Caleb Brown: This is the Cato Daily Podcast for Thursday, January 12, 2017. I am Caleb Brown. What could a President Trump do on the subject of American trade policy without consulting Congress? The unfortunate answer may be quite a lot. Dan Ikenson directs the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. He comments.
With his nominees for U.S. Trade Representative and head of the Commerce Department, the president in general can do a lot to stymie positive trade relationships, bringing a lot of cases at the World Trade Organization, for example, but what else can the president do and where are we unclear on what the president can do with respect to making trade less friendly?
Daniel J. Ikenson: I would say that the past several months has brought into focus the idea that the president does actually have some powers to thwart trade under the U.S. Constitution, Article 1 Section 8, the authority to regulate foreign commerce is vested in the legislature. The Executive Branch has the authority to engage in foreign treaties, including negotiating trade treaties. But over the years Congress demonstrated itself to be a bit erratic with respect to tariff policy. When we had Republican Congresses, tariffs tended to go up. When we had Democratic majority Congresses, tariffs tended to come down. And this is a battle that raged basically from the Civil War until about 1930, the famous — infamous — Smoot-Hawley Tariff Act.
Caleb Brown: And it’s quite a reversal, I mean it’s a long time period of course, but that’s quite a reversal for Republicans to have gone from the sort of protectionist trade people to Democrats, and it was — credit to FDR.
Daniel J. Ikenson: To FDR certainly. I think you know, Republicans came to recognize between 1930, when Smoot-Hawley took effect, and 1934, Republicans did an about-face and they recognized the damage done by the tariffs and the tit for tat trade wars that ensued. In 1934 we had the Reciprocal Tariff Act, in which Congress gave to the president some authority to negotiate tariff reductions on a reciprocal basis with foreign countries. The Congress gave a range, you know, defined its latitude to the executive and he went out and negotiated. By 1974 — that was 40 years after the Reciprocal Tariff Act — the nature of trade agreements started to change. And it wasn’t just tariffs that were important. It was trade policy behind the border. Things like the anti-dumping law and other statutes that affect trade. Congress was skeptical and reluctant to give too much power to the president, and so at the time they created what was then called fast track of trade authority in 1974. Today we call it trade promotion authority. And under those provisions, we have had several sets of fast track legislation over the years, Congress articulates its objectives for trade negotiations, gives the president parameters, the president can go out and negotiate the agreements and bring them back for an up or down vote. So in that sense the president has been given some authority. Also there have been statutes over the years. So the Tariff Act of 1930, the Smoot-Hawley Act, created the anti-dumping law, the countervailing duty law, something called the safeguards law, which enables the president to act unilaterally but within statutory limits. So in other words, for the president to impose anti-dumping duties, certain conditions need to be met. There needs to be injury, material injury to a domestic industry, there needs to be evidence of dumping for anti-subsidy duties to take place under the countervailing duty law, the domestic industry needs to be injured, material injured, and there needs to be evidence of foreign subsidization. For a safeguards action to take place there needs to be a surge in imports that cause serious injury to a domestic industry. So the president has latitude to — his agencies basically can bring these cases and impose these duties but it is you know, it’s confined. His actions are confined. And they are subject to judicial review. But there are also other statutes in which the president has some authority that have not really been used before. There is Trading with the Enemies Act, dating back to 1917, that enables the president to ban all imports, or exports, to seize assets, in times of war. We have other national security exemptions from the 1962 Trade Expansion Act and the 1974 Trade Act that define national security emergencies that would enable the president to do something. President Nixon imposed 10% duties for a period of 150 days on imports to address a balance of payments crisis with the Japanese. The Japanese, the yen, had appreciated fairly dramatically and the president was authorized under this provision of that law to intervene.
Caleb Brown: So many of these provisions haven’t been tested.
Daniel J. Ikenson: Correct. And so that’s what is kind of scary about this. There isn’t a whole lot of precedence. It is unclear who would sue the president if in fact he was overstepping his constitutional bounds. Would Congress take action? Would there be a private course of action? Which courts would hear this? What, you know, it is kind of unclear what could happen. So we are in uncharted territory to a certain extent. President Trump, some of the ideas he has articulated in his campaign rhetoric would seem to require him to act unilaterally to impose across the board 10%, or 25%, or 35% duties on imports from Mexico or China, would require deviation from the normal set of tools at his disposal.
Caleb Brown: But in terms of like his general rhetoric, it seems that every action would be taken unilaterally, so may not want to read too much into that.
Daniel J. Ikenson: Yeah. I would say, though, some actions, some of these actions like the anti-dumping cases, or countervailing duty, or safeguard actions are sanctioned under the World Trade Organization. Now, when we initiated the GATT in 1947, the General Agreement on Tariffs and Trade, and all of the subsequent multilateral rounds through which we achieved greater trade liberalization ultimately producing the World Trade Organization in 1995, a number of countries have agreed to tie their hands and to restrain themselves and to not act impulsively or unilaterally but there are certain things that governments are allowed to do to react to emergency situations, like surges in imports, like unfair trade. So I call that — I’m one of the biggest advocates for repealing the anti-dumping law, but I consider anti-dumping actions to be what I call you know, legalized protectionism. It is within the rules of the international trade game.
Caleb Brown: Alright, so there are actions that the United States can take that could free other countries to raise their tariffs back to some historic level. To what extent can the president do that unilaterally?
Daniel J. Ikenson: Yeah, I mean if the president, if any U.S. action is challenged at the WTO as violating our commitments, and many of these actions would be challenged — we’ve never had a national security-based tariff imposed — under the WTO governments are entitled to what is called a GATT Article XX National Security Exemption, but it is charting new waters. And if in fact we were to invoke that rationale for imposing duties, it is quite likely that other countries would do the same thing and we would see ourselves in this tit for tat race to the bottom, and that’s problematic. What I’m hopeful about is just as Republicans in 1934 recognize the errors of their ways with the 1930 Smoot-Hawley Act, I suspect Trump and company would — they don’t want the economy to tank if they were to start engaging in this unilateralism and the economy started to suffer as a result, they could change course and come back and embrace saner policies.
Caleb Brown: The political benefits of demonizing a company like Carrier, or Toyota, or Ford, or GM, or any number of other companies, there are political gains to be had there, and then — but tracing the price increases of individual products that we are now paying more for because of some trade restriction that has been unilaterally imposed, those are harder to trace.
Daniel J. Ikenson: Yeah. Lots of factors lead to the final determination of the price. Just to speak to Carrier, and Ford, and GM, and Toyota, you know Trump right now is sitting on his couch tweeting out you know, build a factory here or face a border tax. That is — that has been effective. You’ll notice over the past couple of months the business community, which was very skeptical of people like Peter Navarro and Bob Lighthizer when their names came up a few months ago, they said oh, we can’t have those players in Washington. Now they are endorsing these candidates, these appointees, because they recognize that avoiding political retribution is an important thing to take into consideration. So there are a lot of like investment location determinants, including the regulatory environment, the tax environment, you know, access to skilled workers, etc., but fear of political retribution is also important. We’re seeing, I mean, the growth of K Street demonstrates that there are political dividends that sometimes are more significant than the economic dividends of investing in the rustbelt or in the heartland in R&D and production facilities.
Caleb Brown: Now it should be noted that in the chase to sort of attract and keep multinational corporations and their production facilities in the United States, Donald Trump has also talked about regulatory reform, to try to make the U.S. relatively more attractive, but he has been meeting that, of course, with threats. And not necessarily, as far as we know, idle threats at this point.
Daniel J. Ikenson: Right. There is a positive, an affirmative way, to make the United States an attractive place for investment. The United States is the world’s number one destination for foreign direct investment, but we are losing out. Ten, fifteen years ago we had about 39%, 40% of global FDI in the United States. Today it is about 17%. Part of that is because the rest of the world is coming online and they are competing for that investment, but we have a lot of positive attributes. You know, generally speaking, the rule of law is abided and respected here, we have a skilled workforce, we have, despite all of the lamentations, we have pretty good infrastructure and a lot of reasons — a good regulatory environment by and large. It certainly can improve. The president doesn’t need to browbeat companies into staying here. He just needs to espouse the benefits and the virtues of investing in the United States.
Caleb Brown: Give us your best-case scenario, as we continue this podcast series on trade and the incoming Trump administration, for what you know, my personal thought was hey, you declare a few victories, you know, kiss your biceps and — that allow trade and liberalize trade to the extent that it is possible to do, that could be a best-case scenario.
Daniel J. Ikenson: Yeah. I think these guys are trying to change the terms of the discussion. They are reflecting a certain anger. There’s this view that the United States has propped up the rest of the world for quite a long time under this defense umbrella and under these trade arrangements, which has freed up resources to undergird the social welfare state in Western Europe, to free up resources for foreign companies to be subsidized by their governments to compete with the U.S. companies. There is an interest in seeing greater respect for the sacrifices that the United States has made. And so these guys are trying to drive a hard bargain and saying you know, we are not going to take this anymore, we are the United States, we are a benevolent giant, unlike the Romans, and the Ottomans, and the British Empire, you know, we have done a lot for the world altruistically. I don’t necessarily agree with all that but that is the premise I think behind their trying to renegotiate some of these deals and agreements. But I don’t think that they want to ruin the economy, and this could just be an attempt to obtain leverage for opening up trade agreements and renegotiating them. Even so, they are playing with fire.
Caleb Brown: Dan Ikenson directs trade policy studies at the Cato Institute. Subscribe to and rate this podcast at iTunes and Google Play. And follow us on Twitter, @CatoPodcast.