In the 2016 U.S. presidential campaign, Donald Trump vowed to take a hard line against unfair traders, and identified China as the top offender. This week, President Trump made good on that pledge by imposing tariffs on solar panels made outside the United States. This move could be the opening salvo in the confrontation with China over trade that Trump seems to relish; it is more likely, however, to be the beginning of the education of the president in the realities of international trade in a deeply interconnected world.
While campaigning, Trump insisted that U.S. trade partners exploited American naivete, incompetence, ideological blind spots and corruption to gain unfair advantages over U.S. companies in international business competition. The result he claimed was the virtual destruction of the U.S. manufacturing sector, unemployment and the loss of something essential to the American character. Integral to the effort to “Make America Great Again” is leveling the playing field, which will redress trade imbalances and lead to a resurgence of U.S. manufacturing.
The first year of the Trump administration was marked by caution, largely because the president sought Chinese help in dealing with North Korea. His patience has seemingly run out, however, and the mood has darkened. The first concrete indication emerged last week with publication of the annual report by the Office of the U.S. Trade Representative on China’s compliance with the World Trade Organization. The report gave full throat to Trump’s complaints, arguing that “the United States erred in supporting China’s entry into the WTO” and “that the WTO rules are not sufficient to constrain China’s market-distorting behavior.” After detailing numerous alleged violations, the report concludes that China “is not prepared to follow through on significant commitments to make fundamental changes to its trade and investment regime.” To help China change its mind and honor those commitments, the U.S. this week imposed 30 percent tariffs on crystalline-silicon solar cells and modules made outside the U.S.
The move is both more and less than it seems. It is not unprecedented. U.S. President Barack Obama imposed higher tariffs on Chinese solar panels — Trump’s measure does not target a single country — in 2012 and 2014, and the European Union has recently done the same. Trump followed an investigation by the International Trade Commission and the 30 percent import tariff was not the most severe or potentially painful recommendation. The move is also less than it seems because one of the companies that brought the complaint, Suniva, is Chinese-owned, and thus any profits earned as a result of the tariffs will eventually flow back to China.
It also is not yet clear if the real purpose of the tariff is to help solar panel manufacturers or other traditional U.S. energy producers. The immediate effect of the tariff will be to raise the price of solar panels — it is estimated that 80 percent of U.S. solar installations use imported panels — and therefore the price of solar energy will increase. That will help other energy suppliers — and U.S. consumers will pay more — and another of Trump’s campaign promises was to bring jobs back to the coal industry. Burdening solar is unlikely to spur coal production and even if it did, automation in that industry will keep Trump from keeping that promise.
Most analysts have concluded that the tariffs will not have a real impact on the U.S. solar market: Prices are dropping so fast that any additional increase will be quickly absorbed by that general decline — and the tariffs are scheduled to drop 5 percentage points a year for four years. Experts also reckon that the tariffs will cost about 23,000 jobs among installers of solar panels, about 9 percent of the entire solar workforce, at least temporarily. Some of those jobs could be offset by gains in manufacturing, but many of those factories are automated and there will likely be no boost in jobs.
The biggest danger is the prospect of retaliation by U.S. trading partners and, if the WTO compliance report is any indication, a disregard for its dispute settlement mechanism. The Trump administration has endeavored to hamstring, if not cripple, the WTO by refusing to authorize new judges and adopting unilateral measures to redress trade complaints. The WTO is not perfect, but it has been an effective arbitrator of international interests and has done important work to sustain an open and liberal trading order.
It is not yet clear if this is a shot across the bow, an attempt to get international attention and honor campaign pledges or the inauguration of a combative and potentially destructive trade policy. If it is the latter, all U.S. trade partners, and especially Japan, must prepare. The first thing they can do is show Trump the many complexities of the international economy and get him to see the disastrous costs of such an approach.
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