Politics trumps economics in US trade policy

President Trump pursues protectionism that is bad for business and jobs, to play to his electoral base

Trade protectionism was a key element of President Donald Trump's campaign last year, and withdrawing from the Trans-Pacific Partnership (TPP) was one of his first official acts.

But he has not (yet) followed through on tougher promises, to impose 35 per cent to 40 per cent tariffs on imports from China and Mexico, and to withdraw from the North American Free Trade Agreement (Nafta). The United States Treasury has declined to label China (and other countries with large trade surpluses like Japan, Germany, South Korea and Switzerland) a "currency manipulator" - the unfair trade practice that would warrant retaliation.

There have been other actions taken this year to impose trade penalties on imports of lumber and Bombardier jets from Canada, and "safeguards" against imports of solar panels and washing machines, mostly made in China, Thailand and Vietnam.

These anti-dumping, anti-subsidy and "import injury" actions are permitted under existing international trade rules, some petitions pre-date Mr Trump, and final decisions have not been made on all. But the administration's declared intention to more robustly enforce existing trade laws has encouraged US businesses to file more such petitions, which have increased substantially this year.

US trade investigations are under way on whether to impose barriers on steel and aluminium imports on rarely used "national security" grounds (which would set a precedent for other industries), and penalties on China for "unfair trade" based on intellectual property violations, and on how to backpedal on the World Trade Organisation (WTO) government procurement agreement, following Mr Trump's executive order that the federal government should "Buy American".

The risk in all these cases is that any new US restrictions would spark retaliation by the affected trade partners, which would hurt all parties. There could also be a negative demonstration effect, with other countries not party to a dispute imitating the US action. Even if any particular restrictive action is avoided, the uncertainty induced by a cascade of threatened cases could discourage business investment.

Given the "slippery slope" risks of escalating protectionism, American big business has come out strongly against the administration's proposals in the contentious Nafta renegotiation, which could provide a template for other trade actions. (The Korea-US FTA is also under review, and Mr Trump has frequently voiced his preference for unilateral or bilateral over regional or multilateral deals.)

POOR PRECEDENT

With respect to Nafta, American multinationals object to the administration's proposals for a "sunset clause" that could trigger a review and possible termination of the deal every five years, and for weakening investor-state arbitration panels. The administration sees these panels (which also faced resistance in the TPP negotiations), like the WTO's dispute settlement mechanism, as undermining US sovereignty.


Farmers marching in Mexico City on Aug 8 as part of nationwide protests against the North American Free Trade Agreement. US President Donald Trump has not (yet) followed through on tougher promises, to impose 35 per cent to 40 per cent tariffs on imports from China and Mexico, and to withdraw from Nafta. PHOTO: AGENCE FRANCE-PRESSE

The car industry is particularly concerned about the proposal to raise the North American and US content required for zero tariffs in intra-Nafta auto trade. This will raise costs and disrupt complex supply chains carefully calibrated over decades for maximum competitiveness, at a time when the industry's priority for investment is to stay ahead of disruptive new technologies like electric and autonomous vehicles, and ride-sharing.

Such stringent local content requirements also set a poor precedent for, among others, China, whose "Make-in-China 2025" state industrial policy initiative also involves heavy local content targets that the US itself opposes as protectionist.

These US trade policy actions go against the President's own declared priority to create new American jobs and to strengthen US manufacturing, while "getting the government out of business". In solar panels, for example, many more jobs will be lost in installation than will be "saved" in manufacturing, where the two protected US companies are majority-owned by Chinese and German companies respectively. And if Nafta is killed, a recent study suggests that 256,000 US jobs - mostly in services and agriculture - will be lost within three to five years.

Manufacturing's share of global output has been falling for over 40 years, as rising world incomes increase demand for services more rapidly than for manufacturers. Its share of the US economy has remained stable at around 12 per cent for over a decade, and the country accounts for 18.6 per cent of global manufacturing output, second only to China. Even before the recent attainment of economywide full employment, manufacturing's main problem has long been a chronic shortage of skilled workers, which will worsen as retirements increase with the ageing of baby boomers.

FRAGMENTED ELECTORATE

Perhaps because of the current strong economy and tight labour market, Americans' already favourable view of international trade has improved sharply over the past year. The Chicago Council of Global Affairs' recently released survey shows a jump from 59 per cent of Americans last year to 72 per cent this year agreeing international trade is "good for the US economy", with 70 per cent last year and 78 per cent this year agreeing that it is "good for consumers like you", and 40 per cent last year and 57 per cent this year agreeing that it is "good for creating jobs in the US".

What, then, explains the Trump administration's insistent pursuit of an aggressive trade policy, if it is bad for the economy, business and consumers, not good for workers, conflicts with the public's favourable view of trade, and causes foreign policy tensions?

Mr Trump and his trade officials' belief that the US' chronic trade deficit is bad for the country and reflects "unfair practices" by trade partners is simply not correct, since statistically, trade imbalances are caused by domestic savings-investment and fiscal imbalances. Put simply, high consumption in the US and high savings in China are the root cause of the US-China trade deficit, which is readily financed by foreigners' willingness to lend to and invest in the US. The deficit also expands when the US economy grows faster than that of its trade partners, and when the dollar strengthens.

Raising trade barriers could widen rather than narrow the trade deficit - by increasing the cost of imports and thus of domestic production and exports which incorporate non-substitutable imported inputs, by strengthening the dollar (if imports fall sufficiently or foreign investments pour into the country to avoid trade barriers), or by reducing foreign incomes and thus foreign demand for US exports - even if there are no retaliatory foreign trade barriers.

Baffling? Not really, given the Brexit vote, Mr Trump's election itself, and the continued rise of populist anti-trade political parties and leaders in Europe. All show that a growing if still mostly minority share of the population in these countries will vote against their own economic interests if nationalist emotions are more important to them. In a fragmented electorate, some politicians will cater to them, as Mr Trump arguably is doing to his base.

The same Chicago survey shows that 74 per cent of "core Trump supporters" and 68 per cent of Republicans but only 48 per cent of Democrats and 58 per cent of independents believe that "international trade, moving jobs overseas" is more responsible than automation (25 per cent of core Trump supporters versus 53 per cent of Democrats) for the decline in manufacturing employment.

Similarly, Mr Trump withdrew from the Paris climate accord and decertified the Iran nuclear agreement, even though a majority of Americans support both, because he was playing to his base and eager to appear to keep his word on the campaign trail. Failing (so far) to repeal and replace Obamacare, another signature campaign promise, may increase the pressure to use tough trade policy to show that he is putting "America First".

The robust US and world economy may even make it more tempting to execute restrictive trade policies now, since their negative effects could be mitigated by strong underlying growth, weak inflation, and protection-induced job losses readily absorbed in a tight labour market.

President Trump will soon be attending Asia-Pacific Economic Cooperation and Asean meetings and visiting China, Japan, South Korea, Vietnam and the Philippines, all countries that are affected by his trade policies. But the forces that will guide his decision-making are at home, in the electoral constituencies that brought him to power and remain solidly in support of his nationalist rhetoric, despite his low overall approval ratings.


  • The writer is Professor Emerita of Corporate Strategy and International Business, at the Stephen M Ross School of Business, University of Michigan.
A version of this article appeared in the print edition of The Straits Times on October 21, 2017, with the headline 'Politics trumps economics in US trade policy'. Print Edition | Subscribe