U.S. President Donald Trump has begun his assault on the global trade system. After promising to end the exploitation of the United States by its trade partners, the Trump administration was slow to take concrete steps to honor that pledge. In recent weeks, however, the U.S. has acted with gusto and the president seems to relish the prospect of a trade war. This is foolish bravado. There are no winners in a real trade war. Unfortunately, Trump is not completely wrong: The international trade order is not perfect and must be fixed. His approach, however, is misguided and dangerous.
One of the pillars of the Trump presidency is that the world trade system has been abused by countries who take advantage of the U.S. His promise to end the abuse and reinvigorate U.S. manufacturing was, noted Trump last month, “probably the main reason” he was elected. The evidence that Trump uses to make his case is flawed, though. The bilateral trade balance in goods is not proof of that charge.
Trump has peopled his administration with like-minded economists and policymakers (and driven off those who dissented) and after a year of preparation, he launched the opening salvo in his effort to “fix” the U.S. trade balance in early March by announcing tariffs on steel and aluminum imports.
That triggered threats of retaliation from Europe, and Trump doubled-down with threats to European car exports to the U.S. The bluster was more bark than bite: The administration also provided exemptions to U.S. allies and partners equivalent to 67 percent of U.S. steel imports and 55 percent of its aluminum imports. That did not mollify the European Union, which responded with a list of retaliatory tariffs that it said it would impose if Washington followed through.
China, which accounts for less than 1 percent of U.S. steel imports, promised retaliation against the U.S. tariffs with duties on more than 120 U.S. goods worth about $3 billion, even as Chinese Premier Li Keqiang warned that “A trade war does no good to anyone. There is no winner.” Undeterred, Washington announced that it would impose tariffs on another $50 billion worth of Chinese goods and promised action at the World Trade Organization — an ironic gesture given the Trump administration’s hostility to that body. The U.S. government also promised stricter scrutiny of Chinese investment in the country and several deals have already been blocked.
Trump has taken special aim at China, promising to end its multibillion dollar trade surplus with the U.S. and noting that recent moves against Chinese products “will be the first of many.” He and his team claim that years of bilateral trade negotiations have had little effect on trade, and he has reportedly turned down several Chinese offers on trade deals as too small. By all appearances, U.S.-China trade talks have been suspended because of Trump’s disappointment with the results.
China has taken advantage of the global trade system, which is not suited to deal with the policies and practices of state-owned enterprises and a government determined to use its power to help domestic companies. Beijing has forced foreign companies to turn over intellectual property to gain access to its market as well as stolen information by hacking. U.S. officials note that “the harm that is done by what is the theft … of intellectual property is almost incalculable.”
Trump cannot fix the China problem on his own. Worse, his unilateral action is likely to backfire, not only giving targets of his ire excuses to retaliate, but also driving them together to take concerted action against Washington. That is Beijing’s best hope to continue its predatory practices: dividing the coalition that could take the most robust stand against it. Only if the U.S., Europe and Japan stand together can they hope to change Chinese behavior.
Trump’s treatment of Japan is especially worrisome. He has long insisted that Japan too is an unfair trader. Not surprisingly, Japan is not on the list of countries exempted from the steel and aluminum tariffs. There is growing speculation that Trump wants to use the threat of tariffs to force Japan into negotiations into a bilateral free trade agreement. That too is ironic as Trump could have had many of his desired terms if he had not withdrawn from the Trans-Pacific Partnership on his first day in office.
Trade will be on the agenda when Prime Minister Shinzo Abe meets Trump later this month. He must try to convince the president not only of the futility of aggressive unilateralism but of the need to move together in multilateral forums against trade cheats. Both premises challenge Trump’s bedrock beliefs, but our partnership and the future of the global trade order could depend on his success.