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Speculation about Donald Trump’s possible trade actions is running wild right now, and I am going to succumb to the temptation of talking about some of them. Doing so is fraught with peril, largely because Trump is notoriously unpredictable and perfectly happy to contradict people who work for him. Thus, anything that anybody predicts needs to be taken with a large helping of salt. In addition, there are many more topics than can be squeezed into 900 words, so I will limit this comment to three tariff-related thoughts that are floating around.
The first addresses the question of why tariffs. It appears that Trump has three fundamental objectives here:
The first has been much discussed and was a goal of both the current administration and the preceding one. While there is anecdotal evidence of reshoring occurring, few economists expect it to get beyond that stage. The United States is not a low-cost economy, and a lot of manufacturing, particularly the old, heavy kind that Trump favors, is not coming back, nor should it unless you want $300 toasters, as Ed Gresser pointed out in a recent piece. Protecting noncompetitive manufacturers with tariff walls will only guarantee that the United States falls farther behind the rest of the world technologically,
The second has widespread support—everybody is for “fair” trade—but global trade rules allow for compensatory tariffs that equal the harm being done. Punitive tariffs, as Trump has threatened, break the rules, undermine the trading system, and invite retaliation.
The third has been less discussed, but we will be hearing more about it soon. The idea is that the United States is disadvantaged by its low tariffs compared to others—India is often cited—and should rebalance by matching its tariffs with those of its trading partners. This is a mechanistic approach that surrenders our trade policy to those of other countries. If their tariff is high, we match it, producing different tariff schedules for every country in the world, surrendering our interests to theirs. If, for example, Colombia has a high tariff on coffee to keep out its competition, should we impose an equivalent tariff on their coffee even though we are not harmed by theirs and don’t grow coffee? Arguing that an item-by-item approach would prevent that from happening is placing an extraordinary administrative burden on our government and would be a gold mine for lawyers and lobbyists. Such an approach would also bring an end to the most-favored-nation concept and global trade rules. That may not matter to Trump’s supporters, but it will make a huge difference to our companies that operate internationally. If the strategy is intended as leverage, it would lead to many prolonged negotiations, all of which would blow up the system.
A related question is what a tariff-based approach would mean for possible trade agreements. There is an argument that dealmaker Trump may pursue more trade agreements than Joe Biden did, a low bar since the latter pursued zero. However, an examination of the deals Trump negotiated in his first term reveals that they all involved concessions by the other parties and none by the United States. A nonreciprocal approach like that will not be met with much enthusiasm in other countries.
A different approach builds on the growing worldwide concern about Chinese overcapacity and suggests a network of bilateral trade agreements that offer friendshoring on the part of the United States and a common external tariff against China by the others. This would give participating trading partners entry into U.S. supply chains while putting coordinated pressure on China to rein in its overproduction. In a previous column, I discussed the growing willingness of other countries to push back on Chinese overproduction and suggested that there is an opportunity for leadership that will turn that from a disorganized mess of individual actions into a coordinated policy. This approach might do that—if Trump has the patience to pursue it.
Finally, as the required review of the U.S.-Mexico-Canada Agreement (USMCA) approaches, the issue of rules of origin has returned to the table. Trump used them, not entirely successfully, in the current USMCA agreement to force more manufacturing into the United States. He is now concerned, legitimately, with China’s potential use of Mexico as a platform to get its products into the United States and avoid tariffs. One way to deal with that is to define rules of origin in terms of company ownership rather than content. In other words, a product’s origin would be determined by who owns the company making it rather than where its content came from. There are well-established international rules about origin, and this would be a huge disruptive change. It would also lend itself to abuse. Disguising corporate ownership is a well-established practice, and the result of this proposal could well be a world in which everything is officially a product of the Cayman Islands.
These ideas are attractive because they address contemporary trade problems, primarily the challenge China poses. However, they represent a frontal attack on the rules-based trading system. It is fashionable these days, in both parties, to say that the system is finished and it is time for something new. The trick is to come up with something better. The Democrats’ idea—a trade policy for the workers—sounded nice but failed to accomplish much of anything besides undermining the World Trade Organization (WTO). The Trump approach will take us back to the early 1930s and the law of the jungle and similarly attack the WTO. It may be up to us in the center to find a better way.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
