Think twice about "America first" trade policies
05/01/17 Filed in: International Trade
Reader feedback at end.
On the campaign trail, Donald Trump blamed international trade agreements for undermining US manufacturing operations and jobs. New policies were needed, he said, possibly including a heavy tax on imports from countries that were ripping us off. Free trade gets a bad rap, 3/21/16,
[Republican candidates debate in Miami, 3/10/16] . . . trade deals are absolutely killing our country. The devaluations of their currencies by China and Japan and many, many other countries, and we don't do it because we don't play the game. and the only way we're going to be able to do it is we're going to have to do taxes unless they behave. If you don't tax certain products coming into this country from certain countries that are taking advantage of the United States and laughing at our stupidity, we're going to continue to lose businesses and we're going to continue to lose jobs. And if you look at the average worker over the last 12 years, their salary and their pay have gone down, not up. It has gone down.
Other changes would include renegotiation of the North American Free Trade Agreement (NAFTA) with Mexico and Canada, and disavowal of the Trans-Pacific Partnership (TPP) that had been negotiated during the Obama administration and was awaiting congressional approval. Free trade was fine, but it had to be fair trade.
A few days after the election, two former US Trade Representatives spoke at a roundtable discussion in DC. Mickey Kantor headed this office during Clinton’s first term while the NAFTA treaty and several other trade deals were being negotiated; Susan Schwab was at the helm during Bush 43’s second term while the USTR was negotiating bilateral trade agreements with S. Korea, et al. and doing some initial spadework for the TPP. The way forward for trade, roundtable discussion, Cato Institute, video (1h, 31m) 11/14/16.
Ambassadors Kantor and Schwab suggested that popular sentiment about trade agreements is often misinformed, and congressional opposition is typically based on politics versus economics. Thus, manufacturing output has grown steadily, and the oft lamented decline in manufacturing jobs is primarily due to productivity gains versus the offshoring of manufacturing operations. Whatever trade agreements may be negotiated, the lost manufacturing jobs are not coming back. As another example, no state in the union would have more to gain from the TPP than California, yet most members of Congress from the Golden State have opposed it.
If the new president wanted to renegotiate NAFTA, that was fine. The global economy had changed greatly since the 1990s and many aspects of the agreement are out of date. But the goal should be a set of trade rules in tune with current conditions, not payback for injuries NAFTA had supposedly caused to American workers.
Many features of the TPP harmonized with trade deal principles the president elect had advocated, e.g., robust enforcement mechanisms. Perhaps the president could be persuaded to support a renegotiation process that would make use of the time and effort invested in developing the TPP over the last decade instead of starting from scratch. And if there were to be further negotiations, said Ambassador Kantor, a good case could be made for inviting China to join the TPP and participate in finalizing its terms.
Alas, the president seemed wedded to an “American first” trade approach, and the policy statement that is now posted on the White House website tracks his campaign rhetoric. Trade deals that work for all Americans, whitehouse.gov, accessed 4/29/17.
For too long, Americans have been forced to accept trade deals that put the interests of insiders and the Washington elite over the hard-working men and women of this country. As a result, blue-collar towns and cities have watched their factories close and good-paying jobs move overseas, while Americans face a mounting trade deficit and a devastated manufacturing base. *** [Withdraw from the TPP, renegotiate NAFTA, ensure that “any new trade deals are in the interests of American workers.” Also, “crack down on nations that violate trade agreements and harm American workers.”] *** By fighting for fair but tough trade deals, we can bring jobs back to America’s shores, increase wages, and support U.S. manufacturing.
It appears that the administration intends to put these ideas into practice. We doubt that doing so would boost the economy very much, and if other nations retaliated the results could prove seriously counterproductive. See, e.g., The Smoot-Hawley Tariff  and the Great Depression, Theodore Phalan et al., Foundation for Economic Education, 2/29/12.
With that thought in mind, let’s review the major steps that have been taken thus far – some seem substantive while others smack of political posturing
A. Trans-Pacific Trade Partnership – On the first business day after his inauguration, the president signed a memo directing the United States Trade Representative (nominee Robert Lighthizer is reportedly on track to be confirmed, but it hasn’t happened yet) to summarily pull the US out of the TPP agreement and any further negotiations among the other countries involved. Effectively immediately, the USTR office (some 200 people) was to “begin pursuing, wherever possible, bilateral trade negotiations to promote American industry, protect American workers, and raise American wages.” Memo re withdrawal of the US from TPP, whitehouse.gov, 1/23/17.
Proponents of the TPP were understandably dismayed. Not only did they disagree with the policy decision that had been made, but they questioned why the president had chosen to “burn his bridges” in this fashion. Withdrawal from TPP was a senseless act of wanton destruction, Daniel Ikenson, Cato Institute, 1/23/17.
. . . the president didn’t need to go this far to keep TPP out of play. The agreement couldn’t possibly take effect without congressional passage of implementing legislation, and his signature affixed. He could have just kept TPP on the back-burner in the event that its utility, relevance, or imperative to U.S. economic and geostrategic objectives became evident, as his term progressed. Because it will.
The president’s action may be vindicated if the switch to bilateral trade agreements proves fruitful, but for now it’s hard to disagree with Mr. Ikenson’s sentiments.
B. North American Free Trade Agreement – Abandoning the TPP did not disrupt existing trade relationships as the agreement had not been implemented, but the same could hardly be said for NAFTA. This pact with Canada and Mexico became effective in 1994, and it has fostered a vast expansion in trade between the three countries – generally to their mutual benefit.
Granted, NAFTA needs to be updated for current conditions, and there are probably other improvements that could be made as well. But this argues for systematic renegotiation, not an abrupt US withdrawal. Should [NAFTA] be scrapped? Bryan Riley, heritage.org, 3/8/17.
There were reports last week that the president was upset about trade abuses committed under NAFTA, notably by Canada, which apparently were of long standing even though there had previous been no high level public statements about them. Why Trump is teeing off on Canada, Rick Newman, yahoo.com, 4/25/17.
Trump recently said a Canadian effort to protect domestic dairy farmers was “disgraceful,” because it imperiled some American dairy exports to Canada. And his Commerce Secretary, Wilbur Ross, said recently that the United States will impose tariffs of 3% to 24% on imported Canadian lumber products used in homebuilding, to fight back, Ross says, against unfair subsidies that push the Canadian product below market prices.
A rumor of an order for US withdrawal from NAFTA sparked widespread consternation, and assurances were hastily provided that this wasn’t going to happen. Whew, saved by the bell! Nafta in Neverland, Wall Street Journal, 4/27/17.
Early Wednesday a leak from the White House said a Trump decision was imminent to pull the U.S. out of Nafta. The Mexican peso fell immediately, followed by you-cannot-be-serious howls of panic from American exporters of agricultural products and beef and by Members of Congress from Massachusetts to Arizona.
The leak that Nafta was about to die is known in some quarters as jumping the gun, and by day’s end the White House had walked it back, adding that Mr. Trump had productive phone calls through the day with the leaders of Mexico and Canada.
The president subsequently tweeted that “I agreed [to a negotiation instead of US withdrawal] subject to the fact that if we do not reach a fair deal for all, we will then terminate Nafta. Relationships are good-deal very possible!”
Most recently, the president signed two more orders (not yet posted on the White House website when we went to press). One directed the secretary of Commerce to review US involvement in NAFTA and other trade agreements, apparently based on the premise that the promised benefits of trade agreements are often not realized in practice. The second created an Office of Trade and Manufacturing Policy at the White House, which is to be headed by Peter Navarro (a well-known critic of trade policy with China). On his 100th day in office, Trump orders review of free trade agreements, Gregory Korte, USA Today, 4/29/17.
Some critics have characterized Mr. Navarrro as fixated on outmoded economic theories, e.g., mercantilism (which France practiced unsuccessfully in the 18th and early 19th Centuries). Donald Trump’s economic advisor, Peter Navarro, is simply wrong about trade – wholly and entirely, Tim Worstall, forbes.com, 8/6/16.
C. Buy American - We strongly approved of the decision to resurrect the Keystone XL pipeline, which was blocked by the previous administration, and clear the way for completion of the Dakota Access pipeline. These common-sense decisions were marred, however, by a memorandum directing the Secretary of Commerce (nominee Wilbur Ross would be confirmed in late February) to establish a new policy requiring the use of “materials and equipment produced in the United States, to the maximum extent possible” in US pipeline construction. Memo re construction of American pipelines, whitehouse.gov. 1/24/17.
Why should it be thought that Americans would benefit from the required use of domestically-produced steel in this context? If American steel was price competitive, such a rule would serve little purpose, and if it wasn’t then the steel industry and workers might benefit but the general public would get stuck with unnecessarily high costs for pipelines. The benefits of free trade: Addressing key myths, Donald Boudreaux & Nita Ghei, mercatus.org, 1/31/17.
Trade restrictions limit the choices of what Americans can buy; they also drive up the prices of everything from clothing and groceries to the materials manufacturers use to make everyday products. Moreover, lower-income Americans generally bear a disproportionate share of these costs.
Whether due to price or availability, TransCanada didn’t want to build the Keystone pipeline with all US steel. Relaxation of this requirement (about half of the steel will come from Canada and elsewhere) was rationalized so the project could proceed without further delays.
Could it be that the administration was backing away from an impulsive decision that didn’t make much sense from a policy standpoint? According to critics of the pipeline projects, however, the real point was that the president had been outsmarted. Trump’s “made in America” pledge slips through Keystone project, Ben Wolfgang, Washington Times, 3/3/17.
“Donald Trump has sought to portray himself as some sort of master negotiator, but he clearly needs to spend more time in an apprenticeship. Just days ago, Trump pledged before the country and Congress that the Keystone XL pipeline that he was forcing on this country would be made with American steel, but instead, he was outmaneuvered by a foreign company that wants to use imported steel,” Michael Brune, executive director of the Sierra Club, said in a statement.
Far from thinking better of his “Buy America” memo, the president recently doubled down on it by taking two further actions:
•A policy was promulgated of (a) scrupulously monitoring, enforcing and complying with Buy America laws (there are probably many of them on the books), and (b) using public interest waivers judiciously so as “to ensure the maximum utilization of goods, products and materials manufactured in the United States.” Executive order re buy American and hire American, whitehouse.gov. 4/18/17.
•Guidance was provided to the secretary of Commerce concerning an investigation of the effects on national security of a high level of steel imports due to “large volumes of excess capacity [globally] – much of which results from foreign government subsidies and other unfair practices.” Memo re steel imports and threats to national security, whitehouse.gov, 4/20/17.
The purpose of investigating steel imports may be to lay the groundwork for higher tariffs on imported steel, which are already in effect (imposed by the previous administration) for certain specialty steels imported from China. Stay tuned for further developments. White House investigates steel imports in move that could lead to tariffs, Zeke Miller, time.com, 4/20/17.
The U.S. already places tariffs on specific steel imports from China, but the investigation could clear the way for even wider protectionist measures. As a candidate, Trump frequently promised to boost "American steel," but Ross cautioned against prejudging the outcome of the investigation. "No decision has been made whether or not to do so and if so what amounts or on what products," Ross said of tariffs.
D. Trade deficits – At the end of March, the president issued a brace of orders concerning the overall trade position of the US (annual trade deficit in goods running over $700B, overall trade deficit exceeded $500B in 2016)
•There was to be an omnibus report on significant trade deficits with our individual trading partners, with a country-by-country analysis of the reasons therefor (e.g., differential tariffs, non-tariff barriers, injurious dumping, injurious government subsidization, intellectual property theft, forced technology transfer, and denial of worker rights & labor standards). Executive order re omnibus report on significant trade deficits, whitehouse.gov, 3/31/17.
•Stepped up enforcement of countervailing and anti-dumping tariffs was ordered given evidence that such levies aren’t being paid in some cases (as of May 2015, $2.3B remained uncollected) or are otherwise being evaded. Executive order reestablishing enhanced collection & enforcement of antidumping & countervailing duties and violations of trade & customs laws, whitehouse.gov, 3/31/17.
One could hardly object to these orders in principle as the stated aim is to obtain information and enforce existing agreements versus imposing preconceived solutions. Besides, according to some economists, trade deficits aren’t necessarily a bad thing.
America’s trade with the rest of the world is always balanced if investment flows are considered in addition to the exchange of goods and services, and investment flows into this country have arguably beneficial effects. Plumbing America’s balance of trade, Daniel Griswold, mercatus.org, 3/14/17.
Another set of pipes accommodates the enormous flows of capital moving across international borders. The United States benefits from a large surplus in this area. For example, foreign purchasers of US bonds lower long-term US interest rates to the point where a homeowner with a 30-year, $250,000 mortgage saves an estimated $115 a month.
Also, chronic trade deficits with the rest of the world aren’t necessarily a sign that the US is being ripped off. Domestic policies that drive up the cost of doing business here also fuel trade deficits, and fixing these problems is within our power whereas misbehavior by other countries may not be. Some barriers to US trade are self-inflicted, Bryan Riley, heritage.org, 4/13/17.
There has been one notable shift in the president’s trade policy since the election, namely his decision not to publicly label China as a “serial currency manipulator.” Not only is there some question whether China is artificially depressing the value of its currency, but the president is hoping for Chinese help in defusing the North Korean nuclear threat (an issue that seemingly outweighs our trade deficit with China).
It’s been suggested that the last thing this country wants is a trade war with China (actually a shooting war would be worse), but on the other hand the present economic relationship between the US and China is not satisfactory from our standpoint. Renegotiating the terms would not be easy, but it seems to be the most promising option available and here are some thoughts on the approach. It’s time to negotiate a new economic relationship with China, Simon Lester & Huan Zhu, Cato Institute, 4/4/17.
I think the president is on the right track re international trade. A $500B per year trade deficit is serious, and we can’t afford to ignore the fact that other countries, e.g., China and Mexico, are using unfair trade practices (dumping, selective tariffs, etc.) to take advantage of us. The Cato video (Ambassadors Mickey Kantor & Susan Schwabb) focuses on the history of previous trade agreements, e.g., NAFTA and TPP, that have not advanced US interests – who cares? - SAFE director
Response: Trade deficits are not inherently bad, nor are trade surpluses inherently good, at least in the short run. Note that trade imbalances are offset by investment flows, so if the US is running deficits with the rest of the world then the ROW is necessarily sending investment dollars our way – what’s so bad about that? Despite the rhetoric, US trade benefit with China is not a big problem, Walter Williams, dailysignal.com, 5/3/17.
If trade deficits continue too long and the ROW loses faith in the deficit nation as an investment haven, adverse consequences should be expected. Sooner or later, deficit nation are forced to make radical adjustments, e.g., impose capital controls on importers, in order to flip the balance of trade in their favor. Fix trade deficit or risk another financial crisis, Peter Morici, newsmax.com, 5/4/17.
The U.S. Net International Investment Position (NIIP) is now minus 45 percent of GDP and if large trade deficits persist, the NIIP could reach negative 60 percent over the next decade—likely sooner. In recent years, no nation has reached that level of indebtedness without eventually going through a reversal of its trade deficit, often accompanied by a financial crisis or severe domestic deflation.
It seems quite appropriate for the US to work towards elimination of its trade deficits by pursuing complaints about violation of existing trade agreements, renegotiating existing trade agreements, and negotiating new trade agreements (possibly on a bilateral basis, although it remains to be seen how the administration will actually proceed).
But this work should be carried out in a systematic, low-key fashion. History teaches that intemperate bluster and precipitous action can do great harm, e.g., lead to trade wars in which everyone comes out as losers. The Smoot-Hawley Tariff and the Great Depression, Theodore Phalan et al., Foundation for Economic Education, 2/29/12.
All things considered, there is little reason to expect a quick balancing of the US trade accounts and jobs pouring back into the US – and there is the potential for substantial damage if the president and his advisers overplay their hand.
Although the thrust of the CATO video is largely historical, it may be useful to understand what has happened in the past as a guide for what policies should be followed in the future. Also, the panelists did offer some ideas about how the USTR should go about renegotiating NAFTA (which everyone agrees is way out of date).