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Trump’s Tariff Gambit

eye on the news

Trump’s Tariff Gambit

The president’s latest move harks back to an earlier era of truly free trade. June 14, 2018
Economy, finance, and budgets
Politics and law

The recent Group of Seven (G-7) meetings in Canada were uncharacteristically acrimonious. President Donald Trump insisted that the United States would impose tariffs, notably on steel and aluminum, until America’s G-7 trading partners (Canada, France, Germany, Italy, Japan, and the United Kingdom) abandon what he described as their unfair trading practices. Our partners threatened retaliation. Trump announced in a parting shot that his ultimate objective is to force the elimination of trade barriers and subsidies everywhere.

Trump clearly aims to upset the status quo, but neither Trump nor the other G-7 members nor China for that matter, can really want a trade war, because the consequences would be disastrous. Though threats and counter-threats are a common aspect of geopolitical maneuvering, the president and the G-7 leaders are playing a dangerous game. As with military confrontations, matters can take on a life of their own and pull events to a place where no one wants to go.

It’s hard to know where Trump actually does want to go. Many viewed his on-again, off-again tariff threats as unserious, mere postures for political gain. What just happened in Canada casts considerable doubt on such interpretations. Since he cannot want a trade war, Trump might simply be seeking a better deal for the United States, and looking to force others to make major concessions. His tough posture might center on the ongoing efforts to renegotiate the North American Free Trade Agreement (NAFTA), which may explain his singular abuse of Canadian prime minister Justin Trudeau. Alternatively, if he means what he says about the elimination of all trade restrictions and subsidies, then his threats might be a way to bully or dare U.S. trading partners to move in that direction.

Such coercion might get results. The United States, though vulnerable to recession, is better positioned than most of its trading partners should it come to blows, because we’re less export-dependent than they are. According to the Organization for Economic Cooperation and Development (OECD), exports account for some 13 percent of U.S. gross domestic product (GDP); by contrast, exports (mostly to the United States) account for some 30 percent of Canada’s economy. Exports (though mostly to the rest of Europe) make up about 30 percent of the French economy, too, and about 45 percent of Germany’s economy (German exports are spread broadly throughout the world, including to the United States). Exports amount to 30 percent of Italy’s economy, 28 percent of Britain’s, and 16 percent of Japan’s. In a trade war, the pain would be sharper elsewhere than here. Such comparisons might help in a diplomatic game of chicken, but should it come to a genuine breakdown of trade, the United States would nonetheless suffer horribly.

Much of the commentary on this dispute dwells on the truth or falsehood of Trump’s claims and the counterclaims from abroad. This is a distraction, though, because both sides are essentially right, from their perspective: every nation uses tariffs and subsidies to tilt the playing field in it its favor. What Trump says about our trading partners is largely correct, as is what they say about the United States. What each says about itself is, naturally, selective.

Also misleading is the frequently heard criticism that Trump is trying to, in the words of the New York Times, “upend the global trade order built by the U.S.” But the original international trade order that the United States built after the Second World War fell apart decades ago. In the years following the war, the United States steered clear of the kinds of treaties and agreements that today stand popularly as examples of free trade. Instead, the U.S. sought the universal elimination of trade restrictions and used its economic power to bully more protectionist nations into compliance. The General Agreement on Tariffs and Trade (GATT), the precursor to the World Trade Organization (WTO), ran a series of negotiations, called “Rounds,” with support from Washington, to get all nations to reduce tariffs and other trade restraints. This approach ended years ago. The last, weak effort failed when the Doha Round, overseen by the WTO earlier in this century, ended without an agreement.

The movement away from this universal approach actually started long before Doha broke down. In the 1980s, Washington and other world powers began to negotiate what trade economists call “preferential trade agreements” (PTAs). In these, the signatories trade openly among themselves but exclude other economies, sometimes with more restrictions than previously existed. NAFTA, negotiated in the late 1980s and instituted in the early 1990s, was among the first of these. The Trans Pacific Partnership (TPP) is a more recent example. The European Union might count, too, since it imposes high barriers to trade with non-members. These PTAs, though now widely associated with free trade in the media, are in many respects the opposite. Certainly, that is the opinion of WTO director-general Pascal Lamy and an august list of trade economists, all of whom have urged nations to abandon such agreements and return to older, universal efforts at freer trade.

Indeed, if Trump means what he says about eliminating trade restraints universally, he offers a return to the postwar order established by the U.S., not its destruction. If the president really wants to revive this system, as some (but only some) of his pronouncements indicate, he has hardly been forthcoming about his intentions. Certainly, he has said nothing wistful about the Truman, Eisenhower, or Kennedy administrations that actually promoted such an approach. Whatever his specific objective, he is playing with fire—for his own and his party’s electoral chances in 2020 (if not this year), and for the world economy.

Milton Ezrati is a contributing editor of The National Interest and chief economist of Vested, a financial communications firm. He is the author of Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live.

Photo by Leon Neal/Getty Images

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