Embracing bilateral deals and new tariffs, the incoming president casts a zero-sum view on world trade.
- By David FrancisDavid Francis is a staff writer for Foreign Policy, where he oversees FP's breaking news blog, The Cable. An award-winning journalist, David has reported from all over Europe, Nigeria, Kenya, Mexico, and Afghanistan on terrorism, national security, the geopolitics of energy, global economics, and the European financial crisis. His work has been published in outlets including the Christian Science Monitor, the Financial Times Deutschland, Slate, and SportsIllustrated.com.
President-elect Donald Trump and his economic team are threatening to dynamite the foundations of global trade that have underpinned decades of growth, with potentially dire consequences for the economy and for America’s place in the world.
Trump telegraphed a confrontational approach to trade while on the campaign trail, especially with countries like China and Mexico, threatening big tariffs and calling for the United States to pull out of the World Trade Organization. He’s also vowed to scrap sweeping, multilateral trade deals like the Trans-Pacific Partnership and instead boost smaller-scale bilateral deals with individual countries.
By naming Peter Navarro, a China-bashing economist at the University of California at Irvine, as head of his newly formed National Trade Council, Trump signaled Wednesday he will indeed turn that hawkish rhetoric into trade policy — despite plenty of concern among mainstream and conservative economists, and big chunks of the U.S. business community.
The Trump transition team praised Navarro, who advised the campaign, for “challenging the prevailing Washington orthodoxy on so-called free trade.” Trump, who said he read Navarro’s 2006 book, The Coming China Wars, said the rogue economist “has presciently documented the harms inflicted by globalism on American workers, and laid out a path forward to restore our middle class.”
Trump has also made clear that Wall Street raider Wilbur Ross, his pick for commerce secretary, will play a leading role in shaping the administration’s trade policy. Taken together, the moves suggest Trump will seek to sideline the role played by the U.S. trade representative, traditionally the president’s main trade advisor. Trump is reportedly considering tapping Jovita Carranza, a former official in the Small Business Administration with no apparent experience in trade, as U.S. trade representative.
And the threats of punitive tariffs may not have been left on the campaign trail, either. CNN reported Thursday that Trump is considering slapping tariffs, perhaps of high as 10 percent, on all imports after taking office. That would likely violate WTO rules, and could spark retaliation from trading partners, which would weigh on U.S. exports.
The Trump transition team said Thursday it is too early to discuss specifics of future trade policy.
“It’s gruesome. It’s shocking that he wants to turn back the clock to another age, to a manufacturing economy,” said J. Robert Vastine, a former Treasury Department trade official in the Ford administration. “Somehow we get there by abdicating trade agreements? I just can’t believe it.”
The incoming Trump administration’s trade architects share with each other and the real estate mogul some notions about trade that are odds with most economists. They tend to view trade as a zero-sum game, where countries can only gain at other countries’ expense, and where trade deficits are seen as a sign that a country is “losing.”
But since David Ricardo in the early 19th century, most economists see trade as largely mutually beneficial.
Trump has “a very different view of reciprocity in trade than has historically been the case,” Gary Hufbauer, a senior fellow at the Peterson Institute of Economics and former Carter administration trade official, told Foreign Policy.
Trump’s team blames Beijing and bad trade deals for many of the ills affecting U.S. manufacturing. Navarro, in particular, argues that China’s trade policies, rather than long-term trends like rising automation in manufacturing, are responsible for wiping out some 25 million U.S. manufacturing jobs.
Navarro says China keeps its currency cheap and unfairly supports exports by Chinese firms, giving them an unfair advantage in the U.S. market. Like Trump, he has called for tariffs on Chinese goods of up to 45 percent to level the playing field. In fact, in recent years, Beijing has spent vast sums of money propping up the value of its currency, not pushing it down.
Now China is grappling with the implications of a Trump administration that could put into practice what many in Beijing had dismissed as election-year rhetoric. In 2012, Navarro made Death by China, a documentary film based on his book. In it, he claimed that lax standards, cheap currency, and illegal subsidies are helping Chinese firms flood the U.S. market and decimate American manufacturers; Navarro says in the film that Chinese tactics shuttered more than 50,000 factories in the United States.
In an article in the National Interest earlier this year, Navarro detailed how a get-tough policy on China would shape Trump’s economic plans. “Trumpnomics,” he wrote, “will eliminate the ‘pull’ of China’s unfair trade practices like illegal export subsidies, currency manipulation, piracy, and the use of sweatshops and pollution havens.”
Xinhua, the official Chinese news agency, said Thursday that Navarro’s appointment is a “strong signal that Trump could carry out most of his trade policy promises on the campaign trail.”
Navarro, a Foreign Policy contributor, did not respond to requests for comment.
If most economists think Trump and his advisors misdiagnose trade’s impact on the economy, they are even more worried by the remedies the incoming president is proposing.
Slapping unilateral tariffs on all imports, as Trump is reportedly considering, would violate WTO rules, and almost certainly would spark a massive retaliation by U.S. trading partners. Targeted but steep tariffs against countries such as China and Mexico — two of the biggest U.S. trade partners — would be especially risky. In 2015, two-way trade between the United States and China totaled $659 billion, while two-way trade with Mexico amounted to $584 billion.
“We call this absolute trade war,” Marcus Noland, executive vice president at the Peterson Institute, told FP recently. “There are millions of Americans, many of whom are vulnerable, who have no idea that their livelihoods are at risk.”
A willingness to resort to unilateral tariffs, even in violation of WTO rules, highlights the dim view that Trump and his economic team take of the framework that’s come to govern world trade since the end of World War II. That includes Trump’s campaign pledges to pull the United States out of the WTO and his antipathy toward big, multi-country trade deals like President Barack Obama’s proposed Trans-Pacific Partnership.
But pulling out of the WTO would have steep costs for the U.S. economy, the Peterson Institute found. American exports get privileged access to about 96 percent of the world’s consumers through the WTO and other trade agreements in effect. Although Washington has 20 free-trade deals with individual countries, the bulk of U.S. trade takes place with the rest of the world, thanks to the low-tariff access made possible by the WTO.
Bailing out of the WTO, like ditching the TPP, also risks ceding America’s role in shaping the rules governing the global economy, experts have warned. For the Obama administration, TPP was the centerpiece of the U.S. pivot to Asia, and would help Washington “write the rules of the road,” including raising environmental and labor standards. A U.S. withdrawal would open the door for China to gain more economic and diplomatic influence in Asia and Europe, experts say.
A China-dominated regional trade pact, the Regional Comprehensive Economic Partnership, is already shaping up as a successor to the doomed TPP, giving Beijing a bigger role in shaping Asia’s future. And European governments and firms are lining up to court Chinese business — and accept Chinese political influence — as Beijing builds its “New Silk Road” across Central Asia to Europe.
“TPP is very important for foreign policy reasons. China is negotiating RCEP, which could put U.S. companies at a disadvantage,” William Krist, who was a U.S. trade negotiator in the Carter and Reagan administrations, told FP. “It’s important for our allies around there to think we’re reliable.”
Trump and his team argue that existing trade pacts and agreements leave U.S. firms at a competitive disadvantage and are largely responsible for the U.S. trade deficit, which last year reached $532 billion. The North American Free Trade Agreement was a favorite punching bag of Trump’s on the campaign trail.
“The problem with regional trade agreements is you get picked apart by the first country, then you negotiate with the second, you get picked apart, and you go with the third one, you get picked apart again,” Ross said last month. Instead, Trump’s team favors bilateral trade deals with individual countries, with the idea that the U.S. trade negotiators could wrest a “better deal.”
“What has to be put into perspective,” Ross said, is “we are the big market, we are the world’s biggest importer, we need to treat the other countries as good suppliers, not as determining the whole show.”
But trade experts say bilateral deals offer few advantages over more ambitious pacts like TPP or a similar deal in the works with Europe. Bilateral deals don’t mesh well with sprawling, global supply chains that increasingly underpin manufacturing. And they can take just as long to negotiate and get through Congress, but deliver fewer economic benefits than big deals do.
Boeing’s 787 Dreamliner, for example, uses 2.3 million components, 30 percent which come from countries including Italy, Japan, Germany, Korea, the United Kingdom, Sweden, and France. Raising barriers to cross-border trade would make those planes, and thousands of other products, more expensive to produce. That would be especially risky as global trade is already facing plenty of headwinds. This year, for the first time this century, trade is growing at a slower rate than the global economy.
“The evolution of the global value chain is that trade is done within many countries playing by the same rules, not multiple countries playing by multiple sets of rules,” said Wendy Cutler, a former U.S. trade negotiator currently at the Asia Society Policy Institute.
And small, bilateral deals aren’t any quicker to pull off, either. The U.S. free trade agreement with Panama, for example, took nine years from conception to conclusion, but covers just $8.2 billion worth of trade. The TPP, in contrast, covers a dozen countries that collectively account for 40 percent of global economic output, but took only five years to negotiate.
“It takes just as long to negotiate a bilateral agreement as it does a multilateral or regional agreement, and it has much less impact,” Mickey Kantor, who served as U.S. trade representative under President Bill Clinton, told FP.
“They have very little impact on overall U.S. trade benefits.”