingdom (separately), and plenty of alternative negotiating platforms for accomplishing trade and investment liberalization. 

In the short term, if President-elect Trump wants to encourage U.S. manufacturing to produce and hire more, he should ask Congress to eliminate tariffs on all imported intermediate goods – components and raw materials that go into U.S. production. That would immediately reduce U.S. manufacturing costs, which would give the sector a leg up in its competition for U.S. and foreign investment.

Trump might quickly grasp that removing tariffs—rather than imposing them—is the kind of protectionism we can afford.

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The Yuan Makes New Lows, Donald and Hillary Should Relax

At a monetary conference in Vienna back in 2014, the distinguished Frenchman, my friend, and occasional collaborator Jacques de Larosière proclaimed that the current world monetary order should be termed an “anti-system.” He has a point – an important point. Among other things, such an anti-system invites an enormous amount of instability, as well as uninformed loose talk that influences public opinion and policy.

The Chinese yuan has been at the center of much of the recent misinformation and disinformation about currencies. For example, during the first presidential debate between Donald Trump and Hillary Clinton, Trump fingered China as the world’s best practitioner of currency devaluations – devaluations that Trump claims power China’s exports. Clinton didn’t object to Trump’s thesis. Indeed, she boarded the same bandwagon. And with the Chinese yuan making new lows, the ever-misinformed mercantilists who populate Washington, D.C. are clinging to the bandwagon, too.

What are the facts? Well, they contradict the Beltway’s conventional wisdom. Chinese exports have steadily risen since 1995, but they have not been powered by a depreciating yuan. In fact, the yuan has slightly appreciated in both nominal and real terms. The accompanying charts tell that story. Note that the real and nominal charts tell the same story because the inflation rates in the U.S. and China have been similar over the past two decades.

Bucking the Protectionist Trend

In September, the UK government gave the green light for the construction of the Hinkley Point power plant through a French-Chinese consortium. The project—which has received wide international attention after being very nearly relegated to the protectionist dustbin—has been agreed to after much hemming and hawing. It has been mired in controversy mainly over security concerns related to foreign ownership, viewed by some as smacking of protectionism.

It is no secret that there has been a worrying trend toward protectionism in the global markets. The appetite for international trade agreements and foreign investment has been consistently listless. In the United States, and globally, some politicians have been banking on this by flaunting protectionist rhetoric in an effort to garner support. But while protectionism may win votes in the short-term, domestic economic growth will lose out in the long-term. Ultimately, politicizing the global economic rut will only make matters worse.

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