Trump’s Trade Policy at a Crossroads

By Thomas J. Duesterberg

Tuesday, September 17, 2019

After President Trump’s nearly three years in the White House, we can begin to decipher the general outlines of a trade strategy. While moving in the right direction, making up for years of inattention and complacency with regard to the abuse of global rules by China and others, the inconsistent and heavy-handed approach employed by the president threatens to undermine the open-trade-based global economic order and the robust growth of the American economy that has resulted from his more consistent tax, regulatory, and energy policies.

Indeed, the vacillation and unpredictability of Trump’s trade policy have raised economic uncertainty to its highest levels since the 2008 recession, which in turn has weakened investment, employment gains, and market confidence. Even though critics from Europe, former U.S. government officials, and card-carrying free-market purists pine for a return to some aspirational “liberal, rules-based order,” what is really needed is a much more determined and consistent critique of those countries most responsible for undermining the order that actually does reign, and a clearer concept of the importance of trade strategy to strengthening national security, including long-term economic security.

The most important Trump trade initiative is certainly taking on the long-neglected task of challenging China’s systematic disregard of international rules and the basics of fair, reciprocal trade. The confrontation with the world’s rising superpower is fully justified on economic and national-security grounds, especially because the overlap between commercial and security-specific technologies in the contemporary economy continues to grow. Unilateral action on China was necessary because the rules and enforcement history of the World Trade Organization (WTO) are insufficient to address Beijing’s egregious trade and industrial policies.

The Trump administration also has made a good-faith effort to work with allies in Europe and Japan to remedy the shortcomings of the WTO, although this is a slow and tedious process, and Europeans (among others) are recalcitrant in their opposition to major reforms. For example, Europe is again considering broader subsidies for industry, and its privacy and data-transfer laws impede the development of open digital-commerce rules.

The Trump team has also employed a bilateral, sometimes regional, approach to developing new rules and updating existing ones for the 21st-century economy. It has completed trade deals with South Korea and its North American partners and likely soon will complete a deal with Japan and open talks with the United Kingdom. Parallel talks with the European Union (EU) probably won’t succeed for a variety of historical reasons, the EU’s different conception of economic self-interest in sectors such as agriculture and technology, and its pronounced animosity to Trump himself. The other new pacts have good provisions to address emerging problems in digital commerce, data flows, intellectual-property rights, and state-subsidy policies. Many of these are taken from language in the Trans-Pacific Partnership, a larger regional agreement negotiated by the Obama administration and unwisely scrapped by Trump.

The ultimate success of these positive initiatives, however, is jeopardized by two important shortcomings: the wildly inconsistent application of basic principles and the careless alienation of allies, whose support is key to overcoming trade distortions from China and achieving meaningful reform of the WTO.

The unfolding drama over Chinese technology leader Huawei demonstrates the inconsistent application of basic principles. In 2018, the other major Chinese telecommunications leader, ZTE, was given a reprieve from crippling U.S. sanctions in return for promises related to agricultural purchases and Chinese antitrust action against American technology giant Qualcomm. China reneged on these promises after the U.S. side relented on ZTE. There is now every indication that Trump is willing to consider reducing or eliminating restrictions on Huawei in return for a deal anchored by agricultural purchases, which obviously has implications for the 2020 election cycle. ZTE had been caught selling products to Iran and bugging surveillance equipment used around U.S. military bases. Huawei is credibly accused of serial violations of foreign companies’ intellectual-property rights, has violated sanctions on Iran and North Korea, and cannot ensure that its equipment is safe from bugging. Its products could well displace Western-supplied telecommunications networks in the U.S. and allied nations, posing a grave threat to military communications and personal privacy.

The Trump administration has expended considerable effort and political capital in trying to persuade allies not to deploy Huawei products. Cutting a deal to lift the American sanctions on the company, especially if more agricultural sales were all we got in return, would further undermine U.S. credibility with those allies, who are already suspicious of Trump’s broad use of national-security justifications for tariff actions. Compromise on Huawei would also confuse and undermine the legitimate use of national security as a justification for other trade actions, such as steps taken to protect sensitive jet-engine technology during the Reagan and George H. W. Bush administrations. A more consistent set of guidelines for what technologies require protection is badly needed. Another example of confusing purely commercial transactions with national security was the president’s decision not to employ tariffs or quotas on uranium imports, which are increasingly dominated by Russia and its allies. In recent years, American miners have produced less than 10 percent of the annual U.S. demand for uranium due to competition and outright dumping from Russian-controlled companies.

Many traditional allies have been dissuaded from cooperating with Trump’s trade policy due to the use of tariffs for both economic and purely political purposes. In addition to the examples cited above, one could cite the continued threats of imposing tariffs on European and Japanese auto imports, and on Mexico because of dissatisfaction with its efforts to secure our shared border. In order to make significant progress on the hard tasks of changing Chinese behavior, reforming the WTO, and even revisiting historic advantages granted to allies such as the EU, the U.S. will have to work more effectively with like-minded countries.

In recent months it has become clear that the U.S. economy is decelerating and that further escalation of trade tensions, with either China or Europe, could result in recession. The Chinese economy is also slowing and contributing to the threat of a global recession. This presents both a threat and an opportunity for pragmatic compromise, as there is growing evidence of dissent in China against President Xi’s hard-line positions. In a sign of a search for compromise, both sides are making concessions before negotiations next month.

How should Trump and his team balance their trade policy with the need to avoid recession heading into the 2020 election cycle? First, despite the importance of the agricultural economy, the president should accept a deal with China only if it includes progress on the structural issues raised in the past three years: the protection of intellectual-property rights, limits on subsidies given to technology companies, and better protection for industries and technologies key to national security. Above all, concessions on Huawei or on theft of technologies crucial to future economic dynamism should be at the core of any deal with China. Second, the administration should redouble efforts to complete market-opening pacts with NAFTA, Japan, and the U.K. Third, Trump should refrain from invoking national security as a justification for new tariffs — as he has already done with steel tariffs, and threatened to do with automobile tariffs — unless the cases involve significant technologies or sectors identified as vital to national defense and the preservation of personal liberties. Refraining from imposing auto tariffs would be a clear opening to Japan and the EU and would hopefully motivate them to work more cooperatively on the challenges posed by China and WTO reform.

All of these steps would relieve momentum for a global recession and free up the U.S. economy to grow unimpeded, spurred on by the administration’s tax, regulatory, and energy policies. At the end of the day, our continued economic dynamism is the most important tool in winning the global competition with China.