Trade and the Art of the Deal

R. Michael Gadbaw (Georgetown Law Center)

November 30, 2016 10:15 AM

As the reality of governing settles in, it is time to turn the page on the discussion of what President Trump can do in the trade arena and consider what President Trump should do under the banner of “America First.” 

If President Trump is true to his word—and it doesn’t pay to bet against him—two qualities are likely to characterize his administration’s trade policy: change and unpredictability. He has made it clear he intends to change the trade agreements that have failed to serve America’s working class, particularly those in manufacturing who saw trade agreements like the North American Free Trade Agreement (NAFTA) accelerate the pace of job losses from technological change. The Trans-Pacific Partnership (TPP) became a symbol of this loss of trust in globalization, government, and markets.

The challenge for President Trump is that America is deeply divided. One of the divisions is between those who see themselves as the beneficiaries of globalization and those who see themselves as the victims. The victims point to their wage declines, job losses, and disintegrating communities. The beneficiaries acknowledge their higher wages, more job opportunities, and communities that seem to thrive on the diversity that globalization fosters. The trick is to address the concerns of the former without upsetting the apple cart on the latter.

Three broad initiatives could help the new administration walk the line between this division and pursue an international trading system that is more in America’s interest without disengaging or triggering a wholesale unraveling of commitments.

  • reset trade rules that disadvantage the United States, particularly those that are not based on sound international economic policy, starting with the rules on border tax adjustments;
  • enforce—and where necessary renegotiate—trade agreements to address unfair trade practices like currency manipulation, the abuse of state-owned enterprises, and the denial or workers’ rights; and
  • expand the policy space under international agreements for allowing national regulators to deal with the adverse impacts of globalization through adjustment measures and responses to unfair trade practices.

First, Trump has threatened to impose tariffs on imports from China and Mexico to address the offshoring of American jobs. Well, there is one way to impose an across-the-board tariff on all imports while at the same time providing a tax rebate for exports: Reform the taxation system. Europe does it, Japan does it, and a host of other countries do it by rebating a portion of their taxes when products are exported and taxing imports at the border so they bear their fair share of taxation—all perfectly legal under the rules of international trade.

The House GOP has proposed a comparable regime to reform US corporate taxation that is designed to work like a progressive indirect tax (e.g., value-added tax, or VAT) but applied to business cash flow.  This proposal could be combined with tax reforms to bring back firm profits parked abroad which could then be invested in improving US infrastructure. Taken together these measures could provide a boost to domestic demand, counter secular stagnation and, if done properly, increase US productivity in the long term.

The problem is that the GOP proposal could run afoul of a longstanding provision of the global trading rules that allows the rebate of indirect taxes but not direct taxes. Whether the GOP proposal can be designed to operate like an indirect tax is open to debate but the Trump administration could properly insist that in this instance the distinction makes no economic sense and puts the United States at a distinct disadvantage relative to its trading partners.

Second, Trump has already announced his intention to withdraw from NAFTA and the TPP on his first day in office. The problem is that walking away from both those agreements would throw the baby out with the bath water. Instead if Trump consulted with Congress and made renegotiation of NAFTA and TPP more transparent, he could well find broad public support for continuing these agreements for their economic and strategic benefits, provided that the renegotiation improved the United States’ ability to address offshoring, unfair trade practices, currency manipulation, the operation of state-owned enterprises, and the abuse of workers’ rights. Carefully crafted improvements along these lines might well be negotiable and would enhance the United States’ ability to deal with China.

Finally, Trump’s threat to enforce more aggressively trade laws and agreements raises questions about the operation of World Trade Organization’s (WTO) dispute settlement mechanism. Over the past 25 years, the Dispute Settlement Understanding (DSU), guided by the Appellate Body, has failed to recognize the first principle of international economic law: “Thou shall not cause systemic failure.” In particular, the DSU failed to recognize that safeguards (measures to temporarily limit imports to protect domestic producers) and national rules on unfair trade practice rules such as antidumping and countervailing duties (AD/CVD) are essential to managing successfully the adverse impacts of globalization, particularly labor market adjustments and protecting workers from abusive trade practices instigated or tolerated by trading partners. Too often, WTO rulings have failed to recognize the fundamental rule of the DSU: “Recommendations and rulings of the DSB [Dispute Settlement Body] cannot add to or diminish the rights and obligations provided in the covered agreements.” The Appellate Body has interpreted the safeguard clause so narrowly as to essentially turn it into a dead letter, and its obsession with limiting regulatory discretion in AD/CVD cases has led it to add language to the WTO that was never in the text thereby unnecessarily compromising its credibility in the United States.  The Trump administration could reasonably demand accountability from the DSU and insist on more policy space to assist domestic industries and workers adversely affected by globalization and unfair trade practices.

President Trump has some important cards to play in resetting the table to advance America’s interests in competing successfully in international commerce without unreasonably or unfairly impairing the interests of other countries. A Trump trade policy that integrated trade into an overall economic strategy addressing trade, investment, tax, and infrastructure spending would avoid the trap of concentrating on bilateral trade deficits and respect the role of Congress and international law in shaping a successful and sustainable US trade policy.

Let’s hope President Trump tasks the best and the brightest to chart such a course.

R. Michael Gadbaw is an adjunct professor of law at the Institute of International Economic Law, Georgetown Law Center

Add new comment