The Trade War’s Winners Don’t Include UsRobert B. Zoellick
President Trump’s trade thunder booms so frequently that the public has difficulty discerning what’s really happening. After more than two years of trial and much error, Congress and the country should step back to survey the big picture.
The president’s trade policy represents a fundamental break from the past 85 years. It’s more than a matter of aggressive negotiating tactics. Not since Herbert Hoover has a U.S. president so openly embraced trade protectionism. In his inaugural address, Mr. Trump proudly proclaimed himself a protectionist; we should now believe him. His assertion that he is a “tariff man” should convince any holdouts. The president also likes unpredictability, creating the kind of uncertainty that confuses business planning and investment. For example, after signing the U.S.-Mexico-Canada Agreement (the new North American Free Trade Agreement), he stomped on his own deal by threatening to hike tariffs on Mexico because he was angry about Central Americans seeking asylum.
He will not change. Trade—like the wall with Mexico and hostility to immigration—is a core issue for the president’s political base. He must keep it boiling.
What have been the effects of Mr. Trump’s return to protectionism? First, the U.S. has lost markets for exports because it dropped out of deals like the Trans-Pacific Partnership. The TPP lowered trade barriers in Asia for others, but not, thanks to Mr. Trump, for the U.S. The European Union has gained preferential access to Japan and other markets. China has lowered its average tariff for others to 6.7%.
Second, the tariffs have provoked world-wide retaliation, hurting America’s most productive businesses and farmers. For Americans, China boosted its average tariff to 21.8%. Congress now doles out tens of billions of dollars to U.S. farmers to compensate for lost sales. U.S. exporters will pay a price for years because of supply-chain shifts.
Third, the president’s protectionism costs American businesses and families. The administration raised taxes on 15% of U.S. imports even before the upcoming tariff increase on almost all Chinese goods. Mr. Trump started by raising tariffs on intermediate goods—on aluminum, for example, even though 97% of U.S. jobs in the sector use aluminum as an input. The Peterson Institute for International Economics estimated that the cost paid by steel users for each steel job gained by tariffs was about $650,000. As U.S. firms pay more for inputs, some are regretfully moving operations abroad to remain competitive. In two years, the president has increased the average tariff on Chinese goods to 24%, up from an average of 3%. Americans will end up paying these in the form of higher prices.
Fourth, with increased costs and uncertainties about doing business in the U.S., foreign direct investment is falling. This suppresses job and wage growth and disrupts international supply chains.
Fifth, President Trump’s trade policy ignores how the U.S. has used free-trade agreements to write pro-U.S. rules for cutting-edge sectors such as medical and financial services, intellectual-property rights, and data access and security. Trade agreements also allow the U.S. to establish best practices in anticorruption laws, border procedures and transparency. Because U.S. businesses have been leaders in innovation, past American negotiators have been at the forefront of international rule-making. This president disdains rules; he acts as if governments control purchases like in old-style mercantilism.
Mr. Trump counters that these costs are the price Americans must pay for his deal-making. But his record is pitiful. His administration renegotiated with South Korea, adding a steel quota that hurts U.S. users, raising a quota for U.S. autos that companies had already failed to meet, and extending a 25% tariff on trucks. The USMCA is a mixed bag at best. It weakens protections for investors in Mexico at a time when that nation’s government is making investors nervous. The deal enfeebles pledges by governments to allow foreign companies to bid for procurement contracts, thus raising costs for government purchases. The new Nafta even has an expiration date and is subject to review every six years—a recipe for uncertainty. The heart of the renegotiation is a maze of new requirements for how companies should build autos. It will make the North American industry less competitive globally. Ironically, the agreement’s useful modernizations are drawn from the TPP, which Mr. Trump trashed. But the USMCA may never become law; Democrats in Congress want changes and time for action is running out.
Negotiations with the EU are stalled. India and the U.S. have each raised barriers to one another. Mr. Trump is even struggling to strike a small deal with Japan to recover some access that he lost by dropping out of the TPP. He has passed up opportunities to capitalize on China’s need to liberalize. Chinese retaliation carefully excluded almost one-third of U.S. exports because Beijing recognizes, as Mr. Trump does not, that higher taxes on inputs hurt a nation’s global competitiveness. The president’s apologists have retreated to arguing about which country has been hurt more, a sure sign of trade defeatism.
Mr. Trump has even threatened to leave the World Trade Organization. The Reagan, George H.W. Bush and Clinton administrations fought to create the WTO, including its dispute-settlement procedures, because they knew Americans could compete successfully with fair, enforceable rules. The current president, by contrast, has blocked appointments to the WTO appeals body to try to put it out of business by year’s end. The U.S. sabotages or ignores efforts by other countries—even China—to tighten rules on state-owned enterprises and developing countries.
Amazingly, even amid such a record of failure, the Washington Post last month referred to the administration’s “mixed success” on trade. What success? Even by the president’s own measure, the U.S. trade deficit, he’s losing. If the U.S. slides into recession, his policies will make conditions worse. Congress needs to wake up and push back. Business executives should support them before the trade smashup leads to an economic breakdown.