https://www.commentarymagazine.com/articles/taking-trump-seriously-trade/Taking Trump Seriously on TradeHe has policies, or suggestions of policies. What would happen if they were put into practice?
SCOTT LINCICOME / APR. 15, 2016
Let us assume that Donald Trump means what he says and would, upon being sworn in as president 2017, immediately seek the implementation of his two grandest campaign promises—the unilateral imposition of high (35 to 45 percent) tariffs on Chinese and other imports due to “currency manipulation” or outsourcing, and the withdrawal of the United States from all U.S. trade agreements, including the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO).
The first thing that needs to be said is that existing law clearly precludes such actions. No U.S. statute or regulation permits the president to impose unilateral tariffs on a broad range of products from a single country or group of countries. Indeed, the U.S. Constitution (Article I, Section 8) gives Congress the sole authority to tax imports (i.e., “to regulate Commerce with foreign Nations”). So Trump would need congressional approval to impose high tariffs on all Chinese or Mexican imports.
This would be true even if Trump instructed the Treasury Department to declare China a “currency manipulator” or utilized U.S. “fair trade” laws. The former is a superficial action that, contrary to promises made in Trump’s trade plan online, requires detailed findings and in no way authorizes U.S. tariff retaliation. The latter has strict procedural, evidentiary, and substantive requirements that the president cannot circumvent. Determining that imports from China (and other countries) have been illegally dumped or subsidized is under the control of U.S. anti-dumping and countervailing duty (CVD) laws, respectively. A finding of market-distorting surges in imports (thus violating “fair trade” provisions) falls under U.S. safeguards laws. Each type of measure applies to narrow bands of imports (e.g., hot-rolled steel) from certain countries, requires specific findings of “injury” to the U.S. industry, and takes at least a year to result in duties.
These legal barriers are significant: In 2010, the most protectionist Congress in decades balked at a far narrower action and did not pass legislation making currency undervaluation an illegal subsidy under the CVD law. The current Congress failed to pass a similar measure.
Nevertheless, assuming Trump did somehow convince Congress to impose these tariffs, or simply acted unilaterally in contravention of U.S. law, the results would cause immense pain for very little, if any, gain for the U.S. economy and workforce.
The most immediate damage would be done to consumers of imports in the United States. As basic economics and U.S. customs law dictate, they would be the ones who pay Trump’s tariffs—or, if those tariffs result in making it pointless to buy those imported goods, would be forced to pay higher prices for the same goods manufactured in the United States. It’s difficult to predict the precise magnitude of such taxes, but Representative Chris Collins of New York, one of Trump’s own spokesmen, recently suggested that the cost of food, clothing, and other necessities would rise by 10 to 15 percent. Considering the average American household spends about $11,000 on these items each year, such a tax would translate to an extra $1,100 to $1,650 per year that American families would have to spend under President Trump for the same things that they’re consuming right now—money they could have saved, invested, or spent on other important necessities (and the U.S. jobs that provide them). Almost 90 percent of free trade’s consumer benefits accrue to poor and middle-class consumers; Trump’s tariffs would have precisely the opposite effect. Thus, the tax imposed by tariffs is highly regressive.
Most U.S. manufacturers also would be affected for the worse by Trump’s tariffs. Because more than half of all U.S. imports, including from China, provide necessities for other American manufacturers (industrial supplies and materials or non-automotive capital goods), tariffs on these products would force import-consuming firms to pay more for the things they need to remain globally competitive. Such higher costs would mean lower output, fewer employees, and, in the worst cases, outright bankruptcy.
U.S. exporters, in both the manufacturing and service sectors, would likely share this pain. Broad-based unilateral U.S. tariffs would violate two of the United States’ most fundamental obligations under its World Trade Organization agreements. The first is the so-called most-favored nation provision. Under Article I of the General Agreement on Tariffs and Trade, or GATT, a WTO member must treat imports from all other members equally. Second, according to GATT’s Article II, no WTO member can impose tariffs above a so-called bound rate set forth in its tariff schedule. Immediately upon implementation, China (or Mexico) would quickly seek and win the right to impose retaliatory tariffs on U.S. goods-and-services exports in the amount of the damage caused by Trump’s tariffs. At Trump’s proposed tariff level of 45 percent, WTO-authorized retaliatory tariffs by China alone could amount to as much as $225 billion in new annual taxes on U.S. exports and intellectual property. Considering that U.S. exports to China totaled only about $115 billion in 2015, this retaliation would effectively close the United States’ third-largest export market.
This is what Trump’s tariffs would do. What wouldn’t happen?
For starters, China wouldn’t instantly cave to tariff threats; instead, it would likely escalate matters. China is a sovereign nation with its own domestic politics to consider. The Chinese government also knows how to use the WTO dispute-settlement system—and other more covert forms of retaliation. For example, when the United States slapped duties on Chinese solar-panel manufacturers in 2012, China instantly retaliated with similar duties on U.S. polysilicon exports, which cost American companies and workers billions. Finally, because U.S. businesses and consumers pay for tariffs, Trump is actually threatening to hurt China by hurting Americans. This is Blazing Saddles trade policy at its finest, with the sheriff pointing the gun to his own head and threatening to shoot.
Trump’s tariffs also likely wouldn’t result in a significant increase in U.S. manufacturing output or employment. A few directly competitive U.S. companies might benefit from import protection, but the far more widespread result would be “trade diversion”—with imports shifting 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 in 2009, and it’s a very common result of U.S. anti-dumping and CVD cases. Indeed, because of trade diversion, the Brandeis University economist Peter Petri estimates that Trump would need to create a “global tariff wall” to impose his punishment on China—a move that would further impoverish American consumers and expose U.S. exporters to even more WTO-sanctioned retaliation.
Tariffs also wouldn’t bring back many U.S. manufacturing jobs, which have been declining since the late 1940s (as a share of the U.S. workforce) and since 1979 (in sheer numerical terms)—long before trade was a significant part of the American economy. The aforementioned tires case is instructive in this regard. U.S. consumers and importing companies suffered greatly; non-Chinese imports increased; U.S. tire manufacturers didn’t improve at all; and, even under the most generous assumptions, only a few U.S. tiremaking jobs were created (at a ridiculous cost of $900,000 per job).
Trump’s plan to “rip up” the WTO, the North American Free Trade Agreement, and other U.S. trade pacts presents even worse problems. In this case, he would likely have the authority under U.S. law and various trade agreements to withdraw the United States from these deals without the consent of Congress. However, simply withdrawing from these agreements would not permit Trump to raise tariffs or otherwise abandon the United States’ obligations under them. Free-trade agreements are not treaties, which require two-thirds approval by the Senate and have the force of law upon ratification. They are “congressional-executive agreements” that, even after being signed by the president, have no legal force until they are converted into legislation passed by Congress and then signed into law by the president. (This is why Trade Promotion Authority is such a big deal: It smoothes congressional passage of U.S. FTA implementing legislation.)
To change U.S. commitments under such laws, a President Trump would need Congress to pass a new law (or laws) reversing all of the commitments, including low tariffs, previous Congresses have passed over the last 30 years (for example, the massive Uruguay Round Agreements Act that implemented the World Trade Organization Agreements in the mid-1990s). Congressional cooperation with Trump’s schemes would be far from certain.
But while Congress dithered, our free-trade partners would immediately be set loose to raise their tariffs on U.S. imports, to block U.S. service providers, to stop enforcing U.S. intellectual-property rights, and to otherwise discriminate against U.S. companies (and their workers) in favor of domestic producers or other members of the trade agreement. Not only would millions of American jobs supported by exports be at risk of disappearing, but entire global supply chains would collapse, taking the U.S. and global economies with them.
Such thoughts are not mere abstractions. We have many existing examples of how Trump-style tariffs have resulted in lower growth, higher prices, foreign retaliation, and few, if any, new jobs. A President Trump who forced through the plans Candidate Trump has been touring would be calamitous for the U.S. economy—and the world’s.
