Why Trump’s Trade Policy Could Backfire
Although Trump’s professed goal is to “get a better deal” on trade, his brand of economic nationalism is just one step away from old-fashioned protectionism. The president claimed that “protection will lead to great prosperity and strength.” Yet the opposite is true. An “America first” trade policy would do nothing to create new manufacturing jobs or narrow the trade deficit, the gap between imports and exports. Instead, it risks triggering a global trade war that would prove damaging to all countries. A slide toward protectionism would also undermine the institutions that the United States has long worked to support, such as the World Trade Organization (WTO), which have made meaningful contributions to global peace and prosperity.
At the same time, not all tariffs are bad. Congress is considering corporate tax reforms that would involve a “border adjustment tax”—a tax that would apply to all imports to the United States but not to exports. If implemented fairly, such a measure would not be protectionist. Likewise, not all trade threats are bad. Although it is true that closing the market to foreign competition is the wrong way to improve U.S. economic performance, the threat of closing the market has sometimes helped ensure compliance with international trade rules. But this is a high-risk strategy that must be used with care, since it could spark damaging foreign reprisals. …
We’ve undertaken protectionist measures in the past (including during the Reagan Administration). Disaster did not follow (although consumers paid). What about in current conditions?
Another reason trade protection today makes even less sense than it did three decades ago is that other countries are sure to retaliate in a way that they did not before. Back then, the United States demanded that other countries restrict their exports to the United States. Because foreign suppliers reduced their exports themselves to avoid U.S. punishment, they were able to charge much more for these suddenly scarce goods and earn exceptionally high profits. Although countries such as Japan did not always like restricting their exports, they did not strike back because the United States was not imposing tariffs on them.
Irwin does not argue against taking all trade measures. Regarding the use of sanctions with respect to alleged Chinese export subsides, he writes:
Confronting unfair trade practices with the threat of retaliation is not protectionism in the usual sense. Instead, it represents an attempt to free world markets from distortions. In order to return trade to a market basis, Washington may have to threaten trade sanctions, some of which might have to be carried out for the threats to gain credibility. This process will no doubt be disruptive and controversial, but if handled skillfully, the end result could make it worthwhile. [emphasis added — MDC]
In my view, the caveat is important. I have seen little thus far to heighten my confidence in policy implementation.