Douglas Irwin

2019 could be a defining moment for U.S. trade policy. Two years into Donald Trump’s presidency, it should finally become clear whether the U.S. president’s brazen rhetoric on the subject is simply a negotiating ploy in the pursuit of new deals or whether a trade war—and with it the destruction of the post-World War II international order—is his real end goal.

Until now, it has been rather hard to tell. Trump withdrew from the Trans-Pacific Partnership without ever proposing a replacement, and he appeared ready to do the same with the North American Free Trade Agreement (NAFTA). He imposed stiff levies on imported steel and aluminum, leading Canada, China, Mexico, and the European Union to slap the United States with retaliatory tariffs. At the same time, however, his administration ultimately agreed to a renegotiated NAFTA without major changes to the original agreement. It did the same for the U.S. free trade agreement with South Korea. So what signs could reveal his true intentions in 2019?

The first area to watch will be cars. The Trump administration’s legal justification for its 2018 steel and aluminum tariffs was a little-used U.S. statute that allows the president to raise such barriers in cases where U.S. national security is threatened. In mid-2018, the Commerce Department also started looking into whether imported automobiles might pose a similar threat—a sign that the administration was seriously considering imposing duties as high as 25 percent on foreign cars and auto parts, which would affect more than $200 billion worth of trade.

Trump may lack the audacity to go that far, since he would face stiff opposition. U.S. automobile producers oppose such protectionism because they often import cars and parts from their overseas factories. Higher taxes on autos would also hit U.S. households in a more direct way than levies on steel and aluminum. And European trade partners would likely retaliate with more tariffs on U.S. farmers, manufacturers, and other exporters.

If Trump makes good on his threat anyway, the administration might argue that the goal is to get a better deal from trading partners—a reduction in European Union automobile tariffs, say. But the more likely goal of such a move would be to dismantle global automobile supply chains and fully reshore production in the name of helping blue-collar workers.

The second thing to watch will be Washington’s stance toward Beijing. So far, the Trump administration’s actions could be read as either an attempt to force China to change its economic practices or an effort to simply punish it by dismantling the trade partnership.
Trump has imposed about $250 billion worth of duties on Chinese goods, on the grounds that China’s own protectionism and its theft of U.S. technology pose strategic threats to the United States, but has hinted that they may be reversible if China changes its ways. At the same time, his administration has shown little interest in negotiations, which would have to be a precursor to any potential deal.

The key to figuring out Trump’s true intentions will be whether his administration follows through with its plans to raise some of the new tariffs from 10 percent to 25 percent and to expand them to cover an additional $267 billion worth of Chinese exports, including Apple products such the iPhone, which have so far remained exempt. If the administration walks down that path, then trade punishment would be the likely end game, particularly since China will never change its economic model in response to what it sees as U.S. bullying.

Third, Trump will have to take a stand on the World Trade Organization (WTO), a body that regulates trade among its 164 members. Trump has called the organization the worst trade deal ever reached—even worse than NAFTA—and on several occasions has expressed his desire to leave it.

As with many of his other moves, however, his goals are far from clear. On the one hand, his administration has continued to use the WTO by bringing new cases against other countries—including China, for example, which the United States claims has violated the letter or the spirit of various WTO agreements. At the same time, however, Washington has also denounced WTO decisions that have gone against the United States as examples of judicial overreach and has blocked the appointment of new jurists to the WTO’s appellate body.

In the coming year, as the WTO cases move forward, the administration will have to show its cards. If its current attempts to disrupt the organization are for the purpose of bringing about procedural changes, it will have to make clear what changes it actually desires. If it doesn’t, we can assume that Trump plans to abandon the institution by ignoring it.

The final area to pay attention to will be how Trump deals with the trade deficit. The president’s main obsession is with increasing U.S. exports and diminishing imports. In his mind, the trade deficit measures the extent to which other countries have been taking advantage of the United States. Economists have grown weary of pointing out his error, but I’ll do it again. Trade deficits are driven by macroeconomic factors. In particular, if a country has a high savings rate relative to investment, that country will send some of its excess savings to others by exporting more goods than it imports. China, Japan, and Germany—all with high savings rates—have trade surpluses. The United States—with low savings and high consumption—has a deficit.

The deficit, in other words, is mostly homegrown, and Trump’s economic policies are likely to increase it. A large tax cut and increases in government spending have temporarily boosted consumption and economic growth. To help meet the new demand, the United States has started importing more, further increasing the trade imbalance. As this trend continues in 2019, Trump will have to decide how to react—whether by lashing out at the U.S. Federal Reserve (Trump’s go-to scapegoat for all manner of economic issues), at other countries for their perfidious trade policies, or both.

The president is no different from his recent predecessors in saying he wants favorable trade deals. But if he’s actually embracing protectionism for its own sake, that would make him unique. Whereas previous presidents have raised trade barriers in difficult economic times, Trump has initiated them during a period when U.S. economic performance is strong and domestic industries are not asking for such help.

In his first year in office, Trump laid the groundwork for the tariffs that came in year two. Now the second act in this drama is about to begin. The president is unlikely to let his apparent penchant for protectionism go, particularly if the U.S. economy slows and the trade deficit remains stubbornly high. The global economy, and the postwar system of world trade in particular, should be prepared for more blows to come.

Source; Foreign Policy