- Mark Lyons / Stringer / Getty Images
- In the coming weeks, the White House is expected to make trade decisions about several goods, ranging from steel to solar panels.
- These decisions are aimed mostly at attacking China, but the way President Donald Trump is undertaking them could mean massive collateral damage.
- If the White House’s moves are as aggressive as its rhetoric, it could undermine the international trading system and prompt some of the US’s closest allies to retaliate.
In the coming weeks, we’ll find out whether President Donald Trump meant what he said about trade during his campaign – whether he will “Make America Great Again” by throwing up protectionist tariffs meant to punish countries that have been “unfair” to the US in the international trading system.
In this White House’s endeavor to protect industries like steel and aluminum, we could very well anger powerful allies and open a Pandora’s box of issues unthinkable since World War II.
And in its effort to protect American intellectual property in China, the US could undermine the rule of law and, subsequently, its own very real argument against China’s very real IP theft.
In other words, we’re doing this all wrong, and that will have consequences. Of course, if you look at it Trump’s way, we’re already dealing with those.
“We already have a trade war,” Trump told a crowd at a rally in 2016. “And we’re losing, badly.”
Free to decide
The big decisions down the line have to do with steel, aluminum, washing machines, and solar panels.
The administration will decide whether to put up tariffs on steel and aluminum based on national security concerns. Commerce Secretary Wilbur Ross last week gave Trump his report on the issue.
To trade experts, this is a huge problem. Using national security concerns to justify tariffs on commodities brings up issues that World Trade Organization member nations have been responsible enough to leave off the table since WWII.
One such expert, Lee Branstetter, a professor of economics at Carnegie Mellon, said it would “set a precedent that anyone, especially the Chinese, can use against us.”
What he means is that once the US starts invoking national security to protect industries, everyone can do it. That’s why no one has done it. The international trade system is built on trust, and no one has violated that trust to this degree.
What’s more, the Trump administration wants to hit China with these measures for steel and aluminum. China has a problem with commodity overcapacity – it has more steel, aluminum, copper, and more than it can sell or use.
“The underlying source of the issue is China’s overcapacity,” said Chad Bown, an economist and senior fellow at the Peterson Institute. “But the problem from the US side is that we’ve mostly stopped steel and aluminum coming from China through anti-dumping duties.”
The US has used more-targeted measures to stop Chinese steel from coming into the country. It did pretty much the same thing with Chinese solar panels, Bown told Business Insider – in 2012, the US government put anti-dumping measures on them, but they kept coming in from other parts of Asia.
If the Trump administration just puts up blanket tariffs on these goods, we’d be hitting our allies, not the target.
“The proposed cure is worse than the disease,” Branstetter said, adding that it’s “quite likely” the US’s allies would retaliate.
“The WTO will give them a right to inflict equal pain on other industries,” he said.
That means, say, Boeing planes. Or Wisconsin dairy products.
“If a president had deliberately tried to undermine our allies’ good faith in us, you could hardly do a better job than the Trump administration,” Branstetter said.
- US Department of Commerce
Some analysts expect the Trump administration may also act in the coming weeks on its investigation into the theft of American intellectual property in China.
Trade experts across the political spectrum assert that this theft is an issue. When US companies go into China, they’re forced into joint ventures with state-owned enterprises – and that’s where, they say, part of this theft occurs.
Multinationals also say that simply using the internet in China, with its “Great Firewall,” can result in theft. Of course, complaining too publicly is a no-no if they want to continue doing business there.
So the question here isn’t whether this is a problem, but how to deal with it.
The Trump administration has invoked Section 301 of the Trade Act of 1974, something that hasn’t been used in the 15 years since the development of our modern trading system.
China sees the use of Section 301 as an act of aggression because it allows the American president to act against the Chinese economy without consulting the WTO, of which China has been a member since 2001. The section’s use fell out of fashion around that time because US leaders saw the WTO’s framework as having more legitimacy. Even allies were complaining about its use.
Initiating the investigation is not a violation of WTO rules, which the Trump administration would break only if it punished China on the basis of Section 301. The US could still take its findings to the WTO to try to come up with a solution within the body – but that wouldn’t jibe with the administration’s rhetoric.
What would be better, Branstetter said, is an effort to get countries together to subpoena multinationals to see what’s going on with IP theft in China. This would allow them to find out what multinationals are too afraid to say, as well as give multinationals the cover of being subpoenaed by their own governments.
The way this investigation is headed now, though, could give China the moral high ground on this issue. It too, then, could retaliate.
“This issue with China would be there even if had Trump hadn’t been elected,” Bown said. “But there’s still no real strategy from the administration on how to deal with China. There’s more of a piecemeal strategy.”
That piecemeal strategy comes with baggage. It comes with the erosion of trust in the US as a good actor on the world stage, as well as potential retaliation from our friends and frenemies that could harm our economy.
None of this is necessary. And it could have wide-ranging effects.
As Cordell Hull, the US secretary of state from 1933 to 1944, put it: “Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition with war … It is a fact that war did not break out between the US and any country with which we had been able to negotiate a trade agreement.”
- Deutsche Bank