Trump's Trade Policy Is a Big Loser

April 19, 2016

A centerpiece of Donald J. Trump's presidential campaign has been his pledge to impose sizable tariffs on imports from China and Mexico. He wants to punish US companies that offshore manufacturing to other countries by taxing them heavily and imposing tariffs on their sales to the United States. No president can act aggressively on such matters, however, without congressional assent unless she or he were willing to abrogate US law and violate longstanding US international commitments.

But what a President Trump could do is still dangerous. He could legally withdraw the United States from NAFTA and other trade agreements, reject the agreed Trans-Pacific Partnership (TPP) and the pending Transatlantic Trade and Investment Partnership (TTIP), and even leave the World Trade Organization (WTO). He could impose modest import barriers against individual countries.

Trump's trade policy, far from enabling the United States to "win again," would be a sizable loser.

Such a policy would be ineffectual at best and costly at worst, however, for both the US economy and US foreign policy. Most imports cut off from sanctioned countries could easily be replaced with goods from elsewhere, so very few American jobs would be saved or restored. The targeted countries would destroy many more US jobs by retaliating against our exports. Trump also vows to hit currency manipulators, but there has been little if any manipulation for over two years, so that problem is at least in remission.

 Trump's trade policy, far from enabling the United States to "win again," would be a sizable loser.

Lawyers disagree on these issues, like everything else, but US law clearly limits the discretion of any president on trade policy, most of which is reserved for Congress by the Constitution. Withdrawal from trade agreements like NAFTA would not terminate liberalization enacted under them through implementing legislation, which could only be reversed by new legislation. A president can raise tariffs against an individual country by 15 percent for 150 days, but nothing like the indefinite 45 percent Trump has threatened against China unless he invoked crisis authorities. The only other legislative path to trade restrictions aims at specific policies applied to individual products, and the United States has agreed to use it only to implement actions authorized by the WTO. The courts could stay any Trump efforts to evade these strictures.

Even if Trump could raise tariffs sharply against China and Mexico, there would be little or no benefit for US production and jobs. Products that are integral parts of corporate supply chains would simply hurdle the tariffs. Suppliers from other countries would fill the gap in virtually every item that was deterred. Trump would have to block imports from almost every major country to generate any significant domestic gains.

The outcome would in fact be quite negative because Trump would face fierce international reactions to such rogue behavior. He could only justify action against China, or any other individual country, by demonstrating that it was violating its international obligations. He could limit imports across the board by showing that the United States faces a balance-of-payments crisis, but capital has been pouring into the United States, and the dollar has been rising sharply in the currency markets for five years, so our overall international financial position is quite strong. Perhaps higher barriers for steel and a few other products could be based on national security considerations, but most could not.

China in particular has frequently demonstrated its readiness to retaliate promptly, confident that the lengthy WTO legal processes would subsequently validate its actions. All retaliators could easily shift their purchases to other countries, while the United States could find few new markets for its embargoed goods and services. Hence the United States would lose many more, as well as much better, jobs on the export side than any it might gain on the import side. Moreover, even the anticipation of such trade dislocation would spook markets and deter worldwide investment and growth. Trump could hurt the target countries, but he would badly hurt the United States itself.

The foreign policy consequences would be even worse. Rejection of the TPP would cede Asia to China, which would win big rather than lose from Trumponomics. Termination of NAFTA would repel Canada and the entire continent to our south. Europe would be added to the list if the pending TTIP dissolved (especially if Trump disrupted NATO as he also threatens). US withdrawal from the WTO would signal US withdrawal from the world.

Trump's vow to block US companies from shifting production overseas, by taxing them identically at home or abroad, suggests that he wants to abolish the foreign tax credit, which avoids double taxation of firms by crediting taxes they pay abroad against their US tax liability, or at least the deferral of US taxes until the profits are repatriated. But tax policy is clearly under the jurisdiction of Congress, and these provisions are integral parts of the tax code, so repeal would be highly unlikely. Nor is there any legislative authority for Trump to stop foreign investment by US firms or levy discriminatory taxes on their sales back to this country.

While Trump's rhetoric is reprehensible on these issues, as on so many others, domestic and international law fortunately circumscribe the damage that he could do. His proposed trade policy would, however, still be a huge loser for this country. It would replicate the isolationist steps taken by the United States in the 1930s, the Smoot-Hawley tariff, and a huge competitive currency devaluation that brought on and deepened the Great Depression. The United States built an open international trading system after World War II to protect itself and the world from a repetition of such folly; we never dreamed that its rules would have to check our own policies but should be deeply grateful that they can do so.