Trump’s Trade Policies Keep Backfiring Filed under Trade

One of Donald Trump’s first acts as president was quitting the Trans-Pacific Partnership, the nearly completed free-trade agreement between the U.S. and 11 other countries bordered by the Pacific Ocean.

It looked like the end. Barack Obama’s administration had been the driving force behind the negotiations, and U.S. ratification was necessary for the agreement to take effect. But to the surprise of many, the remaining 11 members of the TPP have so far stuck together even without U.S. participation. Unabashed free-traders stepped up to counter Trump’s protectionism: Japan, the world’s third-biggest economy, has assumed the leadership role. Canada, initially a reluctant member of the club, volunteered to host one of the first post-Trump meetings of the remaining TPP countries to work on a way forward — perhaps because research shows that Canadians will do better if they have preferential access that their American cousins lack. Smaller, poorer countries such as Vietnam and Malaysia wanted freer trade with the U.S. but agreed to consider improved access to countries such as Australia, Canada and Japan as a consolation prize for years of hard bargaining.

Ahead of this week’s Asia-Pacific Economic Cooperation summit in Vietnam, there was talk that the remaining TPP members would use the venue to make an official agreement to proceed. Trump is attending that meeting during a five-country, 11-day trip to Asia that began last Friday. It could turn out to be the rare international summit at which the American president is sidelined from the main event.

Trade is core to Trump’s economic agenda. He promised to rewrite or quit existing commercial arrangements, sign new ones on terms that favored the U.S., and punish traders who treat the U.S. “unfairly.” Voters liked the message: The economy was one of the issues on which he won most handily.

Some of those voters may look at record high stock prices and a very low unemployment rate and conclude that Trump is doing a good job. But when it comes to trade, he has done surprisingly little so far. As promised, he bailed on the TPP. Rather than quit the North American Free Trade Agreement and the U.S.-Korea Free Trade Agreement, though, Trump is attempting to rewrite them. He flip-flopped on his election promise to call China a currency manipulator, and this week in Beijing said China deserves “great credit” for “being able to take advantage of another country for the benefit of their citizens.” Altogether, the administration’s highest-profile attempts to curb imports to date have resulted in unintended consequences that arguably hurt the United States. Decades of globalization won’t be easily undone.

Trump appears to have overestimated other countries’ willingness to be cowed. Singapore’s leader, Lee Hsien Loong, said recently that “it is not the right time” to negotiate bilateral trade agreements with the U.S. because the Trump administration insists on getting the better of any deal. One of the reasons Japan wants to salvage the TPP is so that it has a baseline for future talks with the United States. Canada and Mexico so far have refused to concede to any of Trump’s demands at talks to update the North American Free Trade Agreement, which delayed until next year a renegotiation that the White House had originally hoped to complete in 2017. Trump’s threats to quit the U.S.’s free-trade agreement with South Korea were met with an unexpected response: You can’t leave it if we leave first.

Trump has limited room to maneuver on trade in Asia because he needs allies in the region to help counter North Korea’s antagonism, a reminder that U.S. foreign policy is about more than imports and exports. Similarly, Trump curbed his threats to impede Chinese imports because he wants Beijing’s help in containing North Korea. “Kim Jong Un is the saviour of the world trading system at the moment,” Fred Bergsten, senior fellow and director emeritus at the Peterson Institute for International Economics, said at a conference hosted by the Centre for International Governance Innovation in Ottawa on Nov. 2.

And then there’s the trade deficit. When it comes to international commerce, Trump had a simple message for the electorate in 2016: The U.S. was getting screwed by everyone from China to bureaucrats in the World Trade Organization, and he would end the humiliation. His evidence was the big discrepancy between the value of U.S. exports and the value of its imports. (Many economists say the main reason that gap exists is the willingness of relatively wealthy American consumers to use debt to expand their purchasing power, creating massive demand that U.S. producers can’t keep up with and is met by whoever can supply goods cheaply.)

In addition to renegotiating NAFTA and the agreement with South Korea, Trump has prioritized punitive measures against other countries for what he sees as unfair trade practices — and that, too, hasn’t exactly gone as hoped. The administration can sanction imports that undercut American producers if those imports are sold for less in the United States than they cost in their country of origin, or if the seller of those products benefited from government subsidies. Trump’s commerce secretary, Wilbur Ross, provides an update of all the investigations he’s launched every time he announces a new one. As of Nov. 2, his office had launched 77 of these investigations, up from 48 a year earlier, according to the Commerce Department — that’s an increase of 60 percent.

And yet the trade deficit in goods is expanding, not shrinking. Through September, the most recent month for which data is available, the U.S. exported goods worth about $1.15 trillion while importing goods valued at about $1.74 trillion, for a deficit of $587 billion. The deficit over the same period a year ago was $546 billion, according figures released by the U.S. Census Bureau on Nov. 3.

Some of the Trump administration’s moves have made matters worse. Though most of the Commerce Department’s investigations take around a year to complete — so it will be some time before the results of those actions can be determined — they begin with the imposition of temporary tariffs that can have immediate effects. Ross’s trade actions so far have tended to involve relatively obscure products, such as Chinese aluminum foil. When he has gone after bigger game, he has run into trouble. The three biggest categories of imports that Ross went after this year are Chinese steel, Canadian lumber and Canadian aircraft. None of those investigations produced the results he might have hoped for.

Curbing Chinese steel imports

Trump’s threats to curb U.S. purchases of cheap Chinese steel totally backfired. He has repeatedly told domestic steel producers that he would help them by pushing a glut of cheap metal out of the U.S. market. “Wait till you see what I’m going to do for steel and your steel companies,” Trump said at a political rally in Cincinnati in June. “We’re going to stop the dumping and stop all of these wonderful other countries from coming in and killing our companies and our workers. We’ll be seeing that very soon. The steel folks are going to be very happy.” Back in April, the administration initiated an investigation of U.S. steel imports under Section 232 of the Trade Expansion Act of 1962, which allows for the use of tariffs if the government determines that international competition threatens the U.S.’s ability to produce goods related to national security.

The decision to exploit a provision designed for the Cold War was either creative or blatantly protectionist, depending on your point of view. But what is beyond dispute is that the threat to curb steel imports caused a surge in shipments from abroad as companies raced to get their product through the door before Trump closed it. Steel imports were up 20 percent through the first nine months of 2017 compared with the same period last year, according to the American Iron and Steel Institute.

Targeting Canadian lumber

Unlike China and Mexico, with whom America has large trade deficits, Canada is a country with which the U.S. ran a trade surplus in goods and services in 2015 and 2016. Yet in April, the Commerce Department announced that it had decided to tag Canadian lumber with duties of as much as 24 percent in response to what it deemed unfair subsidies from Canada’s provincial governments, which control access to much of the country’s forests. (Earlier this month, Commerce lowered the penalty slightly in its final determination.)

The tariff was meant to assuage U.S. lumber mills, which say provinces charge too little for permission to cut trees on government land. But Trump has no control over nature. The hurricanes that devastated Houston, other parts of the South, and American islands in the Caribbean this summer created unexpected demand for building materials, pushing lumber prices up and offsetting whatever pain Canada’s forestry industry would have felt from Trump’s border tax. Shares of Canfor, a major Canadian lumber company, increased by more than 40 percent in the six months between the time the original duties were applied and early November. Compare that with the performance of the America’s biggest owner of sawmills: Shares of Weyerhaeuser, one of the companies that complained to Commerce about Canadian forestry policy, were only 4 percent higher over the same period.

Protecting Boeing

Another case involving Canada went awry when Boeing asked Commerce in April to punish Montreal-based Bombardier for agreeing to sell planes to Delta Air Lines for what the American planemaker called an “absurdly low” price. There was a problem with the request for retaliation though: Boeing doesn’t make the plane that Delta bought from Bombardier; it had offered to sell Delta secondhand Brazilian aircraft in its own bid for the airline’s business. The Trump administration sided with Boeing anyway.

At the end of September, Commerce initiated temporary duties of 220 percent on any Canadian plane of a certain size that crossed the border — the duties were meant to offset allegedly illegal subsidies. Ten days later, Commerce added a second tariff of 80 percent to offset what it felt was an unreasonably low price. The combined duty of 300 percent far exceeded Boeing’s request for a punitive tariff of a combined 159 percent.

If the tariffs were meant to crush the hopes of an upstart in Boeing’s backyard, they may have instead had the unintended consequence of strengthening the U.S. company’s true rival: Airbus. Bombardier had gone heavily into debt, and the Commerce duties were a deathblow. In need of a lifeline, Bombardier struck a partnership with Airbus — which allowed Airbus to expand without paying a cent.

If Canada won’t be pushed around — despite the country relying on the U.S. to buy more than 70 percent of its exports — that doesn’t bode well for Trump’s trade policy with the wider world. If the president insists on continuing down this path, both enacting punitive measures and reconsidering America’s role in multi-country trade deals, he will likely face more unintended consequences.