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Currency

Op-Ed: Why Trump's dangerous trade policy won't work

It seems President Trump is ready to start rolling back globalization. Let’s hope he doesn’t blow up the postwar economic order.

While Mexican negotiators waited for the United States to make its first move in its proposed renegotiation of the North American Free Trade Agreement, the president last week turned on the invective against another trade deal he called unfair — that negotiated by the Obama administration with South Korea.

Largely in place with the confirmation of Robert Lighthizer as the nation’s top trade diplomat in May, the president’s trade team seems itching to deploy a wall of trade protection around the United States.

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This would include new tariffs on imports of steel — and maybe also aluminum — based on the novel argument that the imports somehow endanger national security. The administration is also mulling anti-dumping duties on Canadian aircraft and countervailing duties on imported solar panels.

A lot of this may look tame when set alongside Mr. Trump’s fiery campaign speeches portraying trade as the bane of the American worker. He no longer calls for a 45 percent tariff on imports from China, nor does he threaten to walk away from Nafta.

Despite his campaign promises to voters in industrial states eager for protectionism, some analysts suggested that Mr. Trump might ultimately be hemmed in by the standard pro-trade orthodoxy of the Republican Party.

But the relative moderation of the administration’s recent trade initiatives is hardly reassuring. It’s not just that many of his proposals will invite retaliation from the nation’s trading partners — inviting the prospect of a protracted tit-for-tat trade war. The most frightening aspect of Mr. Trump’s approach is the seeming contempt for the rules and institutions that have underpinned global trade since World War II.

Might Mr. Trump hew to the rules overseen by the World Trade Organization even as he retreats from prior American commitments to global trade? Or will he eschew the multilateral framework in pursuit of a set of bilateral deals, turning his back on a long history of trade diplomacy?

These days, quite a few economists show sympathy for the argument that some trade protection may be warranted to help workers in industries threatened by imports.

Protectionism will not add to American jobs or raise wages, on the whole. At best it will shuffle jobs around — adding some in protected companies like steel makers and cutting some in industries that buy steel, like auto manufacturers. By making the economy less efficient, protectionism will also make the nation poorer as a whole.

But maximizing economic output is not the nation’s only objective. The case for trade liberalization also relies on the proposition that winners in the process will compensate the losers whose jobs are displaced. If American politics impedes any redistribution of trade’s spoils, perhaps there is a casefor restoring equity by throwing sand in the cogs of trade.

“It would be decreasing the size of the pie to increase the size of some slices,” as David Autor, a top labor economist at the Massachusetts Institute of Technology, put it to me once. “We have always done the opposite thing without making people whole.”

What’s more, unanticipated shocks over the last quarter-century — when information technology swept through every industry and China emerged from nowhere to become the world’s biggest exporter — might justify reconsidering market-access commitments made earlier. “Maybe at the end of the day some trade responses are reasonable,” said Robert W. Staiger, a trade economist from Dartmouth College.

And yet even accepting that the United States may find it reasonable to retreat from trade somewhat, it is critical to figure out what this retreat might look like.

The many rounds of trade liberalization after World War II were anchored in two core principles that, in fact, had been adopted by the United States in 1934: reciprocity and nondiscrimination. Countries could expect to receive concessions as valuable as those they offered. Most critically, a concession made to one country would automatically be extended to all, under what was called the most-favored-nation rule.

The cocktail worked. Notably, the principle of nondiscrimination ensured that a given trading partner could not negotiate a tariff cut with the United States and then offer a more favorable deal to another country — undercutting the American competitive position. This broke through a logjam that had stymied previous attempts to liberalize international trade by encouraging countries to make only miserly offers.

The problem is that these principles make for an ill fit with Mr. Trump’s worldview, honed in the zero-sum sphere of real estate deal making where one party’s win is the other’s loss.

In trade diplomacy, the objective is to arrive at an agreement that everybody can call a win. “The best way to have a trade commitment enforced is to make it mutually beneficial,” Professor Staiger told me. “If we push to get the very best deal for the United States, we will push other countries to the point that they are indifferent.”

Mr. Trump has railed against the fact that Germany’s tariffs on imported cars from the United States are higher than American tariffs on German cars. “Reciprocal is, if you’ve got a 30 percent tariff, you know what, we should have a 30 percent tariff,” he told Chancellor Angela Merkel and other leaders of the Group of 7 most advanced nations in May, according to Gary D. Cohn, his chief economic adviser.

This misunderstands the multiple trading of concessions that has guided trade liberalization over more than a half-century under the most-favored-nation rule, opening deals in which India offers something of value to Europe, in exchange for which Europe offers something of value to the United States and the United States offers something India likes.

As Chad P. Bown of the Peterson Institute for International Economics pointed out, the Germans could equally complain that the American tariff on German shirts is twice as high as Germany’s tariff on American shirts.

And this presents the risk to global trade: that Mr. Trump follows through on his talk of eliminating the nation’s bilateral trade deficits through a series of one-to-one deals, abandoning the multilateral framework. This is not only pointless; in a market economy it is not possible. Trade agreements set the rules, but not the trade balance.

Bilateral trade deficits are not losses. Bilateral surpluses are not gains. They say little about the overall strength or weakness of the economy. “I have a deficit with my grocer and a surplus with my firm,” said Carla A. Hills, the nation’s trade representative during the Nafta negotiations under the administration of the first President George Bush. “As long as I run my economy properly, I stay above water.”

Paradoxically, if Mr. Trump wants to reduce the American engagement with global trade, his best bet is to stay within the strictures of the multilateral trading system. The World Trade Organization, in fact, does not prevent the United States from raising tariffs unilaterally to protect a few industries and their workers. He does not have to convince any of the nation’s trading partners.

All he must accept is that the trading partners would be allowed — after negotiations — to retaliate proportionally by raising barriers against imports from the United States. “The system allows you to reset your commitments,” Professor Staiger said. “But other countries are also allowed to react.”

Not unlike the guarantee of reciprocal benefits extended to all, the opportunity for retaliation merely ensures that the United States proportionally bears the costs as well as the benefits of its choices. Whether the ultimate objective is more trade or less, it seems like a sensible principle upon which to negotiate. And yet the big risk for the global trading system, and the postwar economic order, is that it is a cost that Mr. Trump will refuse to bear.

Source: cnbc economy
Op-Ed: Why Trump's dangerous trade policy won't work

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