Trump’s Backward March on Trade
After three
years of the Trump administration, the economic costs of "America
First" are continuing to mount, with global trade and GDP growth slowing
and investment in decline. Ironically, the biggest loser has been America.
WASHINGTON,
DC – Following America’s disastrous 1930 Smoot-Hawley Tariff Act, the
subsequent international trade war, and eventually World War II, the United
States went on to lead the world toward a more open multilateral trading
system. In 1947, the international community adopted the General Agreement on
Tariffs and Trade, which would later become the World Trade Organization. Under
this international body, trade was bound to the rule of law and the principle
of non-discrimination among trading partners.
The system
has been a huge success. Over the past seven decades, world trade has grown
almost twice as fast as
real output. And owing to US leadership, there have been ongoing multilateral
negotiations to lower tariffs, remove other barriers (such as quantitative
import restrictions), and facilitate trade expansion.
But in 2017,
US President Donald Trump’s new administration abandoned America’s longstanding
commitment to the open multilateral trading system, opting instead for a
power-based approach to international economic relations. Under the new dispensation,
“might” supposedly makes “right.”
The result
has been disastrous. Trade relations between the US and its major international
partners are now fraught. The global growth rates of both trade and GDP have
fallen sharply, and growth projections are being downgraded as
further evidence of the economic damage caused by US trade policies comes to
light.
One early
step by the Trump administration was to impose a 25% tariff on imported steel
and a 10% tariff on aluminum. This policy hurt Canada, the European Union,
Mexico, and Japan – all US friends or allies – but not China, which accounted
for only 2% of
US steel imports at the time. It is estimated that
the metal tariffs have cost Americans $900,000 per year per job “saved.” Worse,
US employment in steelmaking has continued to
decline, and US steel exports have remained flat since the tariffs were
introduced in early 2018.
Since then,
Trump bullied Canada and Mexico into renegotiating the North American Free
Trade Agreement, which has now been replaced by the US-Mexico-Canada Agreement.
The revised deal tightens US regulations on imports of automobiles and auto
parts, and requires that 40-45% of Mexican auto workers be paid at least $16 per hour by
2023. For comparison, that is tantamount to introducing a pay floor for US
autoworkers of more than $75 per hour – obviously an unthinkable proposition.
The Trump
administration has also forced a “renegotiation” of the South Korea-US Free
Trade Agreement, with the main result being to restrict imports of steel from
South Korea and to prolong a US tariff on imported light trucks.
And then
there is the Trans-Pacific Partnership, which the Obama administration
negotiated with 11 other Pacific Rim countries (excluding China) and signed on
February 4, 2016. Immediately upon taking office, Trump withdrew America from
the TPP, leaving the remaining signatories to salvage the deal, which they have
done under Japanese leadership. As a result, US exports to those countries are
now subject to much higher tariffs than is trade among the remaining 11
members.
Then came
Trump’s trade war against China, which has both undercut global trade and
brought the bilateral relationship to its lowest point since the aftermath of
the 1989 Tiananmen Square massacre. Even with the “phase one” agreement that
has just been signed, the average US tariff on imports from China will be around 19%, up from 3% before
the trade war. Worse, the US has gained little from the process. Yes, the
latest deal includes a Chinese commitment to import more US agricultural and
other products. But to represent a “gain,” those additional purchases would
have to be great enough to compensate for the lost exports of 2018-19.
Trump’s trade
wrath has affected other countries as well. The US has imposed additional
tariffs on imports from Turkey, Brazil, Argentina, and several developing
countries, including India, which would otherwise be eligible for preferential
tariff treatment under US law. Now, US-India relations are deteriorating.
The US has
also deployed economic and secondary sanctions against a wide range of
countries. While some sanctions are obviously justified (such as those against
countries involved in terrorism), the Trump administration has expanded the use
of this tool with abandon. The US is now enforcing sanctions against more
than 1,000 countries,
businesses, and individuals per year.
Moreover, the
US has even threatened tariffs
on $2.4 billion worth of French imports in retaliation for France’s plan to
introduce a domestic tax on digital services. And that comes on top of
the $7.5 billion in
annual levies that the US is permitted to impose on imports from the EU as part
of the resolution to a dispute between Airbus and Boeing. Fears of a US-EU
trade war have created a cloud of uncertainty over auto producers and many
other sectors around the world.
Finally, as
if all of this were not damaging enough to the global trading system, the
US refuses to
allow for new appointments to the WTO’s Appellate Body, which has now been
rendered powerless to resolve bilateral trade disputes. In the absence of a
functioning enforcement mechanism, national governments have much less
incentive to abide by their WTO commitments.
Ultimately,
America is the big loser. The Trump administration’s efforts to reduce the US
trade deficit have reduced imports from China, but imports from countries like
Vietnam have risen sharply. Global investment and output, meanwhile, have fallen,
partly as a result of the trade uncertainty. US exporters to the TPP successor
countries now find themselves at a disadvantage. And America itself is no
longer trusted as a leader in the world trading system.
With
geopolitical tensions growing, the US needs allies now more than ever. But many
will be hesitant to engage with the current administration. In the end, Trump’s
unilateral trade policy has achieved the opposite of its objectives, many of
which could have been met through multilateral cooperation.
Writing for PS since 2014
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Anne O. Krueger, a former World Bank chief economist
and former first deputy managing director of the International Monetary Fund,
is Senior Research Professor of International Economics at the School of
Advanced International Studies, Johns Hopkins University, and Senior Fellow at
the Center for International Development, Stanford University.
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