Walking a mile in Trump’s shoes on trade policy

In thinking about President Trump’s approach to trade policy, it is useful to consider how the policy might look from his perspective and to think about what his long-term goals might be.

It is easy to criticize the administration’s trade policy. Many people in the business community wince at the panoply of news reports on American firms attributing rising costs and sometimes layoffs to the tariffs already in place on steel and aluminum and on a range of products from China.

Even our closest allies are retaliating with tariffs against U.S. exports, and the stock market gyrates with each threat of a new trade action. The results look worrisome.

{mosads}From the president’s perspective, however, one can imagine Donald Trump seeing the strong U.S. economy and concluding “this is working.” Sure, economists might say that this view conflates the positives of a strong economy with the negative impacts of trade policy.

Critics might claim that what’s really happening is that the boost from the December 2017 tax cut together with a burst of added government spending from the March 2018 omnibus appropriations package are more than offsetting the drag from trade policy.

For sure, the jobs data show a healthy labor market adding jobs and drawing people off the sidelines, and the GDP data to be released on July 27 are likely to show that economic growth was better than 4 percent in the second quarter. But critics might say it could be yet better with a different trade policy.

Appearing before the House Financial Services Committee last Thursday, Treasury Secretary Steve Mnuchin said that he sees trade disputes but does not think the U.S. is in a trade war.

Whatever the proper label, global-minded analysts might see unnecessary conflict instead and contemplate the alternative approach in which the administration had moved forward with the Trans-Pacific Partnership.

That agreement would have greatly reduced trade barriers facing American products in a range of Asian markets with partners who already face low U.S. trade barriers while knitting together an economic alliance that benefits the United States and leaves out China.

Giving this up just before entering into economic and security disputes with China seems puzzling from both an economic and national security perspective.

Hence the value of looking at the Trump trade policy from the administration’s perspective to consider the possible long-term vision and to think about what would come next as part of a strategy to achieving long-term goals.

The way that makes the most sense is to see the Trump administration as seeking to address a range of longstanding problems in the international arena. Trade policy is the tool because that’s an area in which the president has considerable leeway to act, but the objectives are wider-ranging. These would include:

• Getting China to stop stealing U.S. intellectual property and end its practices of requiring American firms to transfer their technologies to Chinese businesses.
• Having Germany contribute more to supporting both a strong global economy and a strong European defense. These aims could both be addressed with more public spending, especially on its military, which would help narrow the German current account surplus and shore up North Atlantic treaty Organization’s (NATO) eastern flank.
• Updating the North American Free Trade Agreement (NAFTA) such as by changing the rules of origin to reflect a more modern Mexican economy that can supply advanced components on its own rather than relying on countries outside the trade bloc (the administration’s focus on abolishing NAFTA’s Investor-State Dispute Settlement process is more difficult to understand, since that element of the agreement works to the advantage of U.S. firms).

These are sensible objectives — indeed, with respect to China and Germany, the Obama administration voiced similar complaints. Trump is acting in a tough way that involves costs to the U.S. economy and risks foreign policy fallout.

But perhaps the administration judged that there was no point in wasting time on a polite approach that had been tried and failed and that what was needed was a shock. The president certainly has the attention of China, Germany and others.

For sure, there are risks. The U.S. economy looks to remain healthy even through the drag of the tariffs is already in place. A wider set of trade barriers, however, will impose mounting costs on American businesses and families (even if the costs are greater on China, whose growth depends especially heavily on exports).

Or China could try to hit back at the U.S. by selling some of its holdings of Treasury bonds in an effort to raise U.S. interest rates and slow our investment and consumer spending.

This is a danger, though these actions would hurt China as well, since they own trillions in U.S. bonds that would lose value, even while the Fed could offset at least some (and perhaps much) of the negative impact with expansionary monetary policy.

If anything, the biggest risk from the tariffs is that the inflation they induce leads the Fed to tighten sooner than it might otherwise have planned.

To avoid these risks and get to a satisfactory outcome, the U.S. needs to make clear what changes it would accept as satisfactory. This step would be putting U.S. policy on the path to a solution to our trade disputes.

If that happens, and if China indeed changes its practices and Germany takes on its global responsibilities, it could be that in the end the trade disputes will have been for a good purpose. 

Phillip Swagel is a professor at the University of Maryland’s School of Public Policy and a senior fellow at the Milken Institute. He was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009.