The 2019 Economic Report of the President reiterated President Trump’s goal of “zero tariffs, zero non-tariff barriers, and zero subsidies” for international trade. This is a goal that deserves bipartisan support. A good start would be for Congress and the administration to work together to achieve passage of the United States-Canada-Mexico Agreement (USMCA).
Canada and Mexico represent our nation’s two largest export markets. As the President’s Economic Report pointed out, nearly 25% of US trade is accounted for by Canada and Mexico. Per capita gross domestic product of all three countries has soared under free trade.
After adjusting for inflation, per capita US GDP is up nearly 40% under the North American Free Trade Agreement (NAFTA). US manufacturing output has increased by a similar amount.
The bottom line is that the USMCA preserves NAFTA’s core intent of liberalising trade in North America, and a modernised USMCA agreement would allow this progress to continue. With such stark consequences attached to the fate of the USMCA, Congress and President Trump should work together to ensure the trade deal is passed as early in 2019 as possible.
President Trump also has an opportunity to improve US trade with China. US tariffs on imports from China were supposed to force China to change its economic policies, but as the President’s Economic Report noted, “Rather than changing its practices, China announced retaliatory tariffs on US goods.” Predictably, other countries did the same.
It is time to try something new instead of doubling down on a tariff policy that is not working. Fortunately, President Trump says he never gets too attached to one negotiating approach.
A bilateral agreement that encourages market-oriented reforms and allows both countries to claim victory would be far preferable to another round of mutually destructive tariff increases.
Finally, the Trump administration may impose a massive tax hike on imported cars and parts.
Such a move would be incredibly costly for both car buyers and autoworkers across the United States. A study from the Center for Automotive Research calculated that a 25% tariff on motor vehicles and parts from countries other than Canada and Mexico would cost more than 197,000 American jobs while increasing average car prices by $2,450.
A better approach would be to learn from Canada and Mexico. Companies that manufacture in those countries can export their cars to Japan and the European Union duty-free thanks to zero-tariff free trade agreements, like the one the Trump administration claims to want.
If the administration has learned anything from last year’s trade actions, it should be that higher tariffs here do not lead to lower tariffs there – instead they provoke retaliation against US exporters.
President Trump’s Economic Report includes a chapter on markets versus socialism, with a discussion of the costs imposed when governments adopt central economic planning. The costs of central planning apply to trade policy as well. Countries where powerful central governments pick winners and losers by imposing restrictive trade barriers are much poorer than those that embrace free trade.
President Harry S. Truman referred to this following World War II: “But if controls over trade are really to be tight, tariffs are not enough. Even more drastic measures can be used.
Quotas can be imposed on imports, product by product, country by country, and month by month. Importers can be forbidden to buy abroad without obtaining licenses. Those who buy more than is permitted can be fined or jailed. Everything that comes into a country can be kept within limits determined by a central plan …. This is precisely what we have been trying to get away from, as rapidly as possible, ever since the war. It is not the American way.”
Since World War II, treating our trading partners as allies rather than adversaries has paid enormous dividends for Americans. Just since 1990, world tariffs fell by nearly two-thirds as US exports more than doubled, even after adjusting for inflation.
Unfortunately, President Trump has endorsed legislation called the ‘Reciprocal Trade Act’ that would turn this successful approach to trade on its head. In a 2018 tweet, President Trump defined reciprocity this way: “When a country Taxes our products coming in at, say, 50%, and we Tax the same product coming into our country at ZERO, not fair or smart. We will soon be starting RECIPROCAL TAXES so that we will charge the same thing as they charge us. $800 Billion Trade Deficit – have no choice!”
The handful of proponents who endorse this approach often argue that tariff reciprocity is needed to as a lever to reduce foreign trade barriers. But the White House’s own case studies show this is untrue. For example, the White House produced a chart with tariffs on selected cherry-picked products from Japan, China, Thailand, Turkey, and the European Union attempting to show ‘unfair’ examples of non-reciprocal tariffs.
But each of those trading partners has lowered its average tariff on US exports significantly, without the need for blunt instruments like the Reciprocal Tariff Act. President Trump wants to replace a successful post-World War II policy based on the understanding that trade is win-win with one that is likely to encourage foreign governments to retaliate against Americans.
One US legislator contended: “Well, we’ve got to have an Old Testament approach to trade, an eye for an eye.” But this approach to tariff policy has been tried before, with results that were often disastrous. President Ronald Reagan described the risks involved in eye-for-an-eye tariff reciprocity: “I think you all know the inherent danger here. A foreign government raises an unfair barrier; the United States Government is forced to respond. Then the foreign government retaliates; then we respond, and so on. The pattern is exactly the one you see in those pie fights in the old Hollywood comedies: Everything and everybody just gets messier and messier. The difference here is that it’s not funny. It’s tragic.”
Recent US tariffs have led to retaliatory tariffs on $121 billion of exports ranging from lobster (25% additional tariff imposed by China) to pork (25% additional tariff imposed by China) to bourbon (25% additional tariff imposed by the European Union). The Trump administration calls this foreign retaliation “unfair”. Whether it is fair or not, the costs imposed on American exporters continue to mount.
History shows trade policy is more likely to succeed if it is based on the Golden Rule instead of on hostile eye-for-an eye reciprocity. It turns out that the United States benefits when we treat our trading partners the way we would like them to treat us.
US trade agreements are based on a mutually beneficial form of reciprocity with both countries reducing most trade barriers to zero. In almost every free trade agreement, the United States has signed, foreign barriers have fallen by more than US barriers. For example, prior to NAFTA, Mexico’s average tariff on US exports was about 10% while the average US tariff on imports from Mexico was just 2%. Zero-tariff reciprocity remains a desirable goal for US trade policy.
Attempting to mirror foreign tariffs is the opposite of an America First trade policy, because it would result in the US government copying bad policies from other governments instead of pursuing policies that would benefit Americans. As economist J. Laurence Laughlin asked in 1903: “But, should we desire reciprocity? … Certainly, there is no reason why we should deprive ourselves of the immediate benefit of cheaper goods because we feel that we must wait until other countries are willing to get our goods as cheaply.”
Instead of copying bad trade policies from other countries, some legitimate America First trade policies the Trump administration could undertake include:
Phase out all tariffs on imports used by Americans to compete in the global economy, including taxes on imported automobile parts along with steel and aluminium tariffs that were imposed last year for dubious “national security” reasons. These changes would encourage more companies to manufacture in the United States.
Eliminate regressive taxes on imported shoes and clothing, which average more than 13% and disproportionately burden low-income Americans.
End restrictions on sugar imports. US barriers force Americans to pay nearly twice as much for sugar as people in the rest of the world, encouraging sugar-using industries to relocate to other countries.
Allow Americans to use foreign-built ships for domestic transportation, making it more affordable to ship goods to Hawaii or Puerto Rico and reinvigorating a domestic cruise industry.
All trade is reciprocal, consisting of mutually beneficial transactions where each party willingly agrees to trade. The goal of the Trump administration’s trade policy should be to promote reciprocal trade, not reciprocal taxes. If the Trump administration really wants to open foreign markets instead of just hiking tariffs, history demonstrates that leading by example would be a good place to start.
As President Reagan explained: “[T]he future belongs to those who lower trade barriers. These are the countries that will be in the forefront of technology. These are the countries that will see their living standards rise most quickly. And these are the countries that will lead the world in the years ahead.”
There’s also an important role for Congress to play in trade policy. After World War II, Congress delegated much of its tariff authority to the executive branch. It is time for Congress to reclaim this authority.
For example, bipartisan legislation has been introduced that would remove the president’s power to impose tariffs for ‘national security’ reasons without first getting congressional approval.
According to Sen. Pat Toomey (Republican, Pennsylvania): ““Over recent decades, Congress has ceded its constitutional responsibility to establish tariffs to the executive branch. This measure reasserts Congress’s responsibility in determining whether or not to impose national security-based tariffs. I urge all of my colleagues to join this bipartisan effort.”
For success in 2019 and beyond, the Trump administration needs to reject a trade policy based on central planning. The president’s critics have said his “zero tariff” rhetoric is an empty promise. By implementing the United States-Canada-Mexico Agreement, pursuing a trade policy designed to encourage market-oriented reforms in China instead of haphazardly slapping on more tariffs, and rejecting new taxes on vehicle imports, the Trump administration can show it means it when it says its goal is zero tariffs, zero nontariff barriers and zero subsidies.