Trump's Trade Game
In 2018, US President Donald Trump finally followed through on his "America first" trade strategy. Yet it is already clear that his policies will have little impact on trade growth, and even less effect on China's behavior.
CAMBRIDGE – US President Donald Trump's "America first" trade policy came into full bloom in 2018, and it was an ugly sight to behold. In addition to tariffs on steel and aluminum from Europe and other countries, Trump imposed levies on $250 billion worth of imports from China. By the end of the year, he had raised tariffs on 12% of total US imports, causing trade partners to retaliate with levies on 8% of total US exports.
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Trump's trade-policy unilateralism is unprecedented in the post-war period, which is why it caught many by surprise. I, for one, did not expect Trump to act on most of his threats, given the influence that commercial and financial interests have over US trade policy. But when the target is China, the situation changes. The Trump administration's tough approach is supported by a broad coalition of US groups with distinct grievances. These include not just traditionally protectionist lobbies, but also large corporations that bemoan China's industrial policies and a national-security establishment that frets over China's growing geopolitical footprint.
Trump's stated objective is to pressure China to end "unfair" trade practices, such as its subsidies for new technologies and its requirement that foreign companies entering the domestic market transfer proprietary technology to Chinese firms. So far, he has had little success, and that isn't likely to change. Understandably, the Chinese government will not be deterred from pursuing its own objectives of industrial upgrading and technological development.
Still, Trump did clinch one superficial victory in 2018, by concluding the renegotiation of the North American Free Trade Agreement with Canada and Mexico. Trump has heralded the revised NAFTA – renamed the United States-Mexico-Canada Agreement (USMCA) – as "historic," "the most advanced trade deal in the world," and "a new model for US trade relations." In reality, the changes to the deal are relatively minor, and amount to a mixed bag of pluses and minuses. Above all, they expose the fundamental incoherence of Trump's larger trade agenda.
On the positive side, the new agreement strengthens environmental and labor standards somewhat, and limits foreign investors' standing to sue host governments in international tribunals. But the impact of these revisions is unclear. For example, investors can still bring claims under the original NAFTA rules for up to three years after the USMCA has gone into force. As one pro-investor website puts it, "United States investors in Mexico and in Canada who have a potential claim should seriously consider availing themselves of NAFTA protections while they still can."
While Trump has nominally reduced protections for US corporations in one area, he has increased them in others. For starters, the new deal has much more restrictive rules of origin, meaning that a larger share of automotive inputs will have to be manufactured in North America to qualify for tariff exemptions. Also, a first-ever wage floor has been imposed: by 2023, 40-45% of car and truck components will have to be produced by workers earning at least $16 per hour. This provision effectively prices a large chunk of supply chains out of Mexico, where wages are a small fraction of the floor.
Less noticed are the novel protections that pharmaceutical and technology companies have received under the guise of modernizing the agreement. Under the USMCA, both Canada and Mexico will have to make patent terms – including data-protection terms in biologics – more restrictive in order to align with the US. And governments are barred from requiring digital firms to localize computing facilities, as well as from interfering in the cross-border transfer of data and personal information.
Though Trump's unilateralism and mercantilism are bad for the world economy, one should not exaggerate the adverse effects of his administration's approach. If other countries do not overreact – and, so far, they have not – the consequences for world trade will remain manageable. After all, the global trade slowdown predates Trump, and is rooted in ongoing structural and technological trends: the shift in global demand from goods to (less tradable) services; the increased skill-intensity of manufacturing, which weakens offshoring incentives; automation and the consequent reshoring of supply chains; and China's transition from export-led to domestic-demand-led growth. Collectively, these developments are likely to have a larger impact on trade than Trump's bluster ever could.
The deeper – and arguably bigger – cost of Trump's trade policies is that they will distract us from addressing real flaws in the global trade regime. As is always the case with Trump, the challenge is not to lose sight of the genuine grievances that he has tapped. The more outrageous Trump's actions, the greater the risk that mainstream policy elites will rally behind the flawed ancien régime.
Recall that when Trump was elected in November 2016, trade technocrats and international bureaucrats responded by acknowledging that hyper-globalization had left many people behind. There was genuine soul-searching about the need for more robust compensatory mechanisms and other remedies. But such talk has since all but disappeared. These days, one hears all about the virtues of the liberal, multilateral trading system, and almost nothing about the severe imbalances it has created.
And yet we desperately need a new vision for world trade. Existing rules are not up to the challenge of accommodating countries like China, where economic practices are very different from those of the US or Europe. Moreover, the current system provides neither safeguards for maintaining high labor standards in advanced economies, nor adequate measures to prevent regulatory and tax arbitrage.
Trump's antics present us with a false choice between supporting his approach and defending the old rules. If we are genuinely committed to ensuring that globalization benefits all, we must not play his game.
Dani Rodrik is Professor of International Political Economy at Harvard University's John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy, Economics Rules: The Rights and Wrongs of the Dismal Science, and, most recently, Straight Talk on Trade: Ideas for a