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The Two Faulty Assumptions of President-elect Trump’s Trade Policy

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By William Reinsch

I’ve delayed commenting on the election, but I do want to make some general comments about the incoming administration’s likely trade philosophy and how they might implement it. A more detailed discussion of specific policy initiatives will come later.

First, keep in mind that the president-elect has a long history of changing his mind and contradicting his past statements, making predicting what he might do very difficult. However, it looks like a Trump trade policy will be based on two assumptions:

  1. The rest of the world behaves like mercantilists, and as a result we’re being taken to the cleaners. Instead of ranting on and on about free trade we should adopt the tactics of others and play their game to our advantage.
     
  2. They need us more than we need them. This appears to be based on looking at bilateral trade balances and assuming that if we have a deficit — i.e. the other country is selling us more than we’re selling them — we have leverage because any action we take will hurt them more than it will hurt us.

I believe both assumptions are profoundly wrong, and acting on them will cause us serious and lasting problems.

First, it is true that there are miscreants in the trading system. We tolerated them for a long time because it didn’t matter that much, trade being a smaller part of our economy than many nations, and because we had larger geopolitical objectives to pursue, like rebuilding Europe after WWII and facing down the Soviet Union in the Cold War. However, we can’t afford to tolerate them any longer — and even if we could, the election made clear that the American people don’t want to. But fighting it by being as bad as the other guys are is not a winning strategy, particularly when we have less leverage than we think (see below). 

We have spent the past 65 years developing a disciplined, rules-based trading system that is based on rule-of-law concepts and Western models of fair and open trade, and we have benefited mightily from that system. If we start ignoring the rules, we undermine the system and our place in it and effectively hand over leadership to others, like China, who are not as invested in it and also better at cheating than we are. No good will come of that for anybody.

Likewise, the idea that we have the balance of leverage is wrong on both economic and political grounds. Economically, with 95% of the world’s consumers outside the U.S., we cannot grow our economy on a “Buy American” policy; we have to pursue a “Sell American” policy and promote our exports. Some of our biggest targets, like China and India, have, like it or not, been the engines of global growth in recent years — it is China’s slowdown that has reverberated throughout the world, reducing trade flows and contributing to lower commodity prices. A cycle of trade retaliation as we try to leverage them will both make that worse and cripple our exports, not to mention the global value chains we have constructed that include goods and services from a wide variety of countries.

Politically, we may think we have more leverage, but the other countries don’t see it that way. To the Chinese, for example, we’re a declining power and they’re a rising one. We might disagree with that — for good reason — but they will act on the basis of their assumptions and beliefs, not ours. We might be able to strong-arm some small countries, but nobody that will make a difference. America the bully is not a winning strategy in today’s world.

In addition, a Trump trade policy will be handicapped by its negotiating philosophy. The president-elect’s negotiating experience, which is extensive, has occurred in the context of real estate development, which tends to be a zero-sum process. I win; you lose (and, all too often, I get to humiliate you in the process). Trade negotiations, indeed most diplomacy, is positive sum — finding a way to produce win-win outcomes in which both sides think they got something. This is a significant style difference, and though the president will not be negotiating details personally, he will be setting the tone and sometimes trying to close deals, and it will be a major adjustment for him if he wants to succeed.

How this will play out over the first year or so, I think, is that things will get worse before they get better. Redeeming his campaign pledges with respect to China and NAFTA risks launching a downward spiral of retaliation. One possible China scenario: he has the Treasury Department name China a currency manipulator (ignoring all the current facts) and then proposes to negotiate, as the statute provides. China’s likely response is to take umbrage at being “named and shamed” and refuse to negotiate unless he takes it back. That will call his bluff and present him with the choice of retaliating or folding. Either way, we lose, but in the first case it starts a downward spiral of retaliation as the Chinese will most certainly hit back — they’ve already said so. 

At this point you may be thinking this sounds a lot like recess in third grade — and you would be right. The incoming administration is one that might learn from its mistakes but is unlikely to be talked out of them in advance. Hopefully, they will learn that trade policy is a chess game, not Mortal Kombat, which is why I think our policy will get better after it gets worse. That is the opposite of predictions for the domestic economy — that it will get worse after it gets better:  infrastructure spending will produce the equivalent of a sugar rush for a year or two, but the massive accumulated spending and debt will lead to the inevitable crash. That may leave us in the same place as parents whose child is leaving home for college — there’s nothing to do but worry and hope.
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William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

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