We're about to find out if Trump meant anything he said about taking a jackhammer to global trade deals
- In the coming weeks the White House will make trade decisions about a number of goods ranging from steel to solar panels.
- Mostly, these decisions are about attacking China, but the way Trump is undertaking them could mean massive collateral damage.
- If Trump's White House is as aggressive as its rhetoric, it could undermine the international trading system and prompt some of our closest allies to retaliate against us.
In the coming weeks we'll find out if Trump really meant what he said about trade during his campaign - if he will "Make America Great Again," by throwing up protectionist tariffs meant to punish countries that have been "unfair" to the US in the international trading system.
And in this White House's endeavor to protect industries like steel and aluminum, we could very well anger powerful allies and open a "Pandora's Box" of issues unthinkable since WWII. And in its effort to protect American intellectual property in China the US' strategy could undermine the rule of law and, subsequently, its own very real argument against China's very real IP theft.
In other words, we're doing this all wrong, and that is going to have consequences. Of course, if you look at it Trump's way, we're already dealing with those.
"We already have a trade war," Trump told the crowd, departing from his prepared remarks at a rally in 2016. "And we're losing, badly."
The big decisions coming down the line have to do with steel, aluminium, washing machines and solar panels.
When it comes to steel and aluminium, the administration will decide whether or not to put up tariffs based on national security concerns. Commerce Secretary Wilbur Ross gave Trump his report on the issue last week.
To trade experts, this is a huge problem. Using national security concerns to justify tariffs on basic commodities opens up a Pandora's Box that World Trade Organization (WTO) member nations have been responsible enough to leave off the table since WWII. And according to Lee Branstetter, an professor of economics and trade expert at Carnegie Mellon, "it will set a precedent that anyone, especially the Chinese, can use against us."
What he means is that once the US starts invoking national security to protect industries, everyone can do it. That's why no one has done it. The international trade system is built on trust, and up to now no one has violated that trust to this degree.
What's more, the Trump administration wants to hit China with these steel and aluminum measures. The country does indeed have a problem with commodity overcapacity - it has more steel, aluminum, copper and more than it can sell or use.
"The underlying source of the issue is China's overcapacity," said Chad Bown, an economist and senior fellow at the Peterson Institute. "But the problem from the US side is that we've mostly stopped steel and aluminum coming from China through anti-dumping duties."
That is to say, the US has used more targeted measures to stop Chinese steel specifically from coming into the country. It did pretty much the same thing with Chinese solar panels, Bown told Business Insider. In 2012 the US government put anti-dumping measures on Chinese solar panels, but they kept coming in from other parts of Asia.
What all of this means is that if the Trump administration just puts up blanket tariffs on these goods, we'll be hitting our allies - not the target.
"The proposed cure is worse than the disease," Branstetter said. "It's quite likely our allies will [retaliate]. The WTO will give them a right to inflict equal pain on other industries."
That means say, Boeing planes. Or Wisconsin dairy.
"If a president had deliberately tried to undermine our allies' good faith in us you could hardly do a better job than the Trump administration," Branstetter said.
Now, some analysts expect that the Trump administration may also make a decision about its investigation into American intellectual property theft in China in the coming weeks.
Trade experts across the political spectrum assert that this theft is a real issue. When US companies go into China they're forced into joint ventures with state-owned enterprises (SOEs), and that's where they say part of this theft occurs.
Multinationals also complain that simply using the internet in China, or "The Great Firewall" as it's called, can result in theft. Of course, complaining too publicly is a no-no if they want to continue doing business in the country.
So the question here isn't whether or not this is a problem, it's how to deal with it.
The Trump administration has chosen to use Section 301 of the Trade Act of 1974, a law that hasn't been used in 15 years since the development of our modern trading system.
China sees the use of Section 301 as an act of aggression because it allows the American president to act against the Chinese economy without consulting the WTO. China has been a member of the organization since 2001. The use of Section 301 fell out of fashion around that time because US leaders didn't see the point of using it anymore as the WTO's framework had more legitimacy. At the time, even our allies were complaining about Section 301's use.
Now, initiating the 301 investigation in and of itself is not a violation of WTO rules. Rules would only be broken if the Trump administration punished China on the basis of 301. It could still take its findings to the WTO and try to come up with a solution within the body - but that doesn't jibe with the administration's rhetoric.
What would be better, Branstetter said, would be an effort to get countries together to subpoena multinationals and see what's really going on with IP theft in China. This would allow governments to find out what multinationals are too afraid to say, and give multinationals the cover of having been subpoenaed by their own governments.
The way this investigation is headed now, though, could possibly give China the moral high ground on this issue. It too, then, could retaliate.
"This issue with China would be there even if had Trump hadn't been elected," Bown said. "But there's still no real strategy from the administration on how to deal with China. There's more of a piecemeal strategy."
That piecemeal strategy comes with baggage. It comes with the erosion of distrust in the US as a good actor on the world stage, as well as potential retaliation from our friends and frenemies that could harm our economy.
None of this is necessary. And it could have wide-ranging impacts.
As Cordell Hull, US Secretary of State between 1934-44 put it, "unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition with war ... it is a fact that war did not break out between the US and any country with which we had been able to negotiate a trade agreement."
