(This is the fourth essay in a series challenging Trump’s tariffs)
Trump’s trade policy has been centered on a simple trade-off for American workers – experience some hardship in the short-term in return for expanded opportunity in the long-term. So far, the President has kept his promise on the first of those items, as American farmers and manufacturers have been hit hard by retaliatory tariffs, increasingly costly production inputs, and weaker investment into the country. The promised long-term benefits, however, appear as elusive as ever. The three major trade negotiations with the EU, Canada/Mexico, and China have delivered little in the way of solid agreements, and actually serve as a retreat from the more ambitious trade liberalization of the TPP and TTIP talks. Furthermore, American workers are likely to permanently lose many of their foreign consumer bases if the trade policy remains in place, regardless of the results of the trade negotiations. While American workers are struggling today, they are likely to become internationally uncompetitive in the future if Congress doesn’t act to reject Trump’s trade policy.
Trade negotiations have produced little of consequence
Trump’s trade negotiations on three fronts have led to minimal, if any, steps towards increased trade liberalization and US access to foreign export markets. Of the three trade deals, the Trump administration has made the most “progress” in the NAFTA re-negotiations with Mexico and Canada, but even here a binding deal has not been made and the future of the preliminary agreement between Mexico and the US announced earlier this week seems in doubt. This is because Canada, despite the statements from the President, needs to ratify any deal for it to have a chance of success. First, Mexico has stated that they want Canadian involvement for any new deal to go through, and indeed, the optics of the current Mexican president (whose PRI party undoubtedly wants to remain politically competitive after he leaves office) bowing to Trump’s bullying while Canada resists would be politically devastating in a country heavily opposed to Trump. Second, a bilateral deal excluding Canada would almost certainly fail in Congress, as it would represent a significant imposition of tariffs on America’s closest ally and trade partner and would destroy millions of American jobs. As a result, the fact that Canada has not been part of the negotiations since July 1st, and would need to ratify all changes by this Friday in order to pass a deal before the December 1st inauguration of Mexico’s new president, puts a re-negotiation in doubt. Furthermore, significant differences on revisions to the trade deal still exist between Canada and the US, such as an American demand to loosen rules for enacting anti-dumping subsidies and strengthened intellectual property protections. This, combined with enormous Canadian public opposition to Trump, makes a quick concession by Canada this week unlikely, putting the entire negotiations at risk.
Even if a deal were to pass in the spirit of the Mexico-US preliminary deal, however, the long-term gains would be less than those of the TPP (which included Canada, Mexico, and the US) that Trump dismantled when he entered office. In terms of tariff liberalization, the TPP eliminated tariffs on 18,000 products worth $90 billion in US exports, whereas the Mexico-US deal does little to change tariff policy. Furthermore, the environmental, labor, and IP protections of the TPP all are stronger than those in this NAFTA deal. Indeed, the major change in the new deal from the original NAFTA agreement is a revision to the Rules of Origin provision, which under the new deal would require imported goods to have a greater amount of North American-produced content. Importantly, this provision isn’t liberalization at all, but instead acts to increase the cost of imported goods in an identical way as a tariff would. Furthermore, this provision would impose significant costs onto foreign producers, who would likely exit the NAFTA import rules and simply accept a 2.5% MFN import tariff instead. Finally, it is unclear how impactful this change in auto rules would even be for the US economy. One Bloomberg report argues that only 3 car models out of the 40 currently exported from Mexico to the US would be affected by the increase in North American content requirement, and less than one-third of cars exported from Mexico to the US would be affected by changes to wage requirements. What does this new deal, that has a questionable chance of being ratified in the first place, actually do then? It enacts liberalization that is far less ambitious than the TPP, and its major revision actually imposes additional barriers on foreign trade with the US. Further, some reports suggest that the US is requesting use of Section 232 (national security) tariffs on Mexican autos if they don’t meet the new requirements, rather than the existing 2.5% MFN rate. This arbitrary, illegal use of Presidential power would further weaken the global trading system, and our relations with Mexico, and must be knocked out as negotiations proceed.
Negotiations on NAFTA have been slow and likely counterproductive to trade liberalization, but those with the EU have been even more stagnant. After meeting with European Commission President Juncker on July 25, Trump was quick to announce that the EU had made major trade concessions and that a deal was imminent. Instead, it turned out that the EU had simply agreed to begin talks on tariff reduction, something that had already begun under the TTIP framework that Trump dismantled when he took office. Furthermore, the very next day, the EU clarified that agricultural protection would be off the table, stymieing a major goal of the negotiations. While discussions between the EU and US on trade have been intermittent since, talks have not begun and no European concessions have been made. In addition, the significant unpopularity of Trump in Europe has reduced the political capital available to European leaders to accept a deal with the US, further harming the likelihood of an agreement being enacted.
Finally, trade negotiations with China have been largely non-existent since the trade wars began. Instead, there has been a continuing tit-for-tat of increased US tariffs leading to larger Chinese retaliation over the past month, with Trump on August 2nd discussing the idea of increasing tariffs on $200 billion of Chinese goods to 25%. Furthermore, the Chinese yuan has depreciated almost 6% against the dollar in 2018 as a result of trade war fears and increasing interest rates in the US, making Chinese imports to the US even more competitive against US produced goods. For real negotiations to even begin, this escalation must stop, but both sides don’t seem willing to back down. Further, China is unlikely to take steps to either appreciate their currency or reduce domestic protection, because both steps would risk creating dangerous imbalances in the Chinese economy (for example, the depreciation of the yuan is largely a market-based reaction to tightening US interest rates rather than Chinese government intervention) and would demonstrate international political weakness unacceptable to the Chinese government.
More than two months after Trump implemented his tariffs as leverage to revise trade deals, each of his negotiations has barely begun, if at all. Indeed, for the EU, Canada, and Mexico, Trump’s negotiations have accomplished less ambitious liberalization than the TPP and TTIP that he dismantled upon coming into office. The promised long-term benefits, therefore, have failed to materialize for American farmers and manufacturers. Indeed, they face harmful long term headwinds that threaten their international competitiveness over the long term.
Damage to the economy will be long term
First, Trump’s trade policy has put the foreign consumer bases of American exporters at risk. Many US industries rely on exports to foreign markets as a key source of demand for their products. Over 36% of US agricultural revenue comes from exports, for example, and Canada, China, and Mexico are the top 3 export markets for American farmers, representing over $60 billion in US production. Maintaining access to these markets, therefore, is critical to the long term success of American workers. However, Trump’s tariffs have put this success at risk. When competing for foreign consumers, existing producers have large incumbent advantages, because the trading infrastructure is already in place and is costly to change even if other low-cost alternatives exist. The US was in a good position before the tariffs, therefore, because switching to other farmers (e.g. Canada or Brazil) had certain large start-up costs.
Trump’s trade actions have significantly changed this, however, because American supply has been cut off to their foreign consumer bases by the retaliatory tariffs, forcing foreign consumers to go to other producers and giving them incumbent advantages over American farmers. Furthermore, US trade policy has been fundamentally delegitimized, because the US President supported by Congress and the Republican Party have themselves to be willing to implement broad-based tariffs at will. As a result, foreign consumers aren’t willing to risk an export disruption from US tariffs in the future, and instead will go to other producers even if more expensive. As a result, many foreign consumers of US products have said that they will not return to US producers, even after the trade war has ended.
Second, the Trump’s trade policy threatens to significantly weaken the efficacy of the World Trade Organization, which has been a critical actor in encouraging global trade liberalization. Since Trump enacted tariffs on steel and aluminum imports, seven countries including the EU, Canada, Mexico, and India have filed challenges at the WTO to the tariffs. They claim that the US tariffs are being used as “industry safeguard restrictions”, which were ruled in 2002 (against the Bush steel tariffs) to be an illegal use of trade policy. The Trump administration has countered that the tariffs are justified under national security grounds, but this is a laughable justification that can be quickly disproved. Furthermore, the primary precedent for WTO-approved national security tariffs involved those by the EU, US, and Canada against Argentina during the Falklands War. While those involved restrictions against an authoritarian military junta at war with the UK, Trump’s tariffs are against liberal democracies closely allied with the US. As a result, it is likely that many of those challenges to Trump’s tariffs will succeed at the WTO, putting Trump on a collision course with that institution.
While Bush quickly backed down in the face of WTO sanction in 2002 and rescinded his steel tariffs, Trump is likely to not back down, and indeed creating an excuse to exit the WTO may have been a goal of these tariffs in the first place. This type of action would have grievous long-term consequences for the US economy. Firstly, the inability of the WTO to oppose US protectionism would significantly weaken its efficacy with other member states, who would use the precedent to themselves not reduce their trade barriers. The WTO has been extremely good for the US in that it has encouraged countries to reduce their import tariffs to US goods, among others, and indeed the reduction in China’s average import tariff from 32% in 1992 to 4% today was largely due to the conditions required for Chinese WTO entry. Furthermore, if the US refused to accept a WTO ruling, it would likely lead to the WTO-backed imposition of considerable retaliatory tariffs by all WTO members. Chinese retaliation has affected $34 billion in US exports so far and has already caused a significant decline in US farmer and manufacturer revenue. As a result, if each WTO member were to impose retaliation, US exports could fall by hundreds of billions of dollars, with severe impacts on the US economy.
Trump’s trade policy threatens the long-term competitiveness of US workers and the global trading system as a whole, in addition to significant short-term costs to the US economy. And what has been achieved in return – no meaningful trade agreements with Canada, Mexico, the EU, or China, let alone major liberalizing concessions. Indeed, if Trump had simply continued to negotiate the TPP and TTIP treaties that he dismantled when he took office, the US would have made more progress on trade liberalization, without any of the costs to US workers. Congress must act to reject this failed trade policy this fall, before the damage done to American farmers and manufacturers, as well as the global trading order, is made permanent.
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