Por Phil Levy
Will President Trump’s trade war lead to more open markets? Or a long-lasting breakdown of trade? Photographer: David Paul Morris/Bloomberg
The tumult President Donald Trump has unleashed on global trade has left both markets and politicians wondering where he is going with this. There have been three main schools of thought, each leading to very different predictions about the future. One school is now defunct, one is popular, and one is correct.
The first is the rhetorical school. Under this one, the President was to be taken seriously, but not literally. As a candidate, President Trump said he wanted to put a 45 percent tariff on imports from China, a 35 percent tariff on imports from Mexico, kill the TPP, and withdraw from NAFTA. But perhaps this just signaled the extent to which he empathized with trade critics. But who thought he would really do that?
The rhetorical school seemed to reign supreme right up until March of this year. During 2017, President Trump did keep his promise to pull the United States from the Trans-Pacific Partnership (TPP) and threatened in April to withdraw from the North American Free Trade Agreement (NAFTA). But for the most part, it remained rhetoric; there were few unorthodox trade actions to cause much grief. The national security investigation on steel and aluminum trade that was supposed to appear at the end of June, 2017 appeared to have been tabled or forgotten. Not only did it seem that pro-trade advisers like Gary Cohn were providing adult supervision at the White House, there was also effective pressure from Congress to avoid messy trade fights while working on the tax cut bill.
In January of 2018, with the tax cut passed and signed, there was a brief burst of unusual protection when the administration slapped tariffs on imported washing machines and solar panels. The mechanism he used – a safeguard investigation – was reasonably orthodox. It was what George W. Bush had used for his steel tariffs. It involved the President acting on recommendations emanating from a U.S. International Trade Commission investigation.
Then, in March, the rhetorical school began to crumble. President Trump announced steel and aluminum tariffs. Gary Cohn headed for the exits and Peter Navarro, a devout protectionist, was elevated within the White House. The last rhetorical remnants dissolved across May and June, when President Trump rejected Chinese entreaties and pushed ahead with tariffs on $34 billion of Chinese imports, while dramatically broadening the application of steel and aluminum tariffs through extending them to Canada, Mexico, and the European Union.
This then left two schools of thought – the instrumentalist school and the protectionist school. The former holds that the President was applying all this protection as a way to extract concessions from partner countries and fix problems in the trading system. The latter holds that, for the President, tariffs are not a means to an end – they are the end.
The instrumentalist interpretation is popular and actively pushed by the administration. In March, CEA Chairman Kevin Hassett said that President Trump is “very, very serious when he says that he’s a free-trader and that he’s pursuing symmetry and reciprocity.” After an early June White House meeting, Sen. Lindsey Graham (R-SC) said, “Now is not the time to undercut President Trump’s ability to negotiate better trade deals. I will not support any efforts that weaken his position.” In July, Iowa Rep. Steve King (R-IA) said, “Give him some room to freely negotiate here, and let’s see how it comes out. Don’t undercut the president and take the leverage away.” Later in July, prominent market commentator Mohamed El-Erian wondered whether President Trump might be poised for a “Reagan moment” in which his bold action would bring down global trade barriers, just as Reagan’s aggressive push brought down the Soviet Union.
The problem is that there is no evidence to support the idea that President Trump is pushing for freer trade; in fact, all the evidence points in the opposite direction. When South Korea sat down to negotiate away the steel tariffs it was facing from the United States, the solution turned out to be … more protection. South Korea had to agree to tight quotas, severely restricting its steel imports. For Canada and Mexico, the essential and unacceptable part of the U.S. proposal was that the new NAFTA should have a built-in self-destruct mechanism (known as a “sunset clause”). When China struck a steel capacity deal with Commerce Secretary Wilbur Ross, or an import expansion deal with Treasury Secretary Steve Mnuchin, President Trump rejected the deals in favor of applying tariffs.
In fact, for most of the time that the President’s supporters have been asking for patience on negotiations, there have not actually been negotiations taking place. NAFTA negotiations have been on a hiatus and there is no indication the administration has budged from its untenable positions. Nor is there any evidence of new talks with China. Nor of negotiations over removal of steel and aluminum protection.
Instead, the President has escalated the conflicts. He pledged retaliation against China for its retaliation and, rather than pulling back on steel and aluminum tariffs, he has suggested taking the same approach to the much bigger trade in autos.
The instrumentalist illusion that President Trump is on the verge of striking great new trade deals is critical to maintaining public support for his policies, keeping markets calm, and forestalling pushes in Congress to undo the damage. It is a popular belief, despite the absence of negotiations, despite seemingly irreconcilable stances on key trade issues, and despite the President’s repeated statements that he prefers protectionism. On trade, many people are neither taking him literally nor seriously.