Trump’s trade policy is ill-advised and dangerous

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by Hans Dembowski

An erratic US president is playing with fire

US President Donald Trump has now formally declared that he will impose tariffs on steel and aluminium imports. The rates will be 25 % for steel and 10 % for aluminium. Canada and Mexico will initially exempt, and other allies of the USA can apply for exemptions. These steps are ill-advised and dangerous.

They are ill-advised because, as many economists have argued, they have the potential to slow down the global economy, hurting the US economy as much as they will hurt those of steel exporting countries. They are dangerous because other countries are now under pressure to retaliate. If they do not do so, they will allow Trump to bully and blackmail them. They would unilaterally renounce the principles of rules-based trade.

Retaliation may tempt Trump to impose yet more tariffs. Such tit-for-tat action can escalate into a trade war that would severely damage the global economy. It could ultimately affect all companies that depend on cross-border supply chains. In today’s globalised world, that means almost every manufacturing business in advanced nations, emerging markets and developing countries. 

The trade-war risk is exacerbated by the fact that the Trump administration has been slowly undermining the arbitration system of the World Trade Organization. If a government considers tariffs newly imposed by a trade partner to be unfair, it can appeal to the WTO system – and if the WTO arbitrators accept its arguments, it gets the permission to impose punitive tariffs in retaliation.

For months, the White House has been blocking the appointment of new arbitrators who would replace those who retire (see my recent D+C/E+Z contribution “The Trump jolt”). Without a sufficient number of arbitrators, decisions will become impossible later this year. The implication is that retaliatory tariffs could no longer be legitimised by WTO decisions and trade disputes would become much more difficult to resolve. Global trade is heading for a chaotic free-for-all era.

At this point, WTO arbitrators should permit retaliatory tariffs. The case is difficult because the Trump administration is the first government arguing in the WTO context that it needs tariffs for national-security reasons. In principle, that is WTO compatible. There is no precedent, however, and the rule is not clear cut. Trump is opening a kind of Pandora’s box. Following his example, any country might impose "national-security" tariffs on all sorts of products. Almost any commodity, including food, can be considered security-relevant, after all.

If appealed to, WTO arbitrators should therefore focus on the fact that Trump's arguments are incoherent. On the one hand, he argues that his tariffs are needed to protect national security. On the other hand, his tweeting reveals that he wants to use the tariffs as bargaining chips in trade talks, including with Canada and Mexico. There is no indication at all of defence industries in the USA lacking metal supplies, but a clear pattern of Trump catering to his base in rust-belt states. This is a quite evidently a trade, rather than a security issue. Why else would the president have invited steel workers to attend the event he hosted to sign the new rules. The WTO cannot accept a flimsy "national security" pretext if it is to protect the rules-based system.

If the idea is that the USA needs its own steel and aluminium industry, it does not make sense to exclude Canada, Mexico and potentially other allies only temporarily. If, however, the idea is that US-based armed manufacturers can rely on supplies from close allies, they should be exempted from tariffs permanently. If, as seems most likely, the idea is to please Trump’s base and detract from his administration’s many scandals, it is not valid in legal terms at all. None of this matters, however, if arbitrators do not get a say anymore, which may be the case in a few months.

To some extent, regional trade agreements and meta-agreements between them may contribute to limiting the damage. It is interesting that the Trans-Pacific Partnership is now being concluded even though Trump withdrew the USA last year. The remaining governments emphasise that they want a rules-based system. Apparently, they are inviting others to join. However, trade agreements are very hard to negotiate because they touch upon very many interests in very many sectors and very many places. 

That Trump’s trade policy is mad has been pointed out by many commentators. I’ve done my best to summarise the most important points. If you want to read more, check out a column that Martin Wolf, the chief economist at the Financial Times (which uses a paywall), wrote. It summed up the “trade follies” brilliantly. In the New York Times (which allows you to read a number of articles free of charge), Paul Krugman has been hard on Trump’s case as well. Relevant columns were posted on Tuesday and today. Today's issue of The Economist includes relevant stories too. 

Trump is erratic and loves to play with fire. This is something the global public became aware of even before he became president. It is absurd to expect him to assume responsibility at some point because he obviously has no understanding of what it means to assume responsibility. He excels in bragging, bullying – and changing his mind.

The time to consider his personal unfitness for the office he holds is over. Criticism must now focus on the Republicans in Congress who haven been – and still are – enabling him. Some now warn that tariffs are an awful policy choice and ask him to reconsider. Others still support him, saying he is only doing what he promised. Neither side has much credibility.

Unfortunately, it is obvious to anyone who cares to look that the entire Republican party is unprincipled and prone to double standards. They used to demand balanced budgets, but have now decided that huge tax cuts are more important. They promised to repeal Obamacare and replace it with something much better, but are now slowly destroying the health-care system in small steps because they lack any coherent concept. They used to insist on family values, but now they look away when their president pays hush money to a porn star. They used to attack Hillary Clinton because she may have used her office as Secretary of State to put important people in touch with the charitable foundation of her husband Bill Clinton. Today, Republicans refuse to look into how Trump and his family are using the White House to enrich themselves.  

It is fascinating to watch how the media, civil society and state and local governments are fighting back in the USA. US democracy may yet recover from the Trump disease. For the moment, however, it is quite obvious that governance in the USA is struggling with a very serious illness. Due to Republican negligence, checks and balances are not working.  

P.S.: Yet more diversion: the headline news today is not tariffs, but Trump's decision to meet North Korean dicatator Kim Jong Un. I'll refrain from commenting, and will only mention that a top-level meeting with the US president has been high on the wish list of North Korean leaders since Bill Clinton was in the White House. Trump, who likes to act tough, is set to be the first to make it come true. Kim is likely to make it look like his nuclear programme has made him so powerful that Trump must treat him as an equal. Perhaps that is necessary to maintain peace - but it certainly does not make America look great again.   

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