Trump and U.S. Trade Policy: What's Known is Scary, What's Not May be Worse

For the past two decades, the central question in U.S. trade policy has been whether the government could continue to move forward in liberalizing trade. The answer was usually yes, but slowly. For the next four years, following the election of Donald Trump as president, the central question will be a different one: will the United States move backwards on trade, and if so how fast and with what consequences?

The honest answer—and it will take some months or longer for a full accounting of what happened in this election—is that the unknowns are bigger than the knowns. And, to quote former Defense Secretary Donald Rumsfeld, the “unknown unknowns” may matter most of all.

Let’s start with the knowns:

• Opposition to trade agreements as they have been done for many decades now was a core part of Donald Trump’s platform. He was more explicit and detailed about his approach to trade than on almost any other issue. And the issue was central to his election victory. The states that put him over the top—Pennsylvania, Michigan, Ohio, Wisconsin and North Carolina—are all states that have been hit hard by trade competition. According to exit polls, voters in those states believed by large margins that trade had cost them jobs.
• The Trans-Pacific Partnership (TPP) is dead. The mega-regional negotiations involving the United States, Japan and 10 other Pacific Rim countries were embraced by both the George W. Bush and Obama administrations. Trump denounced the deal during the campaign as “another disaster done and pushed by special interests who want to rape our country.” The TPP was already facing rising opposition in the Congress, and Trump ally Senator Jeff Sessions (R-AL) warned there would be “blood on the floor” if the Congress takes up the agreement in the lame duck session.
• China, Mexico and other countries that run large trade surpluses with the United States will find themselves under growing pressure from the new administration. In Trump’s zero-sum bargaining view of the world, so often on display in his campaign, trade balances are like a scorecard for trade, and where the United States is “losing” he will want to start “winning.”
• There will be at least a symbolic push to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico, an agreement that Trump repeatedly in the campaign called “the worst trade deal ever negotiated.”

Turning to the unknowns:

• What does President Trump want on trade? He made it clear during the campaign that he wants to use the threat of trade retaliation—slapping tariffs on imports from China and Mexico, for example—as a bargaining chip to achieve better deals. But he has never said what he actually wants China or Mexico to do on trade. When President Reagan slapped huge tariffs on imports of Japanese semiconductors in 1986, for example, the goal was explicit—to force Japan to begin buying more American-made microchips (and as I write in my new book, he was largely successful in this). Until we know more about what Trump wants from U.S. trade partners, it will be hard to make any assessments of the consequences.
• What mechanisms will he use? If he operates within the spirit of the rules under NAFTA or the World Trade Organization (WTO), the remedies are all slow, uncertain and time-consuming. He could bring new WTO cases against China for example, on its subsidies to steelmakers or its discrimination against U.S. technology companies, but these would take years to resolve. Alternatively, he could use the very expansive executive powers that Gary Hufbauer of the Peterson Institute recently listed  to impose trade penalties on other countries, and wait for them to challenge those measures in the WTO or in U.S. courts. As Hufbauer writes, there is no question that President Trump would have the executive powers to do most of what he has threatened on trade, including slapping tariffs on Chinese and Mexican imports.

The “unknown unknowns”:

• How will U.S. trade partners respond? Will they negotiate with President Trump in the face of WTO or NAFTA-illegal trade retaliation threats? Mexico might; China almost certainly won’t. China has a long history of tit-for-tat retaliations to any trade restrictions. While the media terribly overuses the specter of a “trade war” in which countries reciprocally escalate tariffs, that is a real possibility if Trump makes good on his threats.
• Will other countries turn away from the United States in future trade arrangements? With the TPP dead, many in Asia will look instead to the Chinese-led Regional Comprehensive Economic Partnership (RCEP). As President Obama feared, China could well end up writing the future trade rules for Asia. Elsewhere, almost any plausible new trading partners, with the exception of a post-Brexit United Kingdom, are likely to be wary of entering into new trade deals with the United States.
• Will the WTO survive? The global trading system, for which the WTO is the anchor, was already under tremendous stress. The failure of the Doha Round of negotiations had created a growing gap between the WTO's binding dispute settlement system and underlying trade rules that have not been updated in more than two decades. Trump has threatened to pull the United States out of the WTO, but even if he doesn't go that far, the WTO has now lost its most powerful champion, the United States.
• The impact on U.S. foreign policy. Trade has been a powerful tool for U.S. diplomacy, and a way to encourage economic reforms around the world. Growing trade opportunities have helped lift hundreds of millions of people in the world out of poverty over the past few decades. Without the carrot of the U.S. market, the foreign policy of the Trump administration will have one hand tied behind its back. For the new president-elect, who has sketched out a far more nationalist, inward-looking vision of the U.S. place in the world than any president in modern times, that may not be a problem. For the stability and prosperity of the world, it certainly will be.