"Tariff-Free Zone:" Great Idea, But Is Trump Serious?
The blowup at the Charlevoix Summit in Quebec in the wake of President Trump's rejection of its communique has rightly dominated the headlines over the weekend. But Trump's proposal for a "tariff-free zone" to the assembled G-7 leaders (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) merits more attention as a tactic that could prompt a serious effort to avert a trade war and yield a constructive result.
Considering his aggressive tweets in the days leading up to the summit, his stunning rejection of the joint communique, and his personal insults to Prime Minister Justin Trudeau, few observers are likely to take Trump's idea of a "tariff-free zone" seriously. Apart from his "in your face" brand of diplomacy, the tenor of Trump's attacks undermines the credibility of his whole approach. Moreover, while Trump is fond of denouncing tariff peaks protecting markets abroad—Canada's 330 percent butter tariff, the European Union's 10 percent auto tariff, India's 100 percent motorcycle tariff, and more—he never mentions high US tariffs and nontariff barriers, such as duties on clothing and sneakers running from 15 to 48 percent, peanut tariffs of 130 percent, and the Jones Act, which forbids foreign ships from dropping off containers in Boston and taking fresh loads to Baltimore—not to mention the huge subsidies to US sugar and other agriculture.
The trade policy script authored by Trump and his key lieutenants (Commerce Secretary Wilbur Ross and Trade Ambassador Robert Lighthizer) calls for trading partners to unilaterally slash their tariffs on products singled out when foreign duties are well above US levels. The authors call this script "reciprocity." But their approach has a peculiar twist: "You cut your high barriers, and we'll keep ours."
Trump's justification for the twist is the US trade deficit (projected around $650 billion for 2018), which he insists reflects lopsided market access. The United States, in his words, has become "a piggy bank everyone is robbing," thanks to low US barriers and high foreign barriers. "There is no reason we should have large trade deficits with virtually every country of the world," asserts the president. One of the puzzles of Trump's vilification of Canada and Prime Minister Trudeau, of course, is that one country with which the United States does NOT have a trade deficit is…Canada.
Contrary to Trump's assertions, mainstream economists explain the US trade deficit as the inevitable consequence of a buoyant economy—because Americans have more money to spend on imported goods—as well as a strong dollar, large fiscal deficits, and low household savings. Abundant research shows no connection between the height of a country's external barriers and the size of its external surplus or deficit.1 By Trump's logic, Brazil and India should experience enormous trade surpluses, thanks to their high average tariffs, whereas Canada, Chile, and Singapore should be wallowing in trade deficits owing to their low average barriers. Experience shows otherwise.
While the president's "tariff-free zone" was likely just a throwaway line, he is a man of surprises. On the remote possibility that the president is thinking along tariff-free lines, a place to start could be a tariff-free zone for autos and parts. Thanks to the much-maligned North American Free Trade Agreement (NAFTA), tariff-free trade is already a reality between Canada, Mexico, and the United States. Canada's tariff on imports from countries with which it does not have a free trade agreement (such as Japan) is 6 percent, and the kindred US tariff is 2.5 percent on most autos but 25 percent on pickup trucks, the manufacture of which is the backbone of US auto companies. Japan's tariff is zero, but safety and emission standards are an issue impeding access by US auto and auto parts makers, while the EU tariff is 10 percent.
Trump has warned of a blanket US auto tariff of 25 percent if other countries don't shape up, and to that end he called on Secretary Ross to report, under Section 232 of the Trade Act of 1962, on the threat to national security of large US auto imports. Most observers regard the "threat" as nonexistent and see the 25 percent blanket tariff as a negotiating tactic. If imposed, the auto tariff and inevitable retaliation would throw hundreds of thousands of Americans out of work.2
But what if Trump was serious about a "tariff-free zone"? There could be some advantage to accepting his idea at face value. Accordingly, he should instruct Secretary Ross to report on the consequences of tariff-free trade in autos as an integral part of the Section 232 report. If Trump then adds "sweeteners" to the idea of tariff-free auto trade, such as dropping tariffs on steel and aluminum, abandoning the notion of sky-high blanket US tariffs on autos, eliminating the 25 percent tariff on pickup trucks, and tossing a few other sacred tariff cows on the table, he could surprise everyone (including this blogger) by launching a meaningful negotiation among G-7 countries.
Of course, personal insults are seldom an auspicious start to serious negotiations. But President Trump sometimes seems to regard insults as a prelude to dialogue, not an impediment.
1. Gary Clyde Hufbauer and Zhiyao (Lucy) Lu, "Free Trade Agreements and Trade Deficits," PIIE Trade & Investment Policy Watch, March 31, 2016; Joseph E. Gagnon, "We Know What Causes Trade Deficits," PIIE Trade & Investment Policy Watch, April 7, 2017.
2. Sherman Robinson and Karen Thierfelder find production in auto industries would fall by 1.5 percent and cause 195,000 US job losses if 25 percent auto tariffs are imposed. The production decline and job loss would be larger if all countries retaliate. For their calculations, see Sherman Robinson, Karen Thierfelder, Jeffrey J. Schott, Euijin Jung, Zhiyao (Lucy) Lu and Melina Kolb, "Trump's Proposed Auto Tariffs Would Throw US Automakers and Workers Under the Bus," PIIE Trade & Investment Policy Watch May 31, 2018.