Crunch time for US trade policy: Will Trump aggressively target China?

18 January 2018

US President Donald Trump is scheduled to appear at the World Economic Forum Annual Meeting in Davos next week. A few days later, on 30 January, he will deliver his State of the Union address, marking the one-year anniversary of his presidency. With US trade deficits steadily rising and polls indicating that the Republicans stand to lose their House majority in November’s mid-term elections, this post argues there is considerable risk that Trump could launch aggressive trade measures in the coming months in the hope that such action may turn voter sentiment in his favour. 

 

One of the defining features of Trump’s presidential campaign was its highly trade-protectionist rhetoric. Trump repeatedly stressed that the North American Free Trade Agreement (NAFTA) was “the worst deal ever signed”; that China was a “currency manipulator” which had “stolen” countless American manufacturing jobs; that the World Trade Organization (WTO) was “a disaster”; and so forth. Trump’s message was: “we need much better deals and terms for the US – or we will pull out.”

Conflicting views

When eventually elected, many thought President Trump would be very different from Candidate Trump, especially on trade. Their assumption was that protectionism would remain mainly a rhetorical style, and that US trade policy would not take a strong protectionist turn during the tenure of a Republican president backed by a Republican Congress. After all, they observed, the Republican party has long been the most free trade oriented in the country.

This moderation view now contends that, beyond the rhetoric, Trump’s trade policies during his first year in office actually have not been that different from the Obama administration’s. And, in any case, within the US administration there is a powerful alliance built around Treasury Secretary Steve Mnuchin and Gary Cohn, director of the National Economic Council, who will always succeed in moderating the more hawkish, trade protectionist ideas of US Trade Representative Robert Lighthizer, Commerce Secretary Wilbur Ross, and Peter Navarro, director of the National Trade Council.

Viewed from this perspective, the moderates prevail – and they will continue to do so, ensuring that we only see small substantive changes in US trade policy over the coming years.

Others are far more concerned. They take Trump’s trade policy agenda to be both genuine and substantively new. In this view, emphasis is given to the fact that if there is one thing that Trump believes – and has believed consistently, at least since the launch of NAFTA and the establishment of the WTO in the mid-1990s – it is that the US has been outsmarted and cheated through international trade agreements such as NAFTA as well as organisations like the WTO.

Because these issues are so close to heart for Trump, proponents of this view argue that 2018 will see the trade hawks within the administration triumphing over the moderates. They therefore predict aggressive trade action against China, as well as further attempts to undermine the functioning of the WTO. In short, we will experience major disruptions in the international trading system. Whether one mostly adheres to the former or the latter of these views, almost all analysts agree that the coming weeks and months will offer a clear indication of which direction US trade policy will take. With tax reform legislation completed by having passed both houses of Congress in late 2017, it is now crunch time for trade policy.

Crunch time

If the recent past is any guide when it comes to US trade policy under Trump, our newly released DIIS report suggests that the international community would be well-advised to brace itself in 2018 for aggressive protectionist trade measures on the part of the US, as well as likely retaliation by China, the EU, and others.

The report examines each of the seven key promises on trade policy that Trump made on the campaign trail: withdrawal from the Trans-Pacific Partnership (TPP) agreement; appointment of the toughest trade negotiators; renegotiation of NAFTA (or withdrawing if US demands are not accepted by Canada and Mexico); labelling China a currency manipulator and taking sharp counter-measures; bringing trade cases against China; and, last but not least, using every lawful presidential power to remedy trade disputes. Our finding is that four of these promises have already been fulfilled, two have been partially fulfilled, and only one has been dropped.

With respect to the WTO, the Trump administration is already obstructing its dispute settlement mechanism by blocking new appointees to the Appellate Body, to the point of potentially crippling the organisation’s dispute settlement function. The European Commissioner for Trade, Cecilia Malmström, commented recently that the Trump administration risks “killing the WTO from the inside.”

Little more than a month ago, the US initiated an anti-dumping case against China, not – as is normally the case – by request of a US industry but at the initiative of the US Department of Commerce. It is the first time since 1985 that a US administration has taken such action. Chad Bown, a leading US trade policy expert from the Peterson Institute of International Economics, commented that the US administration, by taking such action, “is sending an aggressive signal that it is eager to impose import protection.”

This trade action taken just weeks after Trump’s return from meetings with President Xi Jinping in China during which both sides claimed to have enhanced their already strong personal relationship – sharply raised concerns over what could follow in the new year, not least in the wake of two so-called Section 232 investigations on US imports of steel and aluminium.

These investigations, initiated by Trump in April last year, gives the US President discretion to unilaterally impose high tariffs on imported products found to be a threat to US “national security.” Last week, a few days ahead of the official deadline, the US Department of Commerce submitted these reports to the President, who now has 90 days to decide what action to take.

Trade experts refer to the imposition of tariffs in the name of national security as the “nuclear option” in trade policy. Many fear that if the US does in fact impose high tariffs on steel imports from China as well as other steel exporters to the US (including several European countries), it could trigger an international trade war.

Recently, Politico reported that three White House officials had revealed that the Trump administration is preparing “an aggressive trade crackdown” for the coming weeks and months. At the same time, reports suggest that an intensive and high stakes battle for power is taking place between the moderates and the hawks in the White House.

Predictions on the crunch

The optimistic prediction is that the moderates will eventually manage to convince Trump that aggressive trade action would risk derailing the solid growth that the US economy is currently enjoying. This would disrupt investor confidence to the detriment of US stock markets, reportedly one of Trump’s leading indicators of success.

A pessimistic prediction would emphasise a different set of metrics and indicators, ostensibly closer to Trump’s heart. Data released last week revealed that the US trade deficit – both in aggregate and vis-à-vis China – has increased during the first year of Trump’s presidency to reach its highest level since 2012. If there is one feature that defines Trump’s economic agenda, it is his tight coupling of the Making America Great Again agenda with the overarching goal of bringing down US trade deficits, country-by-country.

Faced with this predicament, Trump will go a long way to be seen by the American electorate as taking tough action against China. Trump will likely reason that a confrontational course with China is the best chance he has of turning public opinion in his favour and thus avoid losing the Republican majority in the House of Representatives in the November mid-term elections. And avoiding the loss of a Republican majority in the House will be a top priority for the President, not least because this would be his best chance of avoiding the risk of impeachment driven by a new Democratic majority.

The international ramifications of these dynamics are beyond scary.

 

Jacob Vestergaard is senior Researcher at the Danish Institute for International Studies (DIIS). He is the co-author with Peter Gibbon of the 2017 DIIS report US Trade Policy Under Trump. Follow him @jakobvestergard