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Trump’s Road to Trade Wars

1st March 2017

President Trump’s address to both Houses of Congress has been widely covered, and my own comments can be found here. The bottom line I drew was it was the same man talking economic nationalism and US sovereignty in softer colours. The reasons his speechwriters gave him this particular address are open to speculation, but poor opinion polls, a turbulent first few weeks in the White House, and the need to win over lukewarm friends in Congress for his spending plans must all have played some part. What Trump’s speech lacked was any details of policies, and, importantly, any focus on one of the Administration’s most contentious issues: trade.

Yet, the day before the speech, the Financial Times’ Shawn Donnan ran a story on how the Administration’s aggressive trade philosophy might be pursued by passing or sidelining the World Trade Organisation (WTO). If true, and there are few reasons to doubt it isn’t, this would have huge implications not just for US trade policies with China, and America’s NAFTA partners, Canada and Mexico, but also the global trading system. It is doubtful that Brexiteers here in the UK will pay any attention to this, but it should give them significant cause to reflect just what a cliff-edge Brexit might mean if the WTO fall-back position turns out to be as meaningless as it might be if the institution’s raison d’être is undermined by the US.

The basis for the FT story seems to have been a White House policy document, called National Trade Policy Agenda 2017 which you can find here. It says specifically that the objectives and priorities outlined in the document are not the basis for legislative proposals at this time, but it confirms a lot of what we thought Trump’s trade philosophy was about, and it could certainly form the basis for executive or legislative action.

It defines the government’s 4 major priorities as defending US sovereignty in trade matters, enforcing US trade laws strictly, using all sources of leverage to get other nations to open up to US exports and protect US intellectual property rights, and negotiating better trade deals. It is critical of the WTO’s dispute settlement procedures and outcomes, and insistent that one of America’s basic principles has always been the dominate of US law and ‘not rulings made by foreign governments or international bodies’.

The implication is that US law can or more likely will be used more forcefully to press US interests. Under the Trade Act 1974, Section 301 authorises unilateral retaliation against foreign countries that impose unfair trade practices. It was used against Japan in the 1980s, but hasn’t been since the WTO was founded.  Section 201 allows the government to impose temporary restrictions on imports of specific products if an import surge has caused injury or threat, although investigations under this section have to be conducted by the independent International Trade Commission. The US could potentially even have recourse to the Tariff Act 1930, under which the President is authorised to raise tariffs and restrict imports from countries that affect US commerce unfairly. Needless to say, this one has been gathering dust for a long time.

At the very least, though, the US could raise tariffs within the context of WTO membership, if there were product-by product scope, though it couldn’t single out individual countries. Failing that, it could raise tariffs specifically against China, or other named countries, and simply ignore the WTO and any resultant dispute procedures.

It is highly likely that some combination of the above is going to be deployed with attitude in coming months. The report states that ‘The status quo is unsustainable – for too long Americans have lost business to other countries….’ and expands on unfair and distortionary trade practices such as government subsidies, theft of intellectual property and restricted market access, currency manipulation, state owned enterprises, technical and regulatory barriers that curb competition and disadvantage the US.

There is no question that China is very much in the cross-hairs of the Administration’s thinking. Other complaints that have been made about China include dumping as a result of policies that encourage over-capacity; export subsidies; cyber-espionage; local policies such as ‘indigenous innovation’ that favour Chinese companies; restrictions on access to service sectors including banking, films and entertainment, insurance and legal; and industrial policies for state enterprises that mask protectionism. These criticisms are of course not new, but they have increased in intensity and significance over time. Indeed, the Obama Administration has bequeathed to its successor more than a handful of pending disputes to manage or progress. These include WTO dispute settlement cases filed against China over subsidies to certain aluminium producers, tariff rate quotas and excessive subsidies for rice, wheat and corn, and export duties on 15 different raw materials. The US Chamber of Commerce, moreover, has issued a report complaining about US trade restrictions in agriculture because of trade barriers, and investigations are underway surrounding China’s industrial policy to shape the market in semiconductors in its own favour. Any or all of these could be taken up by the Trump Administration to further US interests.

The major exports shipped from the US to China comprise oil seeds and grains (mostly soybeans), aerospace products, motor vehicles, semiconductors and electronic components, and navigation, measuring and medical instruments. China is America’s second biggest agricultural export market. Boeing is a huge supplier to the Chinese aviation market, having received an order for 300 planes during Xi Jinping’s 2015 visit to the US. And General Motors has sold more units in China in each of the last 5 years than in the US, with forecasts of steady Chinese market growth. If the trade climate became tense, therefore, it is easy to see where Chinese retaliation might be targeted. And that’s how things can get out of hand. literally as one thing leads to another.

America’s preoccupation with China is understandable  of course, even China’s size, geopolitical status, and the fact that 70 per4 cent of the US trade deficit is with China. But the mechanistic thinking about China is both wrong and dangerous. Twenty-five years ago, China supplied less than 4 per cent of US manufacturing imports from Asia. Today, China supplies 26 per cent of those imports, but remember that America’s manufacturing imports from Asia as percentage of total manufacturing  imports is about the same today (47 per cent) as it was in 1990. What has happened is a substantial relocation and restructuring of manufacturing within Asia, mostly away from Japan and also Taiwan and Korea to China. Supply chains, Martha, supply chains. By focusing on China, and bilateral trade relations, US trade policy is disrupting the very supply chains on which its own companies depend, along with everyone else’s. It’s why multilateral trade agreements came to be popular in the first place.

The US certainly has a case in arguing that its exports are constrained by China’s trade policies. Yet there are forums and channels, including the Strategic Economic Dialogue, in which it can negotiate and bargain with China, if it simply wants to redress trade grievances. I have stated before though that the Trump presidency seems to want to weaken China, using trade as a tool, not simply resolve trade spats.

And when it says that the WTO has become overtaken by countries that do not adhere to free market principles in their economic systems, and do not operate according to transparent legal and regulatory norms, something potentially serious is afoot when it comes to the integrity of the global trading system. The US can’t leave the WTO without Congressional approval, which seems unlikely, but the implicit threat that it will use its own laws, unilateralism and reciprocity to force China (or others) to open up markets is taking us steadily towards a trade war.