Talking Trade blog
Trump’s astonishingly different trade doctrine
Published 28 September 2016
In yesterday's US presidential debate, both Republican Donald Trump and Democratic candidate Hillary Clinton reiterated their opposition to the Trans-Pacific Partnership (TPP) trade agreement.
While regrettable, opposition to the TPP is just the beginning of trade policy changes that a potential President Donald Trump would follow. What is particularly striking is how radically different his overall trade strategy actually is from decades of previous American policies as practiced by both political parties.
His leading economic advisors, Peter Navarro and Wilbur Ross, just released a new economic plan that should be required reading.
Before getting into the details of the plan, it may be important to remind readers of last week’s analysis by Gary Hufbauer of the Peterson Institute for International Economics (PIIE) about the ability of the US President to unilaterally impose trade policies. In short, a President Trump could—indeed—carry out many or all of the policies proposed by Navarro and Ross and could do so without much interference by either Congress or by the court system.
Navarro and Ross view economic policy as an interlocking set of issues that should include tax cuts, energy policies to drive down energy costs, reduced regulations and trade policies to eliminate America’s chronic trade deficit.
Trade policy is one of “four points of the Trump policy compass.” Trade is thus front and center, with equal weight to tax or regulatory policies. As the math shows (p. 18), getting trade policy right is also critically important to creating the positive economic scoring of the overall economic plan.
Navarro and Ross believe that the United States is already engaged in an economic war that it has lost because the US has failed to engage properly. The Trump economic plan places blame for economic damage squarely at the feet of poorly negotiated trade deals and the failure to enforce them. The “bad deals” include NAFTA, China’s entry into the World Trade Organization, and the US-Korea free trade agreement (KORUS).
These deals are presumed to be so awful in part because they create trade deficits. The paper argues that (p. 5) “when net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.” Hence the solution to this is to reduce a “trade deficit drag” which will increase GDP growth.
Solving this issue includes such things as reducing corporate income taxes to encourage firms to remain at home and recognizing that manufacturing jobs are much more desirable than service sector jobs.
While several commentators have noted Trump's idea to pull the US out of the WTO, the logic behind this statement is shown on p. 12—“Ending the Unequal Value-Added Tax Treatment Under WTO Rules.”
Untangling this argument is challenging, but basically suggests that because the United States does not use a VAT system for taxation, this gives everyone other than the United States an unfair trade advantage that the WTO ought to have sorted out.
Skip over the merits of the argument and ponder the following statements about US participation in the WTO (p. 13).
Since the WTO would be meaningless without the presence of the world’s largest importer and third largest exporter, we had the leverage then—and have the leverage now—to fix the anomaly and loophole… Donald Trump understands that the only way to correct this unfair tax treatment is for the US to use its status as the world’s largest economy, the world’s largest consumer, and the world’s largest importer to put pressure on the WTO to change this unequal treatment. Without the US as a member, there would not be much purpose to the WTO, but prior occupants in the White House have been unwilling to lead on this issue despite its significant negative impacts.
Essentially, although the paper does not make this clear, a President Trump would pull the United States out of the WTO. This would be the logical implication of pursing a policy that no other WTO member country would be willing to discuss. But, since the WTO would cease to exist absent the Americans, the damage would be minor for the Trump White House.
The economic policy outlined by Navarro and Ross goes on to consider additional solutions to long-term structural problems caused by trade, such as currency manipulation. Trump apparently intends to use defensive and countervailing tariffs in instances of currency manipulation. The paper explicitly calls out not just China, but also the euro, the Germans (?) and the Japanese.
Defensive tariffs are also the solution to trade cheaters. China is, of course, the “biggest trade cheater” in the world. But they will stop cheating in the face of higher tariffs, since tariffs will be used as part of a successful negotiating tactic (p. 16).
The Trump Trade Doctrine requires renegotiating all bad trade deals to ensure that all agreements increase the GDP growth rate, decrease the trade deficit, and strengthen the US manufacturing base.
Reducing the trade deficit, Navarro and Ross argue, will put more money in the hands of workers. As workers have more money, they will be able to spend more to offset any price increases on more expensive American products (p. 20). But then, over time, as American products become more competitive, prices will eventually fall.
The Trump Trade Doctrine, Navarro and Ross are certain, will get America out of its current trade war as well. Why? Because of one “very simple reason: America’s major trading partners are far more dependent on American markets than America is on their markets.” (p. 20)
The “obvious Trump negotiating strength” will rebalance trade with the six countries that hold half the US deficit: Canada, China, Germany, Japan, Mexico and South Korea.
The Koreans will just recognize that the current KORUS arrangement is not working and will “simply seek a far more equitable deal.”
Germany and Japan will negotiate mostly for US energy (with the added bonus of creating additional US jobs).
China, Navarro and Ross admit, is a tougher nut to crack. But soybeans, petroleum, motorcycles and raisins, plus a few other goodies should surely be sufficient as carrots when matched with “the strength and resoluteness of Trump.”
And thus, in less than two dozen pages, the Trump economic plan shows exactly how America’s real GDP growth rate will be increased with millions of new jobs created and generate trillions of new dollars in additional income and tax revenues.
Getting from here to there may, as it happens, fundamentally overturn decades of US trade policy as practiced by Republican and Democratic administrations. But the results—Trump would surely say—will be SOOO worth it.
© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).