The Wall Street Journal: Mr. Trump’s Trade War

This week’s “Saturday Essay” by Douglas Irwin of The WSJ captures well the thrust of President Trump’s trade policy: “The president is right to emphasize reciprocity. His mistake is to focus on the balance of trade with individual countries rather than on the rules of market access.” In my on-going trade policy self-study, this is one of the better write-ups I have seen thus far.

Irwin walks thru the history of trade policy in America, starting with Secretary of State Thomas Jefferson’s “Report on Commercial Restrictions”:

“In 1793, Secretary of State Thomas Jefferson issued a ‘Report on Commercial Restrictions’ that extolled the idea of free trade but documented the numerous barriers placed on American goods and ships in foreign markets. He proposed achieving reciprocity through a policy of retaliation: ‘Where a nation imposed high duties on our productions, or prohibits them altogether, it may be proper for us to do the same by theirs.’ But the U.S. was too minor an economic power to make good on such threats and, rather than risk a trade war, opted instead for an imperfect agreement with Britain.

“For most of the next century, the U.S. abandoned the quest for reciprocity. Congress set high tariff rates without regard to the rules set by other countries. By the 1890s, however, new developments prompted some to reconsider the wisdom of protectionism. The U.S. had become a net exporter of manufactured goods, and discriminatory trade policies abroad were impeding access to foreign markets.”

The last gasp of protectionism came with the infamous Smoot-Hawley tariff increase in 1930. Focused solely on the interests of select domestic producers, Congress gave little heed to foreign protests that came pouring in, let alone to the concerns of U.S. exporters or consumers. Congress ignored warnings of possible foreign retaliation, and the international backlash dealt a swift and devastating blow to American exports.”

In 1934 FDR successfully pushed Congress to pass the Reciprocal Trade Agreements Act of 1934, which gave the president the ability to reduce tariffs in trade agreements (I presume unilaterally?). Later, after WWII the General Agreement on Tariffs and Trade (GATT) was formed to chip away at discriminatory trade practices aimed at American exports. In 1967 GATT was revised to reduce trade barriers to American exports bound for the European Economic Community (precursor to the European Union); and in 1993 GATT was updated again, and the World Trade Organization was formed to protect IP rights and settle disputes.

* * *

Irwin cites China’s “Made in China 2025” mercantilist trade policy as precisely what the Trump Administration should go after, rather than bilateral trade deficits with individual countries. I agree. But as I have said in the past, and was confirmed to me in the “Let Trump Be Trump” book (page 149 in the hardcover), there is a good chance there is a lot more nuance to Trump’s focus on bilateral trade deficits than meets the eye, particularly given Wilbur Ross’s involvement. The book says:

“Though some did, plenty of those who came to see him didn’t know the nuances of our trade deficit with the People’s Republic. But they did know that everything they bought seemed to be made in China. So the message resonated. The message was also defendable in the same simple terms.”

* * *

Adding it all up, it appears China is far and away the number one problem with regard to American manufacturing jobs fleeing the country – not NAFTA. As long as the NAFTA-driven imports from Mexico and Canada that replaced American manufacturing were cheaper than what American manufacturers could produce on a quality-adjusted basis, then NAFTA was an acceptable deal. (This assumes policymakers have the ability to appropriately levy quality-adjusted tariffs to level the playing field – perhaps a dubious assumption.) Likewise with TPP. But if China is simultaneously protecting its domestic manufacturers from international imports, and benefiting from America’s lifting of tariffs on Chinese products as part of the deal to allow China into the WTO (???), that is a horrific deal for American jobs.

Setting aside the surface-level focus on bilateral trade deficits, piecing together the entirety of the Trump Administration’s economic agenda thus far is illustrative: aggressive deregulation, corporate tax code reformation and trade policy renegotiation all align to make the American business community more competitive with international peers.

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