At Davos in January, US President Donald Trump warned that the US "will no longer turn a blind eye to unfair economic practices" of others, interpreted by many as declaring world trade war. Before the US mid-term elections in November, Washington is expected to focus on others' alleged "massive intellectual property theft, industrial subsidies and pervasive state-led economic planning" pointing to China without always naming names. With the Republican Party already united behind his tax bill, Trump senses an opportunity to finally unite the party behind him and to continue his campaign for re-election in 2020.
Since January, Trump has taken steps threatened in his mid-2016 election economic policy document, drafted by US's National Trade Council head Peter Navarro and Commerce Secretary Wilbur Ross. In particular, he has imposed tariffs and other restrictions on imports to revive US manufacturing. Import tariffs of 25% and 10% on steel and aluminium respectively have been imposed by invoking Section 232 of the US 1962 Trade Expansion Act, allowing unilateral measures to protect domestic industries for "national defence" and "national security".
Trump's action was supported by a US Department of Commerce Bureau of Industry and Security report, released earlier. It made the case for imposing import tariffs on both metals for national security reasons as "national security can be interpreted more broadly to include the general security and welfare of certain industries, beyond those necessary to satisfy national defense requirements…."
Trade war memories After his announcement, several major trading countries and blocs retaliated or threatened to retaliate against US imports, raising the prospect of a trade war. The resurgence of US trade protectionism poses two threats. The US has a long history of using 'anti-dumping measures', especially on steel. Earlier, imports of washing machines and solar panels were restricted by Trump after the US International Trade Commission declared that they unfairly hurt domestic manufacturers.
The US President has also threatened to impose "reciprocal taxes" against countries imposing tariffs on US exports. This threat has invoked references to the 1930 Smoot-Hawley Tariff Act. Its Republican sponsors, Senator Reed Smoot and Congressman Walter Hawley then argued that it would protect US jobs by shielding American industries from import competition by imposing tariffs on over 20,000 imported goods.
This aggressive protectionism then precipitated the collapse of global trade, as its trade partners then restricted US export access into their own markets. The ensuing trade war undoubtedly exacerbated the Great Depression. Recent developments have understandably revived fears of a new trade war, with similar consequences.
Undermining trade multilateralism The US's unilateral actions have seriously challenged the multilateral framework of World Trade Organization (WTO) trade rules. The Trump administration has been challenging post-Bretton Woods rules-based trade multilateralism, which sought to develop international trade regulation. Besides many rhetorical attacks on the multilateral trading system, the Trump administration has largely avoided engaging with the WTO while also avoiding violating the letter of existing trade agreements.
Undermining the WTO and its rules is hardly new for the Trump administration, but what is rarely acknowledged is that it also represents continuity with previous presidents including his arch-nemesis, Obama's. Both administrations have blocked appointing WTO Appellate Body (AB) members, effectively undermining the WTO's dispute settlement process. The AB should have seven members, but will soon only have three members left, undermining its functioning. Aggrieved WTO members wishing to challenge alleged violations of its rules have no redress without a functioning AB.
Advocates of international trade liberalization have long claimed that it boosts growth and makes everyone better off in the long run, although many acknowledge shorter term casualties in 'uncompetitive' economic activities. With successful political mobilization around growing doubts over such claims, these claims have lost credibility, feeding the tide of ethno-populist-nationalism in the West.
Freer trade has widely distributed benefits in terms of lower consumer prices while seemingly concentrating costs on displaced producers. Conversely, tariffs meant to protect particular industries have concentrated benefits while widely distributing costs. Thus, even without considering the consequences of retaliatory trade measures by others, some (e.g., US steel) jobs may be saved while consumers pay more for 'downstream' products, threatening related jobs downstream. Consumers, however, are unlikely to act politically because they have to pay a little more for some goods, whereas workers are more likely to be mobilized if their livelihoods are threatened by foreign import competition.
Is Trump all that different? Trump has long complained about US and foreign trade policies. He seems to believe that trade is a zero-sum game in which the goal is to export more and to eliminate the US trade deficit. Importing from another country implies that country has "won" and the United States has "lost". Thus, his version of US 'sovereigntism' links trade to national pride. Thus, he accuses others, especially China, of "laughing at us". As trade issues are about US jobs, pride and dignity, costs or losses become "a small price to pay". Thus, imposing tariffs will show foreigners that the US is strong, and cannot be taken advantage of.
With this logic, "winning" may involve losing although the tariffs will benefit relatively few workers in protected industries at the expense of the vast majority of other workers in downstream industries and consumers. But longstanding economic imbalances and inequities are unlikely to be well addressed by protecting a few politically influential industries.
For half a century, the US has gone back and forth with trade liberalization, often coming dangerously close to trade warfare. President Ronald Reagan's 1980s protectionism is rarely acknowledged as he is now the paragon of US economic neoliberalism. (Current US Trade Representative Robert Lighthizer earned his reputation in Reagan's administration.) His trade restrictions used loopholes in trade agreements to raise tariffs and limit many imports besides forcing political allies to accept "voluntary restraints". Dani Rodrik has argued that Reagan's protectionism "let off political steam", enabling the US economy to recover and globalization to accelerate.
International economic liberalization or globalization since Reagan has also transformed the international context and the consequences of Trump's recent measures. Unlike Reagan who arm-twisted political allies to accept his demands as necessary concessions during the Cold War, Trump's 'US sovereigntism' is based on 'victimhood', invoking the image of an ex-hegemon, and makes no pretensions of being mutually advantageous or reciprocal.
Yet, prematurely 'crying wolf' about trade war may also accelerate trade war momentum as it remains unclear how international policy is made and changed in Trump's White House. While possibly ominous of much more to come, premature, exaggerated criticism of his unilateral trade measures may become 'self-fulfilling', given the political need for continued ethno-populist and nationalist mobilization against enemies, real or imagined.