In the weeks since inauguration, the new administration has struck a more protectionist tone. Trump’s White House seems less convinced by the benefits the United States has accrued from globalization and comparative advantage through international trade. Rather, it has focused on the continuing decline of manufacturing jobs.
Peter Navarro, head of the new National Trade Council, has theorized that open trade—particularly with China—has impacted U.S. manufacturing job prospects. His views appear to have found resonance with others in the administration. This has created uncertainty over the direction that U.S. trade policy will take.
In his first month, President Trump has already pulled out of the Trans-Pacific Partnership (TPP), voiced concerns over currencies in China and Japan, and opened negotiations over the North American Free Trade Act (NAFTA) with Canada and Mexico. Navarro has also criticised German trade policy. Yet meetings between President Trump and Japan’s Prime Minister Shinzo Abe, which included future trade relations, appeared productive.
{mosads}Looking ahead, trade relations with Mexico and China appear priorities. In the first instance, Mexican trade relations appear to be wrapped up with the renegotiation of NAFTA. The scale of sought after change here is unknown. However, this process will take some time. Do not expect unilateral protectionist measures while such talks are underway.
The outlook for China is less certain. The administration has loosely talked about currency manipulation. Although China currently breaches only one of the U.S. Treasury Department’s three guidelines for manipulation (and importantly, China has been supporting the value of its currency for around 18 months), we see some risk of this. Yet such a move would be largely symbolic and designed to provoke broader negotiations.
More direct action cannot be ruled out. Broad-based tariffs would risk a comprehensive retaliation from the Chinese authorities that would prove damaging to U.S. economic interests, harming both producers and consumers. A series of targeted-tariffs are more likely. The president enjoys a wide range of executive authority over trade policy that goes largely unchecked by Congress.
The current administration has renewed targeted anti-dumping tariffs on China steel imports, but may go further by pursuing a different approach. Concentrating on sectors that account for significant portions of the U.S.-China bilateral trade deficit and that have had a significant impact on U.S. jobs, as proxied by the scale of import penetration, the electronic and computer sector, as well as the electrical and appliance sector, may face a high risk for targeted tariffs in the future. However, even these measures should be expected to prompt retaliatory action from China, with the risk of further escalation.
The prospects for domestic production do not lie solely with trade policy. Another key element to domestic competitiveness is tax policy. For years, corporate America has called for a more competitive system that does away with worldwide taxation—a practice eschewed by most other OECD economies—and lowers the headline tax rate from the currently uncompetitive 35 percent rate.
House Republicans have proposed a shift to a destination-based, cash flow tax system. This would overhaul of the current system and combine a lower headline corporate tax rate—Republicans argue for 20 percent—with other incentives for investment, including full expensing of capital investment. Proponents state this would modernize the tax system, incentivize investment and underpin domestic competitiveness. This could significantly boost the outlook for U.S. production without recourse to trade policy.
That is before we consider border tax adjustability, which is a mechanism that would exclude U.S. exports and input costs from domestic production from taxation. To proponents of tax reform, a move to a destination-based, cash flow tax system requires measures to prevent base erosion—or an accelerated process of corporate inversions, outsourcing and intellectual property transfers.
Border tax adjustability is proposed as a policy designed to remove incentives for base erosion, which should prove trade neutral. However, the assumption of trade neutrality requires significant dollar appreciation of 25 percent, which is an unlikely outcome. Without such an appreciation, border tax adjustability would likely have a marked additional impact on the balance of trade beyond any prospective boost that broader tax reforms could provide. Border tax adjustability policies would also likely be considered protectionist by the World Trade Organisation (WTO), due to the unlike tax treatment of domestic and foreign production.
Hence the scale and direction of corporate tax reform remains uncertain for now, although President Trump has promised an announcement over the coming weeks. Some degree of tax reform looks likely, although the scale proposed by the House Republicans now appears ambitious. Progress would be a key development for the competitiveness of domestic manufacturing. As such, the administration might only be in a position to determine trade policy in the light of tax reform.
I remain wary of the new administration’s direction over protectionism, although I acknowledge marked uncertainty in this regard. Direct protectionist measures remain a threat. For 2017, I consider a renegotiation of NAFTA and trade relations with Mexico to be the most likely priorities. I also consider the United States unlikely to strike out with direct tariffs ahead of concluding corporate tax reform measures. Yet there is a likelihood of increased trade tensions. I see the risk of the United States labelling China a currency manipulator. And I consider further risks ahead with the prospect of direct import restrictions or tariff measures, if the administration considers progress towards boosting domestic production inadequate.
David Page is senior economist at AXA Investment Managers, a global investment firm with more than $740 billion in assets under management.
The views expressed by contributors are their own and are not the views of The Hill.