Trump’s Trade War

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Trump’s Trade War

A Contest for the Future of the President … and the World

Trump’s Trade War
Credit: U.S. Department of Energy

In southwestern Pennsylvania, on the rugged western slopes of the Allegheny Mountains, lies the town of Washington, affectionately called “Little Washington” to avoid any confusion with the distant federal capital. In 1794, Little Washington was the site of the “Whiskey Rebellion” – a violent protest against the first tax imposed on a domestic product by the newly formed federal government, an initiative of Treasury Secretary Alexander Hamilton to meet the debt incurred during the Revolutionary War. With full military regalia, President George Washington, the town’s namesake, led armed troops into the region to restore order.

During the glory days of the U.S. steel industry, Little Washington thrived by manufacturing steel products that helped support NASA’s Mercury missions like John Glenn’s landmark orbit of the earth in 1962. When the local American football club, the celebrated Pittsburgh “Steelers,” won the Super Bowl in 2006, Little Washington temporarily changed its name to “Steeler” Pennsylvania. Despite this fervor, the American steel industry has been in decline for the past four decades, the buzz of millworkers in Little Washington more a longed-for legacy than ongoing reality.

On the back of his “America first” populism, with promises to revive the U.S. steel industry and decrease the trade deficit, Donald Trump decisively carried Little Washington and all of Pennsylvania in the 2016 election. But that contest is also becoming a distant memory. As we went to publication, in a special election, the voters of this restless region were setting the tone for the coming 2018 midterm elections – the outcome of which could determine the balance of power in Congress and, by extension, the ultimate fate of the Trump presidency, given House Democrats plans for impeachment proceedings. Recent polls show the Democratic candidate, Conor Lamb, a youthful former Marine officer and federal prosecutor, in a surprisingly tight race with his Republican contender, Rick Saccone, a 60-year-old four-term state legislator. A local headline sums up the dynamic: “Close race in 18th doesn’t bode well for GOP.”

It is within this changing domestic political climate that we must first consider Trump’s decision to launch a “trade war” by imposing steep tariffs on steel and aluminum imports. However, the stakes extend beyond “steel country USA” and are much higher than Trump’s tenure in the Oval Office. What is unfolding is the future order of the world.

Steel And Aluminum Tariffs

On March 1, 2018, during a White House forum, Trump announced new tariffs targeting steel and aluminum imports, catching many of his advisers and the world by surprise. On Wall Street, the stock market dropped, particularly shares of automakers, aerospace companies and other big consumers of steel and aluminum. America’s trading partners, allies and competitors responded with concern, anger, and threats of retaliation.

For China, Trump’s announcement represented a harsh rebuke, especially given the visit to Washington of Liu He, one of Beijing’s top economic aides, which many saw as an attempt to re-open the stalled bilateral Comprehensive Economic Dialogue established during the Mar-a-Largo summit between Trump and President Xi Jinping last April. China is the world’s leading manufacturer of steel and aluminum, and its excess capacity has driven down global prices. The White House blames overcapacity in the market on Beijing’s state-backed economic policies.

Indeed, astute observers should not be surprised by Trump’s tariffs. Within days of dining with the Chinese leadership at his Florida club, the president authorized the U.S. Department of Commerce to investigate the effects of steel and aluminum imports on U.S. national security. In doing so, President Trump relied upon an obscure statutory provision, Section 232(b) of the Trade Expansion Act of 1962 (19 U.S.C. 1862(b), which provides the President, in consultation with other government officials, discretion to impose restrictions on imports, such as tariffs or quotas, on the basis of protecting U.S. national security.

When initiating the so-called “Section 232” investigations, Trump remarked on the importance of this action to U.S. national security and defense industrial base. He further noted: “I pledged [in the election] that I would take action. And I think it’s probably one of the primary reasons I’m sitting here today as President.” As I noted in these pages, Trump reinforced these themes in his National Security Strategy, which prioritizes revitalizing American manufacturing and protecting the industrial base from a perilous dependency on the global supply chain.

Trump bluntly measures America’s risk exposure in terms of trade imbalances. China accounts for the largest U.S bilateral trade imbalance, rising to $375.2 billion last year, up from $347 billion the previous year, according to U.S. Department of Commerce data. During his trip to Beijing in November, Mr. Trump laid blame for this deficit at the feet of his presidential predecessors. In his second year, he fully owns this issue and likely feels compelled to take action.

From a U.S. political perspective, foreign trade is an easy target. As I explained during an interview with CGTN America, part of this is based on a misperception on the role of trade for Americans in their daily lives. The benefits of trade are enjoyed broadly, often imperceptivity, such as through inexpensive consumer goods, but its costs are born by visible constituencies, as seen through the loss of steelworker jobs in Pennsylvania. Thus, even if trade with China saves typical American households up to $850 a year, this material benefit is easily lost in the political calculus. After all, elected officials are not necessarily economists, and vice versa. By launching a trade war, however, President Trump is testing the proposition of whether this is actually a prudent assessment, particularly given the potential economic and geopolitical consequences.

Global Response

The global response to Trump’s tariffs has been universally negative. In a rare intervention, World Trade Organization Director General Roberto Azevedo expressed concern with the change in U.S. policy: “The potential for escalation is real, as we have seen from the initial responses of others.” Indeed, the most obvious reaction to unilateral tariffs from the United States is to repay in kind.

For instance, in order to maximize political pressure, the European Union is taking a targeted approach by threatening to impose duties on bourbon from Kentucky (home of Senate Majority Leader Mitch McConnell), Harley-Davidson motorcycles (based in Wisconsin where House Speaker Paul Ryan lives), and Levi’s jeans (headquartered in San Francisco, in the district of House Minority Leader Nancy Pelosi).

China is considering similar action. Beijing is promising a “necessary response” in the face of punitive tariffs on steel and aluminum imports. This could come in the form of tailored strikes against large American exporters like Boeing, the aerospace manufacturer. In reaction to Trump’s new tariffs on solar panels in January, China began its own investigation into $1 billion of U.S. sorghum exports, which could furnish a pretext for new tariffs from Beijing. Such action would negatively impact U.S. farmers who reside in parts of the American heartland that Trump won in 2016. China imported $21.4 billion in U.S. agricultural products in 2016, including soybeans, which present another potential target for Chinese retaliation.

In response, Trump tweeted that trade wars are “good” and “easy to win.” This was not the case in 2002 when President George W. Bush imposed tariffs on steel imports (notably under a different legal provision, the more conventional Section 201 “safeguard” clause of the Trade Expansion Act). China, the European Union and others responded with tariffs and the United States experienced a 3 percent increase in steel prices and a $30 million hit to the economy. Bush was forced to back down, reversing the tariffs the following year. Andrew H. Card Jr., Bush’s then-chief of staff, concluded: “The results were not what we anticipated in terms of its impact on the economy or jobs.”

Time will tell the long-term economic effect of these tariffs, but the international legal battle, if commenced, will lead to unprecedented and dangerous territory for the rules-based international order. In the face of the Trump tariffs, China, the European Union, or other member states impacted by the Trump tariffs could appeal to the WTO’s dispute resolution process. It is not clear whether trade barriers invoked in the name of “national security” (under Section 232) would be consistent with the United States’ obligations under the WTO regime.

If challenged, the Trump administration may attempt to invoke the security exception under Article XXI of the General Agreement on Tariffs and Trade (GATT), which permits WTO members to take “any action which it considers necessary for the protection of its essential security interests” but only under specific circumstances. This provision has not been fully tested in the history of the WTO. Even under U.S. legal precedent, Trump’s action is rare. According to the Peterson Institute for International Economics, since 1962, the United States has conducted only 28 investigations under Section 232, and the last restrictions imposed under the law occurred over 30 years ago when President Ronald Reagan acted against imported machine tools.

Although such a legal battle would take years to resolve, if the United States were to ignore a ruling by the WTO against the Trump tariffs, or if other states retaliated against U.S. imports (such as agricultural products) in the name of “national security,” we could witness an unraveling of the international trade regime or a tailspin into protectionism crippling the global economy, or both. We only have to look back to the impact of the Smoot-Hawley tariffs of 1930, which sparked a world-wide trade war and extended the Great Depression. It may be hyperbole to invoke the specter of disorder, distrust, and uncertainty prior to World War II, but Trump’s trade war is yet another indication that we are entering a new world order.

New World Order

Following global uproar, on March 8, 2018, Trump formalized the tariffs with an initial exemption for Canada and Mexico based on ongoing renegotiations of the North American Free Trade Agreement (NAFTA), and signaled further exemptions for U.S. allies subject to new trade concessions. Regardless, Trump’s tariffs and trade war threats have shaken the shared faith and confidence in the liberal international system once championed by Washington. It should not be overlooked that at the same time, President Xi Jinping solidified his control of China with the constitutional amendment to eliminate presidential term limits.

Although President Trump may have recklessly praised Xi’s power grab, his national security policy represents a growing sentiment in the West that the strategic bet to incorporate China into the global economic system, in hopes of eventual political and economic liberalization, was wrong. In short, the perception is that an illiberal China is now “gaming” the system to the material detriment of the United States and its allies. Accepting this conclusion sheds new light on Trump’s (ham-handed) attempts to strengthen America’s industrial base and harden its advanced technological capacity against theft and unlawful appropriation. If China is undertaking a new and daring revisionist phase supported by advanced weaponry and military modernization, as I observed in this magazine, then action is required. For the United States, this may include revisiting the bargain underpinning the global trade system.

The problem is that Trump’s unvarnished protectionism fails to account for the tremendous cost – the lost prosperity and material pain – of his abrupt policy shift to the American public and other stakeholders across the globe. The same global economic system that benefits Chinese manufacturers in Shenzhen also creates prosperity for farmers in America’s Midwest and port workers in Panama. This is by design. While weighing the cost to U.S. primacy, we cannot ignore the broader moral good achieved in the last three decades: a historic rise in living standards for nearly a billion people and a reduction in the share of the world living in “extreme poverty” (below $2 a day) from 35 to around 10 percent, as reported by the U.S. National Intelligence Council.

If there are to be new national security barriers for trade, from protections for intellectual property rights to limits on foreign investment to tariffs on key commodities, or other actions to safeguard core U.S. interests, then the Trump administration must lay the necessary political and diplomatic ground for these changes, nationally and internationally. Recalibrating the liberal international order will require incredibly adept U.S. leadership. So far, however, the Trump White House has done its best to disrespect potential partners (pretentious “globalists”), disregard foreign allies (ungrateful “free-riders”) and drop-out of international engagements (the Trans-Pacific Partnership was recently completed in the absence of the U.S.).

Trump may enjoy the conflict created by his approach to politics and foreign policy. But the limitations (in terms of efficacy) and expenses incurred (in terms of reputation) are obvious. When President Washington marched on the rebels of southwestern Pennsylvania, he commanded the power, prestige and foresight to enforce his vision of a new country. As his recent foray into steel country shows, Trump is starting from a different position.

Roncevert Ganan Almond is a Partner and Vice-President at The Wicks Group, based in Washington, D.C. He has counseled government authorities in Asia, Europe, the Middle East, Africa, and Latin America on issues of international law. He served as an aide to Hillary Clinton’s 2008 presidential campaign, but is not currently affiliated with any campaign. The views expressed here are strictly his own.