Trump on Trade: A Few Cautions
President-elect Donald Trump will possess ample statutory powers he needs to restrict all forms of international commerce, including merchandise and service trade, capital flows, and private remittances. He can slap restrictions without congressional say-so and with little fear of judicial reversals.
That said, even though advisors might urge Trump to strike hard and fast, it would be prudent to move slowly and cautiously to avoid the risk of provoking an unnecessary confrontation with Congress.
Trump’s tax cuts, infrastructure spending, and Obamacare reforms will require congressional approval. It makes no sense for Trump to disrupt the economy with trade restrictions that adversely impact firms just when his administration needs to round up votes for major changes in domestic law.
As emphasized in the Peterson Institute’s recent Briefing, Assessing Trade Agendas in the US Presidential Campaign, US trade restrictions and inevitable foreign retaliation are sure to cost affected American workers their jobs. If Trump eventually decides to restrict imports, the painful and unpopular side effects may be less noticed once the fiscal stimulus inherent in Trump’s tax cuts has given a boost to the labor market.
Equally important, Congress instinctively believes that Article I, Section 8 of the Constitution requires that any president must consult closely before taking steps that would either liberalize or restrict foreign trade and investment.1 As a statutory matter, this belief is not well founded, but as a political matter it would be foolish to ignore Congress. When Senators and Congressmen believe the administration is overstepping its constitutional bounds, there are multiple ways they can delay or derail presidential objectives. Control over appointments and appropriations are among the most prominent means.
These considerations counsel President Trump to launch thoughtful negotiations with trade partners that he thinks are taking advantage of the United States—notably China and Mexico, but possibly Korea and Japan as well (all cited unfavorably during the campaign). Trump should invite aggrieved US firms, as well as labor and environmental groups, to suggest changes in bilateral trade practices, and listen closely to congressional priorities, before laying detailed demands on foreign partners. His officials should consult with domestic constituencies before and after each negotiating session. Negotiations and consultations will take time, but the public and Congress expect nothing less.
Turning to the content of negotiations, Trump’s pronouncements in the campaign suggest that the reduction of US bilateral trade deficits could be his foremost concern. This will be difficult to achieve because trade negotiators are bred to insist on “reciprocity”—meaning that new trade agreements must foreseeably increase national exports as much as they increase national imports. Trump’s objective flies in the face of this time-honored formula. A bilateral agreement that foreseeably increases US exports by $50 billion but US imports by only $10 billion will be hard for a foreign partner to accept.
Additionally, economic analysis argues that shrinking a bilateral trade deficit does not necessarily translate into shrinking the US global trade deficit. If the US trade deficit with one country—say China—is reduced by the terms of a new bilateral trade agreement, much the same deficit will pop up elsewhere, through larger US imports from other countries or smaller US exports to other countries—unless companion US macroeconomic measures are implemented alongside the trade agreement.
If reducing the US global trade deficit ($500 billion in 2015) is Trump’s paramount objective, he should complement bilateral trade agreements with macroeconomic tools. One possible tool is to encourage the Federal Reserve and Treasury to coordinate their policies to lower the trade-weighted value of the dollar in foreign exchange markets. This might not make Wall Street happy but it would gladden Main Street.
Another possible tool is to embrace the Ryan/Brady cash flow tax, adjusted at the border. Border adjustment means the tax (at a suggested rate of 20 percent) would not be imposed on export receipts, while import payments could not be deducted from a firm’s tax base. In very rough terms the initial economic impact would resemble a 20 percent depreciation in the foreign exchange value of the dollar. That would delight Main Street firms that export or compete with imports, but it would not be welcome by oil refiners or retailers that rely heavily on imports to conduct their operations. Moreover, unless the Treasury and Federal Reserve took appropriate measures, it is possible that the foreign exchange value of the dollar would appreciate and partly or wholly offset the economic impact of the border adjustment.
Perhaps the US global trade deficit is not Trump’s paramount objective—especially since the fiscal stimulus inherent in tax cuts and infrastructure spending will likely enlarge the trade deficit. Perhaps Trump’s paramount objective is to show the American public and foreign partners that his administration drives a hard bargain. If so, renegotiating the North American Free Trade Agreement (NAFTA), cancelling the Korea-US FTA, and pushing China to limit its exports of steel could achieve that goal. But such measures—even undertaken with close congressional consultation—likely will not bring substantial new jobs to the battleground states.
1. In the relevant passages setting out congressional powers, Article I, Section 8, reads: “The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises… [and] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes; …” Over the past century, successive Congresses have enacted statutes that delegate its constitutional powers to the president