Could Trump's Protectionism Spark a Trade War?
While President Trump’s new tone and actions may relieve people’s worst fears of protectionism, he still presents a threat on trade.
Trump in recent weeks has offered reason for many to sigh with relief, at least where foreign trade is concerned. The man came into office in January preaching a strictly protectionist gospel. Though other aspects of his economic agenda had merit, the prospect of a trade war threatened to more than undo any economic good that might emerge from his other policies. Since April, however, the White House seems to have backed away from its most strident positions on trade. Trump even seems open to advice on the subject, a disposition of which many believed he was constitutionally incapable. Though ample reason to fear Trump’s impact on trade remains, this more recent news should allow people to set aside their worst fears.
This administration did once seem determined to start a trade war. Trump had promised during his campaign to accuse China of currency manipulation. Though there is little doubt that China has manipulated its yuan, or at least once did, a formal accusation from the White House would have set in motion retaliatory machinery against China that just as surely would have evoked a retaliatory response from Beijing, in other words, a trade war. Trump had also threatened to raise tariffs on imports generally and especially on those from China, as well as from American firms operating in Mexico. He had described all trade treaties of the past twenty to thirty years as “bad deals” and threatened to pull this country out of all of them, including the well-established North American Free Trade Agreement. As he took office this past January, little from the campaign had changed.
By March, White House belligerence seemed to intensify. Trump went beyond rhetoric. He abruptly pulled this country out of the Trans-Pacific Partnership trade deal that the Obama administration had spent years negotiating. He also signed two executive orders pertaining to trade. The first executive order authorized what the White House described as a “large-scale review” to identify the causes of this country’s trade deficits. The second executive order authorized stricter enforcement of anti-dumping laws that forbid foreign producers from “undercutting” U.S. domestic producers but selling goods in America at lower prices than they do in their home country. Trump complained that the previous administration had failed to collect on penalties due the United States from dumping cases that it had won. He described what then was his upcoming meeting with Chinese president Xi Jinping as likely to be “very difficult.” To those who feared a trade war, this all sounded ominous.
But even as Trump’s rhetoric continued at high volume, his administration began to utter soothing sounds. Secretary of Commerce Wilbur Ross described the first executive order as evidence that the administration has no intention to “hip shoot” or do anything “abrupt” on trade, which it has frequently been accused of doing. Subsequently, Ross speculated that the Trump White House sought to build on aspects of the TPP and even suggested an openness to aspects of the Trans-Atlantic Trade and Investment deal with Europe that many thought Trump had effectively killed when he took the country out of the Pacific pact. Ross reassured the media, the public, and the nation’s trading partners that the administration’s “first guiding principle is to do no harm.” Neither in all this time did the administration label China a “currency manipulator.” Nor did it mention the threatened tariffs. Trump, contrary to his own forecast, had an amicable meeting with President Xi. It ended not with a trade war, as many had feared, but with trade concessions on both sides. The United States agreed to remove barriers to Chinese poultry meat, and China agreed to do the same for American beef, while arrangements were made for this country to export natural gas to China.
Tone on NAFTA improved as well. From blunt declarations that the nation needed to withdraw from this “worst ever” treaty, the White House by April began to talk simply of a renegotiation to update the pact, almost an echo of Obama administration goals. White House releases went so far as to borrow language on trade used by Obama last year to sell the TPP. In that same spirit, Wilbur Ross, presumably speaking for his boss, characterized Canada as “blameless” for its trade surplus with the United States, something he attributed to market forces and not “misdeeds.” Meanwhile, reports that the new Trump stance has emerged in response to advice from cabinet members, his economics team, business and members of congress hints that, contrary to common perceptions, the president may actually listen occasionally.
As a further sign that the administration has little appetite for grossly protectionist measures, the White House recently took the time to explain Trump’s approach to trade deals. As he signed the memorandum pulling the United States out of the TPP, he made clear that he had no intention of limiting trade. Rather than that, his objection centered on the deal’s multilateral character. He preferred, he said, the clarity of bilateral arrangements and their ability to enforce terms expeditiously. Because a negotiation with the nations of the EU would have a bilateral character, these statements revived for a time hope that perhaps the Transatlantic Trade and Investment Partnership had avoided death.
While this new tone and these new actions may relieve people’s worst fears of protectionism, President Trump still presents a threat on trade. His immediate resort to tariffs on Canadian softwood in retaliation against Canadian policy on dairy imports stands as one. Canada’s dairy import policy has prevailed for years. It received an exception in the original NAFTA negotiations. Trump might have caused less consternation had he resisted retaliation and simply pledged to renegotiate this long-standing exemption. His threat to place a tariff on imported steel tracks with this troubling behavior. He has claimed dumping to justify his posture, but that is hardly plausible when U.S. domestic steel prices are already well above their global equivalent.
The recent sugar deal with Mexico, though less belligerent, also stands against open trade. Trump refused to allow free access to Mexican sugar, keeping protections for American producers. But at least his negotiators avoided beating up on the Mexicans, as some had feared they would. Instead, they compensated Mexico with a carve-out of for its own producers in the U.S. market. Now the American consumer can pay high prices to both sources of its sugar.
If the postures on Canadian softwood, steel and sugar are discouraging, Trump’s behavior in this differs not at all from that of his predecessors. Bush, on a similarly bogus pretext, put tariffs on imported steel. Obama did the same with Chinese tires and automotive parts. Sugar’s protections go back decades.
Other supposed ill effects of Trump policy seem more farfetched. Some, for instance, have criticized his preference for bilateral trade agreements. They claim that it undermines the “rules-based system” under which international trade has prospered since World War II. No doubt it would undermine such a system had it not perished in the 1980s, when the world abandoned efforts to reduce trade barriers globally and instead turned to multilateral agreements, each with its own rules and as much exclusivity to some as inclusiveness to the signatories.
Some fret that his belligerence, along with his rejection of the Paris Climate Accord, undermines this country’s long-standing leadership position in global exchange. There may be something in this, but it would be easy to exaggerate. For one, the Paris Accord is not a trade agreement. For another, it is purely aspirational and binds its signatories to nothing. Besides, there is hardly a plausible replacement for the United States to lead in this matter. The European Union has severe financial problems and, in any case, is far from an open economy. China has put itself forward as a replacement for leadership in this regard. That is even less plausible. Its economy can hardly be described as open, and the country has closed financial markets as well.
Given Trump’s mercurial nature, a firm conclusion remains impossible. Still, the record on trade so far and the new tone certainly threaten less then did Trump’s campaign rhetoric did or the way matters looked as he took office. If prospects on trade still offer little basis for optimism, then they, for the time being, offer a lot less food for pessimism than they once did.
Milton Ezrati is a contributing editor at the National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and recently joined Vested as its chief economist. His latest book, Thirty Tomorrows, describing how the world can cope with the challenges of globalization and aging demographics, was recently released by Thomas Dunne Books of Saint Martin’s Press.
Image: A cargo ship sails across the ocean.