In the next few weeks, America and the world will find out how much bite is behind President Trump’s protectionist bark.
The US and China have just wrapped up 100 days of trade talks, heading into a bilateral economic summit this week in Washington. A month later, the administration will begin renegotiating the North American Free Trade Agreement (NAFTA) with partners Canada and Mexico. Then there’s the curious case of sanctions against steel and aluminum imports.
The administration has rattled its sword repeatedly since taking office. But so far the threat of stiff tariffs has remained sheathed.
The delay is understandable: The administration set an ambitious timetable for decisions that are complex and far-reaching, affecting everything from relations with key allies to the price Americans pay for cars and refrigerators. The delay also reflects deep divisions within the administration and a growing structural dilemma for the Republican Party around this key question:
Who’s largely to blame for America’s trade woes: China or the world?
If it’s China, then the United States can sharpen and deploy its existing trade tools more forcefully. If it's the world, then the US might find itself rejecting the global system of trading rules – which previous US Democratic and Republican presidents worked so hard to foster – in order to gain more favorable trade terms in bilateral trade agreements.
That's potentially a huge deal. If the giant US economy changes its tone, that alone undercuts the system now built around the World Trade Organization. And any hoped-for wins for the US aren't guaranteed: Moves like potential US steel tariffs could prompt other nations to ratchet up sanctions of their own – making the pivot toward protectionism a nobody-wins global trend.
“Steel is a big problem," President Trump told reporters July 12 aboard Air Force One on his way to Paris. "I mean, they're dumping steel. Not only China, but others.... They're dumping steel and destroying our steel industry. They've been doing it for decades, and I'm stopping it."
Why impose curbs on imports?
There are at least two reasons the administration might threaten tariffs or quotas – or both – on longtime trading partners and allies.
First, the strategy has worked before. In the 1980s, after a deep recession, President Ronald Reagan used aggressive trade threats to convince Japan and other nations to agree to “voluntary” reductions in exports of cars, steel, and other industrial products to the US. It also provided the impetus for a new trading system, the World Trade Organization, which included new rules that the US had pushed for.
The Reagan strategy “woke up the rest of the world ... to United States’ demands for an improved multilateral system,” says Chad Bown, a senior fellow at the Peterson Institute for International Economics in Washington.
Second, manufacturing has become relatively more important in Republican states (and less important in several Democratic ones) in the last 20 years. That’s forcing the Republican party to begin to reassess how it approaches two core GOP values: free trade and low taxes.
Free trade creates winners and losers, and current GOP orthodoxy makes it hard to help the losers. Raise taxes to subsidize the losers? No way. Income and retraining for those who lose their jobs to imports? Only to the most limited extent.
That laissez-faire approach worked for Republicans during the 1980s and ’90s. Most of the big job losses were concentrated in Democratic strongholds in the Midwest and Northeast. In Republican strongholds in the South and the West, manufacturing jobs were on the rise.
But since 1997, manufacturing jobs have been declining in almost all states (more from automation than trade, but that’s another story). And increasingly, it’s Republican states that are feeling the pinch. Of the 15 states where job markets were most reliant on manufacturing in 1996, 10 voted for Democrat Bill Clinton in the presidential election. By 2017, the last two of the Northeastern states had fallen out of the top 15, replaced by reliably Republican Kansas and a western Democratic stronghold, Oregon. And of the top 15, all but two voted for Mr. Trump, including the Midwestern manufacturing powerhouses: Indiana, Wisconsin, Michigan, Iowa, and Ohio.
“Trump has changed some Republican base opinion on this with anti-NAFTA and anti-China rhetoric,” Doug Irwin, a trade economist and economic historian at Dartmouth College, writes in an email.
The risk: unintended consequences
Solving the problem, however, is a lot trickier than railing against it.
Economically, trade protections are like squeezing a balloon. Try to save jobs in, say, steel factories, and you risk raising prices and costing jobs in the industries that use steel to make appliances and cars.
Then there are the political crosscurrents. Midwest and Plains states are big exporters of agricultural products, Mr. Irwin says, so they’re leery of pulling out of NAFTA and other multilateral trade agreements.
House Speaker Paul Ryan promoted a novel solution to the problem. His proposed border adjustment tax would tax imports, discourage US corporations from locating abroad, and raise money for corporate and individual tax cuts that would improve the business climate. But Trump and other Republicans shot it down, arguing it would constitute a new tax.
The right battle with China?
Finally, there’s the challenge of crafting a coherent trade policy. While there is wide agreement that China is pursuing a mercantilist export push in many key industries, which flouts the spirit of the world’s trading system, it’s not clear that the administration has put together a strategy to counter it.
“Is this [steel action] a one-off or is this part of a broader set of policies and changes that the Trump administration wants to pursue?” asks Nigel Cory, a trade policy analyst at the Information Technology and Innovation Foundation, a Washington think tank. “There are a range of Chinese policies targeting US high-tech sectors – such as semiconductors, advanced manufacturing, and emerging technologies – which are far more central to US national security and the US industrial base than steel.”
Steel tariffs are also unlikely to gain negotiating leverage over Beijing. Although China is the main culprit behind the world steel glut, existing trade restrictions have already cut steel imports from China by 75 percent from their level two years ago.
So new tariffs, if not narrowly targeted, would mean seriously reducing steel imports from major US trading partners like Canada, South Korea, and Mexico, potentially undermining joint efforts to bring the Chinese into line. The European Union has already threatened to retaliate if it’s targeted by US sanctions.
Will Trump risk alienating allies and challenge the rules of the world trade system to create, at best, a few thousand jobs in the highly automated steel industry?
Trump has set the stage for using an unusual rationale for reducing imports – national security – via a rare so-called Section 232 action. Trump’s US trade representative, Robert Lighthizer, a veteran of the Reagan-era disputes, is again pushing aggressive trade measures to counter what he says is widespread international abuse of free-trade rules.
The context for such moves has been flipped on its head, however. At a time when the US was coming out of a deep recession, free-trader Reagan used the voluntary restraint agreements to head off more protectionist measures from Democrats. Now, with an economy firing on most cylinders, a Republican administration is threatening to initiate protectionist measures.
It's highly controversial even within the Trump administration. With the president vowing to move forward, the open question is whether it will work as in Reagan’s day or tilt the world closer to a path of beggar-thy-neighbor protectionism.