Even short of extremes, Trump protectionism damaging: economists

WASHINGTON: While his advisors have played down some of President-elect Donald Trump’s most extreme trade threats as negotiating tactics, economists remain worried about the potential to inflict real damage.

The Republican billionaire has said that on his first day he will label China a currency manipulator, has threatened to pull out of free trade agreements like NAFTA and slap punitive tariffs of up to 45 per cent on China and Mexico.

And there is no question the US president has the power to take those actions unilaterally, without the consent of Congress, economists say.

In a campaign season drenched in hyperbolic rhetoric, those protectionist threats have pushed economists to issue truly apocalyptic projections, warning of job losses of four million or more, and a deep and damaging recession in 2018, with negative spillovers to the global economy.

 

Using threats to negotiate

Since his surprise elections win November 8, Trump’s advisors have suggested his threats were designed simply to push trading partners to agree to a better deal for the US.

Even so, economists say Trump’s stance already has done damage, although it is hard to quantify what might happen until he provides specifics.

The Trans-Pacific Partnership, which comprised 12 economies and would have been the biggest US trade deal, is widely considered dead following Trump’s election.

US Trade Representative Michael Froman said the deal “is in purgatory.”

“We’ve seen a rise of populism, not just in this country…politics that did not always permit a full debate on the facts,” he said at a forum late Monday.

It could be that Trump’s threats have worked to some extent, since Canada and Mexico each announced last week that they are willing to sit down with the new administration to reexamine NAFTA.

But not factored in to the Trump team calculation is the reaction of US trading partners to Trump’s protectionist policies.

Marcus Noland, executive vice president of the Peterson Institute for International Economics, points out about US trading partners: “They’ve got complaints too” about NAFTA.

Under the rules of the US free trade agreements like NAFTA, the president can pull out simply by notifying the other members. Notification triggers a 180-day clock for new negotiations, but absent a new agreement – which must be ratified by all member legislatures – the accord would disappear.

If that occurs, Noland warns that Trump’s most famous promise to build a wall may become necessary quickly. As the Mexican economy takes a huge hit from lost trade, many more immigrants may try to come to the United States in search of work.

“That is potentially a very risky move,” Noland said. “There is a high degree of trade integration between the US and Mexico. In Texas a lot of people make a lot of money off trade from Mexico, so he could get resistance.”

 

Unknown unknowns

Edward Alden, trade specialist at the Council on Foreign Relations, said it is hard to predict what could happen in hypothetical trade wars, but the uncertainty around Trump policies is concerning, what he calls the “unknown unknowns.”

“His goal here is leverage. He doesn’t just want to tear up NAFTA, he wants to use the threat to negotiate something better,” Alden said. “The problem is we don’t know what his vision is of something better.”

Part of the reason Trump’s protectionist rhetoric resonated with voters is that the US has trade deficits with each of its top three trading partners, Canada, Mexico and China, with China amounting to over $30 billion a month.

But China, the economists warn, will react to any US moves, with direct and indirect retaliation.

“China has a long history of tit-for-tat retaliations to any trade restrictions. While the media terribly overuses the specter of a ‘trade war’ in which countries reciprocally escalate tariffs, that is a real possibility if Trump makes good on his threats,” Alden wrote in a recent blog.

 

Repeat of the Reagan era?

The economists say Trump seems to be modelling his trade policy on Ronald Reagan, who sharply cut taxes, deregulated and pushed through enormous increases in spending (in his case on the military, while Trump is focused on infrastructure). This created huge fiscal and trade deficits, which then created a protectionist backlash.

In that Cold War era, Japan was seen as the trade villain, and Reagan pressured Tokyo to voluntarily restrict some exports and increase imports.

But the economists agree Washington does not have that kind of leverage with China in a multilateral trading system.

With $2 trillion a year in exports, and 14 million Americans who owe their jobs to trade, “cutting off trade is the wrong remedy,” Froman said.