Trump’s Week in Trade in Three Acts: NAFTA, Data, and Tariffs

The Cynical: NAFTA

On Thursday, leaked documents revealed that the administration’s version of Making NAFTA Great Again would make it more like the Trans-Pacific Partnership (TPP). NAFTA, of course, is what Trump called “the worst trade deal maybe signed anywhere, but certainly ever signed in this country.” The TPP, for its part, was “almost as bad as NAFTA.” As former Roosevelt Institute fellow Matt Stoller put the volte face on Twitter, “Now that’s how you break a promise!”

We don’t know what the significance of this document really is. Trump’s press secretary Sean Spicer quickly told reporters that the document is “not a statement of administration policy.” Could this be an example of the Wall Street wing or holdover staff from the Obama administration attempting to sabotage the trade skeptics within the White House? Perhaps.

But if it’s an indicator of where the Trump administration really hopes to go, it will do little to satisfy the progressive trade-skeptical groups whose rhetoric he coopted in the race.

The Interesting: More Trade Data Collection

While we wait for clarification on that front, new executive orders slated to be published today revealed still more clues.

According to the New York Times, a first executive action “will order a 90-day study of abusive trade practices that contribute to the United States’ trade deficit. The Commerce Department and the United States trade representative will do a country-by-country, product-by-product accounting of the reasons for the imbalance.”

The premise of this review is that the U.S. trade deficit is a result of bad behavior on the part of American trading partners, whether currency manipulation, non-tariff barriers, hidden subsidies or other causes.

While bilateral deficits aren’t a hugely significant indicator of overall economic health, persistent and large multilateral deficits are. And for specific industrial sectors, sector deficits are an important indicator. It would be valuable to better understand the causes of specific imbalances and whether solutions lie in correcting partner behavior, renegotiating trade deals, or domestic policies to promote exports.

Indeed, recent months have showed gaping holes in our statistical collection on trade, especially on metrics that would matter for determining the impact of trade on working-class voters. (Our Sustainable Equitable Trade Doctrine report outlines some of the major priorities for data upgrading, including and beyond what the new executive order would propose.)

However, care should be taken to ensure that this exercise doesn’t simply scapegoat trade or trading partners, when a more direct solution could be simply to raise taxes on the rich to finance spending on basic and applied research. Unfortunately, the administration is poised to do exactly the opposite on the latter score, shredding vital supports for manufacturing, as Brendan Duke from the Center for American Progress reports here.

The Uncertain: Tariffs

The Times further reports that “[a] second directive is aimed at increasing the collection of duties from countries whose companies American officials believe are selling products in the United States below their cost of production.”

Used correctly, such countervailing duties constitute a form of international antitrust enforcement, as we detail in our recent report.

But in blunter form, they’re protectionist tariffs that raise costs for consumers.

Might they be justified? We summarize some of the pros and cons below.

What are tariffs?

Under the U.S. Constitution, tariff rates are established by Congress, which can delegate the power to executive branch agencies to collect (and, in certain situations, modify) the amounts due from importers. Currently, Customs and Border Protection, an agency within the Department of Homeland Security, collects tariff revenue and then transfers it to the Treasury Department. Before the imposition of the income tax in 1913, average tariffs sometimes topped 40 percent and tariff revenue accounted for up to 95 percent of government revenue. Today, the average U.S. tariff is around 3.5 percent and tariff revenue accounts for around $40 billion (or 1 percent) of the federal budget. A primary focus of most trade agreements has been to reduce tariffs based on the economic assumption that freer trade will increase GDP for both trading partners. The World Trade Organization enforces rules for when nations can increase tariffs and to what degree.

What are the politics of tariffs?

Generally, producers that compete with imports like tariffs, as often do the labor unions that represent workers in those affected industries. In fact, the Republican Party was historically pro-tariff as a tool for developing domestic industry. To Alexander Hamilton (America’s first Treasury secretary and the forefather of the Republican Party), the case for protective tariffs was so clear that its “propriety…need not be dwelt upon.” Political science research has found that Republican officials were significantly more likely than Democrats to raise tariffs in the 1877-1934 period. Indeed, Republicans supported early domestic pro-competition laws like the Sherman Anti-Trust Act as a counterweight to their restriction of international competition through tariffs. President William McKinley (1896-1901) advocated both tariff protectionism and anti-trust, campaigning with the Trump pre-figuring slogan of “Patriotism, Protection, and Prosperity.”

Democrats, for their part, were more responsive to the agricultural export interests in the South. After President Franklin Roosevelt lowered tariffs in the 1930s, exporters became a more powerful lobby and Republicans gradually “converted.” Nonetheless, Republicans have engaged in some of the most (relatively) protectionist measures of recent years, with Richard Nixon, Ronald Reagan, and George W. Bush threatening or temporarily instituting tariffs.

Do tariffs still matter politically? Since they have not varied greatly in recent years, it’s hard to know for sure. In the past, however, major revisions generated unpredictability that was associated with a loss of congressional control.

Tariffs are sometimes justified…

The most die-hard of free trade economists suggest tariffs are always inefficient, distortionary, and ultimately harmful to overall economic growth. However, a range of pro-tariff arguments are made by economists, political scientists, policymakers, and advocacy groups. A few examples are listed below, but theoretically trade rules could allow for tariffs to offset all manner of national behaviors, from loose labor laws to human rights violations.

Tariffs can protect domestic industries during critical growth periods. Nearly all of today’s developed countries engaged in tariff protection of so-called infant industries. When low-cost imports dominate the domestic market, it may be impossible to attain the economies of scale in production required for an industrialist to find it worth flipping on the assembly line switch.

Tariffs can also correct for unsanctioned behavior among trading partners. The most obvious examples involve tariffs designed to combat WTO-illegal behavior. For instance, the U.S. passed a tariff on Chinese solar panels that were sold to foreign markets below the cost of production (a practice that violates anti-dumping rules in trade agreements).

Likewise, tariffs can be and have been used as a stick to get countries with persistent trade surpluses to bring their macroeconomic fundamentals into global balance.

There are other emerging areas where tariffs may be useful. For instance, the Climate Leadership Council has called for carbon tariffs to limit global warming. The logic here is simple: It doesn’t make sense for the U.S. to consider taxing or regulating carbon produced by our manufacturers if they can just relocate their production to countries not taking such steps. A tariff can be calculated to eliminate any incentive to do so.

… but they also come with drawbacks

Because tariffs can generate winners and losers, both internationally and within domestic economies, they should be used with caution.

Most immediately, any tariff will raise the price of the imported good. In addition to raising prices for consumers, the increased cost of inputs could disrupt local production. President Bush’s 2002 tariffs on Chinese steel, for example, pitted the interests of steel-producing states like Ohio, Pennsylvania, and West Virginia against steel-consuming states like Michigan and Wisconsin. Similarly, in the short term, at least, the proposed Trump tariffs would cause severe dislocations, with the Peterson Institute estimating job losses of nearly 5 million.

More generally, mainstream economists caution that tariffs—even if justified on an infant industry basis—generate rents that domestic firms will mobilize to protect, risking a semi-permanent inefficiency.

Finally, a unilateral imposition of WTO-illegal tariffs can trigger a trade war, with unintended consequences for domestic industry and workers.

Takeaway:

Tariffs are part of policymakers’ arsenals, although they have fallen largely out of favor. Now that the distributive impact of trade is coming back into view, it’s little surprise that they’re back on the policy agenda. However, to maximize benefits and minimize costs, they must be strategically targeted. This does not mean that the tool itself must be categorically banished, but reasonable observers may worry whether Trump has the negotiating, diplomatic, or administrative skill to effectively wield tariffs.