How Different Are Trump’s Tariffs?

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at 

At Davos in January, US President Donald Trump warned that the US “will no longer turn a blind eye to unfair economic practices” of others, interpreted by many as declaring world trade war. Before the US mid-term elections in November, Washington is expected to focus on others’ alleged “massive intellectual property theft, industrial subsidies and pervasive state-led economic planning” pointing to China without always naming names. With the Republican Party already united behind his tax bill, Trump senses an opportunity to finally unite the party behind him and to continue his campaign for re-election in 2020.

Since January, Trump has taken steps threatened in his mid-2016 election economic policy document, drafted by US’s National Trade Council head Peter Navarro and Commerce Secretary Wilbur Ross. In particular, he has imposed tariffs and other restrictions on imports to revive US manufacturing. Import tariffs of 25% and 10% on steel and aluminium respectively have been imposed by invoking Section 232 of the US 1962 Trade Expansion Act, allowing unilateral measures to protect domestic industries for “national defence” and “national security”.

Trump’s action was supported by a US Department of Commerce Bureau of Industry and Security report, released earlier. It made the case for imposing import tariffs on both metals for national security reasons as “national security can be interpreted more broadly to include the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements….”

Trade War Memories

After his announcement, several major trading countries and blocs retaliated or threatened to retaliate against US imports, raising the prospect of a trade war. The resurgence of US trade protectionism poses two threats. The US has a long history of using ‘anti-dumping measures’, especially on steel. Earlier, imports of washing machines and solar panels were restricted by Trump after the US International Trade Commission declared that they unfairly hurt domestic manufacturers.

The US President has also threatened to impose “reciprocal taxes” against countries imposing tariffs on US exports. This threat has invoked references to the 1930 Smoot-Hawley Tariff Act. Its Republican sponsors, Senator Reed Smoot and Congressman Walter Hawley then argued that it would protect US jobs by shielding American industries from import competition by imposing tariffs on over 20,000 imported goods.

This aggressive protectionism then precipitated the collapse of global trade, as its trade partners then restricted US export access into their own markets. The ensuing trade war undoubtedly exacerbated the Great Depression. Recent developments have understandably revived fears of a new trade war, with similar consequences.

Undermining Trade Multilateralism

The US’s unilateral actions have seriously challenged the multilateral framework of World Trade Organization (WTO) trade rules. The Trump administration has been challenging post-Bretton Woods rules-based trade multilateralism, which sought to develop international trade regulation. Besides many rhetorical attacks on the multilateral trading system, the Trump administration has largely avoided engaging with the WTO while also avoiding violating the letter of existing trade agreements.

Undermining the WTO and its rules is hardly new for the Trump administration, but what is rarely acknowledged is that it also represents continuity with previous presidents including his arch-nemesis, Obama’s. Both administrations have blocked appointing WTO Appellate Body (AB) members, effectively undermining the WTO’s dispute settlement process. The AB should have seven members, but will soon only have three members left, undermining its functioning. Aggrieved WTO members wishing to challenge alleged violations of its rules have no redress without a functioning AB.

Advocates of international trade liberalization have long claimed that it boosts growth and makes everyone better off in the long run, although many acknowledge shorter term casualties in ‘uncompetitive’ economic activities. With successful political mobilization around growing doubts over such claims, these claims have lost credibility, ing the tide of ethno-populist-nationalism in the West.

Freer trade has widely distributed benefits in terms of lower consumer prices while seemingly concentrating costs on displaced producers. Conversely, tariffs meant to protect particular industries have concentrated benefits while widely distributing costs. Thus, even without considering the consequences of retaliatory trade measures by others, some (e.g., US steel) jobs may be saved while consumers pay more for ‘downstream’ products, threatening related jobs downstream. Consumers, however, are unlikely to act politically because they have to pay a little more for some goods, whereas workers are more likely to be mobilized if their livelihoods are threatened by foreign import competition.

Is Trump All That Different?

Trump has long complained about US and foreign trade policies. He seems to believe that trade is a zero-sum game in which the goal is to export more and to eliminate the US trade deficit. Importing from another country implies that country has “won” and the United States has “lost”. Thus, his version of US ‘sovereigntism’ links trade to national pride. Thus, he accuses others, especially China, of “laughing at us”. As trade issues are about US jobs, pride and dignity, costs or losses become “a small price to pay”. Thus, imposing tariffs will show foreigners that the US is strong, and cannot be taken advantage of.

With this logic, “winning” may involve losing although the tariffs will benefit relatively few workers in protected industries at the expense of the vast majority of other workers in downstream industries and consumers. But longstanding economic imbalances and inequities are unlikely to be well addressed by protecting a few politically influential industries.

For half a century, the US has gone back and forth with trade liberalization, often coming dangerously close to trade warfare. President Ronald Reagan’s 1980s protectionism is rarely acknowledged as he is now the paragon of US economic neoliberalism. (Current US Trade Representative Robert Lighthizer earned his reputation in Reagan’s administration.) His trade restrictions used loopholes in trade agreements to raise tariffs and limit many imports besides forcing political allies to accept “voluntary restraints”. Dani Rodrik has argued that Reagan’s protectionism “let off political steam”, enabling the US economy to recover and globalization to accelerate.

International economic liberalization or globalization since Reagan has also transformed the international context and the consequences of Trump’s recent measures. Unlike Reagan who arm-twisted political allies to accept his demands as necessary concessions during the Cold War, Trump’s ‘US sovereigntism’ is based on ‘victimhood’, invoking the image of an ex-hegemon, and makes no pretensions of being mutually advantageous or reciprocal.

Yet, prematurely ‘crying wolf’ about trade war may also accelerate trade war momentum as it remains unclear how international policy is made and changed in Trump’s White House. While possibly ominous of much more to come, premature, exaggerated criticism of his unilateral trade measures may become ‘self-fulfilling’, given the political need for continued ethno-populist and nationalist mobilization against enemies, real or imagined.

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7 comments

  1. Clive

    While Trump’s protectionist banter is subject to the usual Trump inconsistencies and even irrationalities, the rhetoric does get within sight of a valid target.

    Which is: for as long as I can recall, we (and I do mean we — this applies to governments, business and people) have been expected to participate and have largely done so unquestioning in what is in effect the Wizard of Oz with us as audience participation. So many so-called markets are nothing of the sort. Financial services is the most obvious to Cfdtrade readers. Then there’s energy, food, even potable water. US readers will no doubt shout up about cable / broadband services and be joined by Europeans for cellular (mobile) phone services. I’ll add in a couple of my own, just for fun: the Payment system card scheme duopoly and niche industrial chemicals such as synthetic oils, refrigerants and even hair colourants. Healthcare is also a particularly odd one — not a market at all in most European countries, but the awful pretend market you have in the US. And that’s before we get to pharmaceuticals.

    So Trump’s fixation on China is the right focus on the right problem but on the wrong party. Nevertheless, in coming out and saying “these free markets ain’t free markets” he is, probably unwitting, opening up — not before time — a Pandora’s Box containing capitalism’s dirty laundry (if I may be permitted to mix my metaphors).

    1. vlade

      Out of curiosity, why do you think EU mobile market is not a market? It does have its problems, but I know a number of people who use a non-domestic provider for their calls (and data), because the domestic ones are expensive. Telcos totally hated the “roam in EU for free” regulation.

      The main problem with that is that you still have to get the number in-person, not just anywhere, but that is not dissimilar to other areas?

      But getting back to Trump – the main “problem” for me is that US is crying “not a free market” only when it suits it (not that US is the only one doing this).

      That said it would be best (not that I expect to see it in anyone’s lifetime) to admit that free markets are a chimera for a number of reasons – starting with that definition of what the “free” means changes based on who you ask.

      1. Clive

        The old business adage that “if you don’t know your cost of goods sold, you don’t know if you have a viable business” applies here — not to the carriers, of course, they know overall their profitability and most of their costs inputs, but to the consumer.

        For a mobile phone, the only true cost is the cost of the infrastructure to provide the cellular service to subscribers ( some small additional costs for billing, customer support and so forth). As there’s no universal service obligation, the carriers can shape their coverage — and the resultant infrastructure costs — to maximise their profitability.

        But because the carriers can conceal the costs of their infrastructure with a miasma of cross subsidies from their retail sales, white labelling SIMs to other retail service providers and site sharing arrangements (amongst others) consumers don’t know if what they are paying on their particular tarriff is somewhere vaguely near the costs of the infrastructure they use a reasonable profit margin or being totally price gouged.

        Nothing that the EU’s roaming surcharge ban did cured this issue. It merely removed one element of cross subsidy (roaming fees). Even then, it arguably just swapped one problem (high roaming fees being used for carrier profiteering and a little cross subsidy) for another (cross subsidising system users from low cost countries in high cost countries). There is little justification, for example, for a Greek SIM card registering and generating network traffic on a German mobile phone mast but paying Greek prices. And the example you cite is actually a good example of the problem rather than showing a viable solution — in-the-know users can play price arbitrage by getting a non-domestic SIM and using it on the domestic network. But that pricing trickery is just that — trickery. It still doesn’t address the problem of what a fair price should be for that user in that geography.

        Japan is trying to rebalance the market to better favour (or perhaps, more accurately put, less disadvantage) low usage level customers and end the hidden costs (and therefore hidden cross subsidies) from “free” (or heavily discounted) high-spec phones. Especially where these tie people into long contracts or are only available to new subscribers.

        And I haven’t even covered the issue of kick-backs —- perfectly legal —- and preferential treatment being given by phone manufacturers to the mobile phone networks.

        Nothing about the so-called mobile phone market is anything like a market.

        1. vlade

          Ok, I see where you’re coming from. But I’d argue that no user (ok, 99%, for the purposes of general customer the same as “no”) understands the underlying cost and make a call on whether they are gouged or not.

          In fact, I’d argue that there’s few, if any, products where anyone but a specialist can truly understand whether they are gouged or not. Which is why for big-ticket items it pays to hire a specialist.
          Going back to the mobile and the infra perspective, then the charge should really be not what a Greek on a German mast should pay. But what a Londoner in Orkenys on a Wednesday’s midnight should, or an Italian on Barca’s stadion during the game tonight should. But that would be IMO horribly complicated, and TBH, for the majority of the people probably not worth the hassle considering other items that tend to make much more difference (and they don’t have to be big ticket on their own. like food). Not to mention that using (for example) Facebook is for me gouging, even if it’s technically ‘free’. So even if part of the population may end up subsidising other, well, I don’t think it’s a big deal overall (unlike the bank overdraft fees and the like where the poorest in the UK subsidised the middle).

          Of course, the point you made “it’s not a (free) market” is still valid – although I’d argue it’s still a market (in my definition of parties entering into contracts voluntarily), but as any markets, has power assymetry. If anyone believes there exists a market where the power between the parties is always perfectly symetrical (any, anywhere), I have a bridge I’d like to sell them.

  2. John B

    Yes, Trump’s tariffs are different.
    Before Obama, U.S. antidumping measures almost ceased to exist. No or very few new cases were filed in the mid 2000s. Even after the financial crisis of 2007 many academics were surprised how little protectionism there was. Later in the Obama administration the United States took a broad interpretation of the WTO antidumping rules, and allowed increasing measures, particularly against China. But it always had a reasonable case, focused on specific products and countries, and backed down when the WTO ruled against it.

    Trump, on the other hand, is taking a broad interpretation of the WTO’s national security rules — essentially, arguing that the United States can impose any tariffs or quotas it “considers” justified to defend “national security,” including the welfare of important industries. The Trump Administration is basically arguing that the WTO restrictions on tariffs are flexible they are just about meaningless. That’s a big escalation from merely applying antidumping duties.

    Also, given the rhetoric, and the US refusal to appoint appellate body members, it’s not clear the Trump Administration would back down even if WTO dispute settlement ruled against it. The US has not gone so far as to repudiate the WTO agreements, which it has a right to do on six months’ notice, but the Trump Administration has moved distinctly closer to that in practice.

  3. clarky90

    Our bodies are self sufficient and full of redundancy. We have two lungs, kidneys, eyes, ovaries, testis. We can exist for months, exclusively on our own fat stores.

    Globalization is like living in an apartment in a big city. You are vulnerable. If the garbage is not picked up? if the restaurants are closed and the grocery stores empty? If the water and electricity stop.

    Calling for fair treatment is not “a trade war”. It is a demand for equity, self sufficiency, healthy redundancy (not efficiency) and resilience.

  4. Altandmain

    Let’s face it, the WTO was formed for the purpose of enriching corporations.

    These “free trade” agreements are often about giving corporations the right to rape, pillage, and plunder society, destroying the bargaining power of labor.

    That doesn’t mean that Trumpism is the solution, but he has highlighted a problem that deserves a lot of scrutiny. The whole reason why Trumpism is popular is because liberalism has failed. The free trade world was supposed to leave society on the whole better off. Instead it has left a small part of society wealthy, while the rest are in an economically precarious situation.

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