Trump’s Trade Policy So Far: Too Many Trade Wars, Very Little Trade Liberalization

This past week was an eventful one for trade policy, and not in a good way. In the trade world these days, no news is good news, and any tweets are probably bad news. President Trump's trade policy has been stridently protectionist, abusive of the constitutional separation of powers, destructive to U.S. alliances, and fundamentally flawed as a strategy to achieve its stated goals.

Last week, President Trump was agitated by China's retaliatory tariffs (which were in response to tariffs previously imposed by the Trump administration), and in reaction to the Chinese retaliation, Trump announced on Twitter some retaliation for the retaliation, this time bumping up the various existing and promised tariffs by 5 percentage points. In doing so, he escalated a trade war that has been quickly spiraling out of control. By the end of 2019, if all tariff threats are implemented as planned, the vast majority of Chinese imports to the United States and U.S. exports to China will be subject to tariffs. And not just the low tariffs which had become the norm in recent years: the Chinese imports in question will be subject to tariffs of either 15% or 30%, which is a significant tax. American importers, retailers, producers, and consumers will feel the effects.

Beyond tariffs, Trump made the following over-the-top, anti-free market demand in relation to China: "Our great American companies are hereby ordered to immediately start looking for an alternative to China, … ." That sounds borderline authoritarian as well as extremely harmful to the U.S. companies operating in and selling products in China (ceding the Chinese market to European and Japanese competitors makes no sense). How could Trump possibly have the power to do such a thing? There is, in fact, a statute that gives the president emergency powers that might be broad enough for this executive power grab, but of course it is subject to judicial and legislative oversight. One would hope that those co-equal partners in the U.S. government would play their role and prevent a president from executing such an order.

Trump's defenders will say that a trade war has been going on with China for years and that Trump is the one who finally had the courage to fight back. It is true that the best defense of Trump's approach to trade is that China really does engage in bad trade practices (such as high tariffs and subsidies, and a failure to protect intellectual property). Unfortunately, the Trump administration's aggressive trade policy is not focused only on China. The administration has been abusing the power Congress delegated to the president over the years and is targeting just about every major U.S. trading partner (and when it does take on China it does not do so very effectively)

With regard to the role of Congress, Article I, Section 8 of the Constitution gives Congress power over customs duties and regulating commerce with foreign nations. Over the years, however, Congress has delegated a fair amount of this power to the president. Most presidents have used the power to focus on signing trade agreements that promoted trade with other countries, through mutual tariff reductions and other forms of liberalization. By contrast, President Trump has done very little of this. His negotiations with other countries have mostly focused on reopening old trade deals in order to make trade less free; and he has invoked a statute, rarely used in recent years, that gives him the power to impose tariffs on the basis of "national security" considerations, even in industries where such concerns have little basis. In this way, with regard to domestic trade practices, Trump has pushed the United States in a far more protectionist direction than anything seen since the 1930 Smoot-Hawley tariffs. 

The results have been clear and unsurprising: Higher costs for consumers. A number of studies have come out showing that most of the costs of the tariffs are being borne by U.S. consumers (either ordinary purchasers or businesses who use imported goods as inputs in their own manufacturing). 

The domestic trade policy disruption also has an impact on international affairs, as our trading partners are being hurt too. The Trump administration has imposed tariffs and quotas on steel and aluminum imports from most trading partners (in response to which, many of these partners have retaliated with tariffs of their own); and it has threatened tariffs on imports of automobile imports, which would be a massive tax imposed on U.S. consumers. These actions, along with Trump's attacks on the World Trade Organization, have made our allies less likely to work with us in the effort to push China to liberalize.

The Trump administration has offered up the explanation that the U.S. tariffs are necessary in order to negotiate trade liberalizing deals with these countries. But that logic is undermined by all the deals negotiated by past administrations without such tariff threats, as well as the continued failure of the administration to achieve new liberalization. Any tiny bits of liberalization on the part of foreign governments (e.g., through the renegotiated NAFTA, or a talked about U.S-Japan trade deal), are dwarfed by what was negotiated by the Obama administration through the Trans Pacific Partnership, from which Trump withdrew rather than look for a path for it to be passed by Congress.

Trump's misguided approach to trade policy may be based on a number of factors, and it is difficult to get into his head fully. It is worth noting, however, that he has called himself a "tariff man." Perhaps that is all the explanation we need. An additional factor is almost certainly his misunderstanding of the concept of trade deficits. When Trump sees that the United States has a trade deficit with a country, he automatically thinks that the United States is "losing." But that is not how trade works. The trade balance is not a scorecard, and having a trade deficit with a country does not mean you are losing to them.

There was a point where Trump and his trade advisers suggested he wanted a world with "zero tariffs, zero barriers, zero subsidies." That statement seemed like a fantasy at the time, and the ensuing months have proved it to be clearly false. Tariffs continue to climb, and massive farm subsidies have been authorized to bail out the farmers hurt by Trump's trade war.  We are in the midst of what feels like a "forever trade war." Cooler heads are sure to prevail some day, but how much damage will be done in the meantime?