Monday, July 17, 2017

Global Trade’s Evolution May Check Trump’s Protectionism

President’s approach differs from predecessors, who praised free trade but pushed protective measures.


By Bob Davis
The Wall Street Journal
July 17, 2017

President Donald Trump has looked to make protectionism respectable again, citing Abraham Lincoln’s embrace of tariffs, pulling the U.S. out of a Pacific trade pact and preparing tariffs on steel imports. But changes in the international economy and the institutions governing trade are acting as constraints on what Mr. Trump can achieve.

Gone are Mr. Trump’s campaign threats to hit China with 45% tariffs and Mexico with 35% levies. Steel tariffs could come in a matter of days, but steel lobbyists worry they will be more limited in magnitude than similar actions taken in the past. Meanwhile, Mr. Trump’s commerce secretary says talks to update the North American Free Trade Agreement, which commence in August, will be guided by the principle, “Do no harm.”

“The interests of companies and sectors are making it very difficult to go through with the extreme (measures) Trump proposed,” says Brandeis University trade economist Peter Petri, who is known for forecasting the economic impact of trade measures.

During the campaign, Goldman Sachs estimates, markets were betting that Mr. Trump’s trade policies would lift tariffs by about 10 percentage points—enough to jolt the global economy. Now Goldman estimates the impact of Mr. Trump’s more limited efforts at a 1 percentage point tariff increase. “Market expectations of major trade policy changes now appear to have completely reversed,” Goldman economists Daan Struyven and Ben Snider write.

Mr. Trump has taken the opposite approach of some White House predecessors. He threatens protection but so far has acted modestly. They praised free trade but pushed protection.



Richard Nixon imposed a 10% import surcharge to press trading partners to revalue their currencies. Ronald Reagan started more than a decade of pressure on Japan, whose imports battered U.S. industries, much as China’s do today. He imposed stiff tariffs on Japanese electronics, and forced Japan to limit exports of cars to the U.S. and buy U.S. semiconductors. George H.W. Bush continued the semiconductor deal and pressed Japan to buy more U.S. auto parts.

Even Bill Clinton, seen now as an avatar of free trade for his passage of Nafta and a deal that let China join the World Trade Organization, badgered Japan on cars, auto parts and computer chips throughout his first term. He threatened tariffs on luxury Japanese automobiles, calling off the levies at the last moment after Japan agreed to expand U.S. auto production.

Later presidents had their protectionist moments too, with George W. Bush imposing tariffs on steel imports and Barack Obama singling out Chinese tire imports

Past presidents used protection in part to give them domestic political cover to push for overall trade liberalization. From Nixon’s term through the end of Clinton’s, the U.S. negotiated two global trade pacts, Nafta and the creation of the WTO, among other international trade deals. Now those trade deals limit Mr. Trump’s maneuvering room.

Many of the unilateral actions that Mr. Reagan used to punish Japan now would be handled as trade cases at the WTO, which generally frowns on protection and takes years to make decisions. Deals to reserve parts of a foreign market for U.S. companies are forbidden by WTO rules—although trade experts say such arrangements could still be used if they don’t raise objections from other WTO members.

Industries that once lobbied heavily for protection have become more international, making them less likely to push for restrictions.

When the U.S. and Japan fought over Japanese car imports, for instance, it may have made sense to put quotas on Japanese automobile imports. But that logic doesn’t work for the U.S. and Mexico. U.S.-based car makers—some of them Japanese owned—ship parts both ways across the border to build a car cooperatively.

The textile industry, long one of the most aggressive voices for trade protection, has become a defender of Nafta, because of how international the industry has become. The industry “supports building on the successes of Nafta through seeking reasonable improvements,” the National Council of Textile Organizations recently testified, “but not a cancellation, due to the high level of supply chain integration.”

On steel tariffs, Mr. Trump is using a rationale, national security, that President Nixon cited as a reason for his across-the-board import surcharge. This time, the steel industry is asking the administration to use tariffs for a more limited objective—to prod China to cut back its vast steel excess capacity. The administration, steel industry officials say, is looking at how to apply tariffs without prompting widespread retaliation.

“If the steel consumers or the critics get their way, there is real possibility that the relief Trump will provide is smaller,” than what occurred under erstwhile free-trade presidents, Mr. Obama and George W. Bush, said Scott Paul, president of the Alliance for American Manufacturing, a steel industry and labor group.

None of this means that a new era of trade liberalization is at hand. It’s been 23 years since the last global trade deal and none is on the horizon. Tariff cuts are slowing around the world, according to the International Monetary Fund, as are the number of free-trade deals being signed annually. But the architects who built the international trading system over the past half-century created a structure resistant to dramatic change. Over time Mr. Trump may find himself ensnared by it.


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