https://www.aei.org/publication/what-would-trumps-trade-policy-look-like-in-action/What would Trump’s trade policy look like in action?James Pethokoukis
The WSJ’s Holman Jenkins speculates:
Whereas, contrary to what you may have read elsewhere, President Trump would have considerable power to provoke trade wars to create an instant opportunity for his negotiating acumen. As the University of Houston’s Brandon Rottinghaus and Wesleyan’s Elvin Lim point out in a highly relevant 2009 paper, the Constitution may reserve for Congress the power to regulate international trade, but presidents increasingly have claimed “delegated unilateral powers” to issue proclamations under the 1974 Trade Act.
That law is aimed at expanding trade and lowering barriers, but presidents have used it to justify trade-restricting actions by invoking unrelated laws instructing the executive to pursue some definition of the national interest. Though such proclamations can be overturned by Congress, they never are. And President Trump would find no shortage of recent statutes—having to do with terrorism, pollution, cybersecurity, consumer safety, labor rights, etc.—that he could plausibly cite as an excuse for unilateral action against trade partners.
What’s more, he would invoke an impeccable precedent, none other than Ronald Reagan,who, within weeks of taking office in 1981, imposed sweeping “voluntary” restraints on Japanese cars that amounted to price fixing for Detroit’s benefit. Reagan further “negotiated” unilateral restraints on memory chips, forklifts, motorcycles, color TVs, machine tools, textiles, steel, Canadian lumber and even mushrooms—any one of which, if done today, would likely hit our more interdependent and currently fragile global economy like a bombshell.
Reagan never campaigned as a protectionist. He did not argue that America’s problems were caused by other countries. Privately, his team excused his behavior as necessary to defuse protectionist rage in Congress while waiting for tax cuts and deregulation to waken America’s animal spirits during a disastrous recession. And Reagan made sure his “voluntary” restraints were palatable to the Japanese, who, in return for going along, were rewarded with a share of the price-fixing profits at the expense of American consumers.
Mr. Trump would be launching his trade war in a very different world, and as a solution to America’s ills, so we can start “winning again.” Since Reagan’s day, the U.S. economy has grown 2.5-fold, but trade has grown eightfold. International capital flows, once a fraction of global GDP, now are a multiple of global GDP. Plus, today’s economies are bogged down with debt. Markets would likely respond to Trump economic war in chaotic ways Reagan didn’t have to worry about (until he did, with the 1987 crash).
And then what, exactly, other than a possible tumultuous financial market reaction? Indeed, markets may end the Trump trade war just as they demolished congressional resistance to the TARP bailout in the autumn of 2009.
But let’s assume Trump persists. What problem does his tariff solution address? The St. Louis Fed recently noted, “US consumers have been enjoying huge quantities of low-cost goods by borrowing cheaply from China at negative real interest rates.” Why would we want to stop something that benefits millions of Americans? As AEI’s Derek Scissors recently argued, our big problem with China is “them stealing our intellectual property and protecting their state-owned enterprises from our competition. These problems can’t be solved with tariffs.”
Still, Trump might well try to impose his broad, sweeping tariff on Chinese goods. Maybe even get Congress to go along with it — probably would have to. Cato’s Scott Lincicome outlines one possible follow-on scenario:
Chinese “currency manipulation” is not a serious problem for the United States (probably never was), and that even the most aggressive U.S. currency hawks now acknowledge that China is not hurting the United States by keeping the yuan artificially low. Indeed, China’s “cunning” economic planners are currently struggling to keep their currency from falling, not—as Trump seems to think—from rising. So if Beijing relented to Trump’s fantastical threats and let the market dictate its currency, the result would be a weaker yuan, not a stronger one, as Trump confidently claimed last Thursday night. …
Even assuming Trump wasn’t just making an empty threat and that he somehow convinced Congress to impose the Trump tariff, the result would be a lot of pain for little or no economic gain. This WTO-sanctioned retaliation would effectively close the United States’ third-largest export destination. First, as noted above, the Trump Tariff is blatantly WTO-inconsistent, so China would go straight to the WTO and easily win the right to impose retaliatory tariffs on U.S. exports in the amount of the damage caused by the tariff.
Assuming the retaliation was something like 45 percent (the proposed tariff level) of about $500 billion (total Chinese imports into the United States in 2015), that would mean about $225 billion in authorized retaliation against U.S. exports and intellectual property. Considering that U.S. exports to China totaled only about $115 billion in 2015, this WTO-sanctioned retaliation would effectively close the United States’ third-largest export destination—a devastating result for American exporters. Second, the economic pain wouldn’t stop with U.S. exporters because the Trump tariff, just like any other consumption tax, would inevitably increase U.S. prices of everything American consumers currently buy from China. Econ 101 (and U.S. law) say that U.S. importers, not Chinese exporters (and certainly not the Chinese government), pay U.S. tariffs and pass those new costs on to American consumers.
Individuals wouldn’t be the only ones screwed by the Trump tariff. American businesses (and their many workers) would also be hit. Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods (i.e., inputs used by American manufacturers), many of these firms would pay more for the things they need to remain globally competitive. These higher costs, of course, also mean fewer employees, if not outright bankruptcy.
Third, it’s highly unlikely the Trump tariff would lead to a significant increase in U.S. manufacturing. Sure, a few directly competitive U.S. companies might benefit from that sweet, sweet import protection (by being able to milk U.S. consumers for more money), but the far more likely result is trade diversion—i.e., imports would shift from China to other (more expensive) foreign countries like Vietnam, India, or Mexico. This is exactly what happened when the United States imposed tariffs on Chinese tires, and it’s a very common result of U.S. anti-dumping and CVD cases. In the tires case, for example, U.S. consumers and importing companies suffered greatly, while U.S. tire manufacturers didn’t improve at all. That case didn’t even involve WTO-sanctioned retaliation against U.S. manufacturers, farmers, and ranchers.
This all makes Trump’s trade policy seem a bit problematic.
