7 November 2018

Rodney D. Ludema is a Professor of Economics, with a joint appointment in the School of Foreign Service and the Department of Economics at Georgetown University, Washington D.C. (See bio below)

As the fifth meeting of the U.S. and U.K. Trade and Investment Working Group takes place this week in Washington, hope for an eventual U.S.-U.K. trade deal is on the rise, thanks to the White House’s recent notification to Congress of its intent to launch formal negotiations. This new optimism is astonishing in light of Trump’s protectionist moves of the past year and raises questions about the direction of U.S. trade policy more generally. Should Trump’s free trade overtures be taken seriously? Do they represent a change in strategy or even a change in tactics? How ambitious should we expect a U.S.-U.K. trade deal to be? To answer these questions, it is helpful to understand Trump’s motivations and the policy environment in which his policies are being developed.  Such is the goal of this essay.

The Two Faces of Trump on Trade

A case can be made that Donald Trump is the most protectionist U.S. president in over a hundred years. In his inaugural address, which introduced his “America First” doctrine to the world, he declared, “we will follow two simple rules: buy American, hire American.” He described the U.S. as a country exploited, impoverished and humiliated by its trading partners and claimed that protection would restore U.S. prosperity. Upon taking office, he withdrew from the Transpacific Partnership (TPP), and within the year, he had threatened to withdraw from NAFTA and imposed safeguard tariffs on washing machines and solar panels. This was followed by national security tariffs on steel and aluminium, sparking retaliation from America’s major trade partners, and a spate of unilateral tariffs on hundreds of billions of imports from China, which has escalated into a full-blown trade war. In announcing the steel and aluminium tariffs, Trump cited the “protective tariff” of his 19^th Century Republican forbearers as inspiration.

Curiously absent from Trump’s account of Republican history is the fact that for the past 70 years, his party has generally supported free trade. Even more curious is that opinion polls now show that Republicans overwhelmingly approve of Trump’s tariffs. Are Republicans such slaves to Trump that they would abandon their free-market ideology en masse so quickly? I doubt it. The more likely explanation is a counter-narrative that has taken hold in conservative circles, cultivated by the White House itself. It holds that Trump is, in fact, a free trader, albeit one who is willing to use tariffs as a tool to advance his agenda. With this narrative, Trump lays claim to the legacy of a more recent Republican hero: Ronald Reagan, whose “free and fair” approach to trade policy combined free trade ideology with aggressive unilateral trade restrictions aimed at “levelling the playing field” for American industries, or what Jagdish Bhagwati termed, “aggressive unilateralism.”

Evidence of this counter-narrative can be found in Trump’s public statements. For example, in a January 2018 speech at the World Economic Forum in Davos, he declared, “America first does not mean America alone,” adding “We support free trade but it needs to be fair and it needs to be reciprocal because, in the end, unfair trade undermines us all.” In June, he challenged the G-7 to eliminate all tariffs, barriers and subsidies. “That’s the way it should be,” he stated. More tangibly, the Trump administration has now concluded its renegotiation of NAFTA, rebranded as United States-Mexico-Canada Agreement (USMCA), and recently notified Congress of its intent to negotiate new trade agreements with the UK, EU and Japan.

The Real Donald Trump: Ideology and Influences

So which one is the real Donald Trump? Is he the protectionist heir of William McKinley or a free trader in the mould of Ronald Reagan? One reading of the record suggests three tentative conclusions. First, Trump himself is an unrepentant mercantilist and, as such, is largely indifferent to closing U.S. markets to imports and opening foreign markets to U.S. exports, so long as the balance moves in the right direction. Second, Trump’s inscrutability is by design. Politically, he must appeal both to his blue-collar base, whom he has promised to protect, and the pro-business conservatives of his party, who bear the costs of his tariffs. Thus he must hold out the promise of eventually opening markets. Third, there does appear to be an evolution in policy goals, but it is not toward freer trade per se. Rather, it is toward more intense confrontation with China, with North-North trade agreements playing a strategic role.

Trump’s mercantilist views are legendary. In speeches and interviews dating back 30 years or more (not to mention a constant flow of Tweets since in office), Trump has expressed the belief that U.S. trade deficits constitute a loss to U.S. income, wealth, power and prestige. “First they take all our money with their consumer goods, then they put it back in buying all of Manhattan,” Trump complained (of Japan) in a 1990 Playboy interview. “So either way, we lose.” Moreover, he believes deficits are caused by unfair trade policies, permitted by the poor trade agreements inked by incompetent U.S. negotiators in previous administrations.

During his campaign and early presidency, Trump’s mercantilism dovetailed with a political strategy of attracting trade-afflicted blue-collar voters from swing states with promises of protection. Steve Bannon, Trump’s chief political strategist at the time, famously characterized Trump’s genius as having “combined ‘Jacksonian Populism’ and ‘Hamiltonian Economic Nationalism’ to galvanize working-class Americans.” (Never mind that Hamilton was a proponent of the infant industry argument, while Trump’s promises were to dying industries like steel and coal.) Trump’s inaugural address, penned by Bannon and immigration hawk Stephen Miller, and subsequent trade actions were meant to prove his commitment to such voters.

As important as blue-collar support is for his power, however, Trump needs the support of Congressional Republicans to govern. His appointment of Goldman Sachs alumni Steven Mnuchin, as Treasury Secretary, and Gary Cohn, as National Economic Council director, and his sacking of Bannon, were meant to signal to pro-business conservatives that he could be trusted with the economy. Cohn oversaw the administration’s push for deregulation and corporate tax cuts and the more pragmatic trade policy views on display at Davos in January 2018. However, he was ultimately unsuccessful in dissuading Trump from imposing steel and aluminium tariffs and resigned in early 2018, passing the pro-business torch to his successor, supply-sider Larry Kudlow. Kudlow is reportedly behind Trump’s G-7 free trade challenge.

With the demise of Bannon and Cohn, the emergent players in U.S. trade policy are U.S. Trade Representative (USTR) Robert Lighthizer, Commerce Secretary Wilbur Ross and advisor Peter Navarro. All three have deep ties to the steel industry, advocate support for the manufacturing sector (which they associate with national security), and are outspoken critics of China. Ross and Navarro appear to share Trump’s mercantilist views. Lighthizer is harder to pin down ideologically. While he spent much of career litigating for protection of the steel industry, he also served as Deputy USTR during the Reagan administration and was a key player in the aggressive unilateralism of that era.

Trump’s Idea of a Great Deal

As a practical matter, while Trump and his team have imposed a lot of tariffs, they have also succeeded in negotiating the successor agreement to NAFTA, the USMCA, which they hold up as tangible evidence that their get-tough strategy is working. In Trump’s words, NAFTA has gone from “the worst trade deal perhaps ever made” to the “single greatest agreement ever signed.” Yet the slightly more careful language of Trump’s prepared remarks at the unveiling of USMCA is revealing: “This new deal will be the most modern, up-to-date and most balanced trade agreement in the history of our country with the most advanced protections for workers.” The USMCA is, in fact, NAFTA, with few added chapters from TPP, covering such areas as digital trade (hence, the modernity) and labour and environmental standards (hence, the protection for workers). It also contains several provisions aimed at discouraging U.S. companies from offshoring to Canada and Mexico, such as a weakening of investor-state dispute settlement and adding more stringent rules of origin for the automobile sector (hence, the balance). Notably,  neither the steel and aluminium tariffs nor Canada and Mexico’s retaliation were eliminated as part of the deal. In other words, compared to the status quo at the time Trump took office – with both NAFTA and TPP still alive – Trump’s get-tough negotiating strategy has succeeded in merely adding costs to the North American value chain. This is perhaps the clearest indication that mercantilism remains the lodestar of the administration.

Cold War II

If mercantilism gives the administration direction, China gives it motivation. All factions supporting the administration find something to fear in China. China’s bilateral trade surplus with the U.S. dwarfs that of any other country. Its export surge after joining the WTO is blamed for manufacturing job loss in the U.S. heartland. Its trade and technology policies have long been criticized as unfair, and its recently launched “Made in China 2025” plan is an import substitution policy aimed directly at sectors of U.S. comparative advantage. China’s military buildup, territorial ambitions in the South China Sea, soft power assertiveness in other regions, cyber warfare and infiltration of U.S. security-related supply chains have U.S. national security agencies seeing red. While Trump began his presidency with conciliatory noises toward China, probably because he hoped for China’s help in dealing with North Korea, this has given way to harsh criticism and the escalating trade war. Vice President Pence’s October 4, 2018 address to the Hudson Institute explicitly linked these and many other strands together, making it clear that U.S. trade policy toward China is part of a broader plan to counter China on many fronts in the interest of U.S. national security.

An interesting aspect of administration’s China strategy is a renewed interest in trade agreements with U.S. allies, particularly the UK, EU and, especially, Japan (never mind that TPP was exactly that). This is also reflected in the USMCA’s so-called “loyalty oath,” which allows for the eviction from the pact of any member that negotiates a preferential trade agreement with a non-market economy (i.e., China). Thus, it would appear the push for trade agreements has less to do with Trump’s interest in free trade than enlisting U.S. allies in its fight against China.

The Road Ahead

Trump’s enduring mercantilism and penchant for threats suggests that the upcoming negotiations with the UK, EU and Japan are likely to play out in dramatic fashion. Whether they will ultimately produce the disappointing mix of progress and regress found in the USMCA or something better depends in large part on whether the pro-business and the national security factions in Washington can harness the China strategy to make real progress on trade. Expect Trump to demand loyalty. What remains unclear is what price he is willing to pay for it. Also unclear is whether Whitehall, Brussels and Tokyo will use this modicum of leverage to good effect.

About the author

Professor Ludema received his B.A. from Calvin College and his M.A., M.Phil. and Ph.D. degrees in Economics from Columbia University. He specializes in the area of international trade.  His research interests include the political economy of trade policy, international trade bargaining, preferential trade agreements, trade and the environment, GATT rules and dispute settlement, and economic sanctions. He served as Chief Economist of the United States Department of State from 2014 to 2016, and as Senior International Economist in the White House Council of Economic Advisers, 2012-13. At Georgetown, he teaches international trade in the undergraduate, MSFS and PhD programs.

Rod is part of the Sussex-Georgetown standing group on the Future of US-UK trade and collaborated on the group’s first publication: Briefing Paper 20 – The Future of US-UK Trade: What case for a bilateral trade agreement?

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