By starting a trade war, President Trump is playing with matches in a gunpowder factory. Other nations are retaliating, creating the risk of escalating tit-for-tat protectionism.
But is that really what’s happening? Is it possible that the President instead is playing hardball to get other nations (who generally have more trade barriers than America) to open their markets?
Depending on who you ask, you get different answers to those questions.
Steve Moore of the Heritage Foundation lavishes praise on Trump for being a de facto proponent of free trade.
Trump and the European Union reached a handshake deal that is designed to LOWER tariffs on both sides of the Atlantic. They agreed to shoot for zero tariffs on both sides of the Atlantic. Sounds like freer and fairer trade to me. …It gets better:
the two sides also agreed in principle to find ways to combat “unfair trading practices, including intellectual property theft, forced technology transfers, industrial subsidies and distortions created by state-owned enterprises.” …Before Trump came on the scene most nations denied that this cheating and stealing were even happening. Any progress in ending these unfair trade practices is an indisputable victory for the U.S. Well done, Mr. President. You’ve accomplished something in 18 months that no president has in at least 30 years. …We have here more evidence that the American president is the master negotiator. …the key point: Trump’s tariffs are meant to force other countries to LOWER theirs.
Likewise, Marc Thiessen of the American Enterprise Institute argues in the Washington Post that Trump is playing a clever game designed to produce free trade.
Trump was roundly criticized for publicly berating allies over their trade practices and provoking a needless trade war. Well, once again, it appears Trump is being proved right. On Wednesday, he and European Commission President Jean-Claude Juncker announced
a cease-fire in their trade war and promised to seek the complete elimination of most trade barriers between the United States and the European Union. …Zero tariffs. Wednesday’s breakthrough with the European Union shows that, contrary to what his critics allege, Trump is not a protectionist; rather, he is using tariffs as a tool to advance a radical free-trade agenda. …Trump’s hard-line trade strategy is being vindicated. …the E.U. negotiating zero tariffs… That’s three-dimensional trade chess. …If Trump succeeds in using trade wars to bring down European and Chinese trade barriers, he may end up being one of the greatest free-trade presidents in history.
Claude Barfield of AEI doesn’t agree with his colleague that Trump is a closet free trader.
…one cannot be counted a free trader if one subscribes to the flat-earth equivalent theory that trade deficits (or surpluses) can be changed dramatically by trade policy rather than by changes in a nation’s savings/investment ratio — or indeed that bilateral trade deficits
are evidence of “unfair” trade practices or the US being “raped” by its trading partners. One cannot be a free trader if one supports, as the president does, a “Buy American” policy, no matter the ultimate cost to US businesses and consumers. One cannot be a free trader if one prostitutes the concept of national security by invoking it for purely protectionist trade actions against historical allies. One cannot be a free trader, or free market leader, if one compounds protection with outsized subsidies, as the president contemplates with a $12 billion farm bribe. …Thiessen made a valiant effort to craft a silk purse out of sow’s ear. But, given their vehement protests over Trump’s tariffs, it seems that even pig farmers aren’t buying it.
Veronique de Rugy also has a very jaundiced view of Trump’s actions on trade, explaining that higher tariffs aren’t the right route to achieve free trade.
…trade…is one policy area where he’s been remarkably consistent over the years. That’s why I’m always surprised whenever articles, TV commentators, or friends in casual conversations argue that his real goal in boldly imposing unilateral tariff hikes
is to achieve freer trade. …Nothing in what the president has ever said suggests that he’s anything but a diehard mercantilist. …unilaterally increasing tariffs against other nations has never been an effective way to get them to lower theirs. Other government officials, often protectionists themselves, use the attack as an excuse to raise their own tariffs even higher to protect domestic interests. Retaliation from Mexico, Canada, China, and the European nations is proving this point once again. …Historically, the only way the United States has managed to get other countries to drop their trade barriers has been through multilateral agreements where everyone commits to behaving better. It is not a perfect process, but it beats pretending that Trump’s protectionism will do any good.
So who’s right, the Thiessen-Moore team or the Barfield-de Rugy team?
For what it’s worth, I hope Thiessen and Moore are right, but I’m afraid that Barfield and de Rugy have a stronger argument (as illustrated by this scale that I recycled from two days ago).
Trump repeatedly has demonstrated that he has no idea how trade works. He actually thinks a trade deficit is somehow evidence of economic defeat. But that’s nonsensical. The “deficit” in trade only exists because foreigners are anxious to invest in the U.S. economy. In other words, it’s really a sign of a capital “surplus.”
Veronique mentioned this in her column, and also noted that this won’t change in a zero-tariff world. Indeed, the so-called deficit would probably increase since America would become an even more attractive place to invest.
Trump’s obsession with increasing exports relative to imports is misguided. The imports are a means to achieve what Mark Perry of the American Enterprise Institute calls “job-generating foreign investment surpluses for a better America.” That also means that a world with no tariffs will not necessarily translate to a lower U.S. trade deficit. …Thus the president would likely hate the outcome of a zero-tariff world, putting us back where we are today.
Moreover, let’s not forget that the tax reform legislation – particularly the lower corporate rate – also will make America more attractive to foreign investors. And that also will lead to a higher trade deficit.
So unless Trump learns that a trade deficit is not a bad thing, he’d probably react by pushing for more protectionism instead of more trade liberalization.
That being said, I’m going to conclude with some optimism. Not because I think Trump wants the right thing or believes the right thing, but rather because he a) doesn’t pay attention to details, and b) values appearance over substance.
Consider what happened with the big spending battle with Congress last year (which actually dragged into this year). Trump’s big issue was illegal immigration and building a wall, yet he capitulated to a spending bill that basically ignored his demands. Yet he signed it because he decided that more defense spending could be portrayed as a victory (even though the bill was larded with additional domestic spending).
Maybe the same thing can happen on trade. In this fantasy scenario, he’ll huff and puff about the trade deficit and then wind up agreeing to a good pact because the other side makes some splashy concession that Trump can portray as a win.
At least that’s what I hope will happen. Especially since I don’t enjoy thinking about the alternative outcome.
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Image credit: Gage Skidmore | CC BY-SA 2.0.
