How Feasible are Donald Trump’s Trade Reforms, and What Might Their Impact Be on the US Economy?
Trade reform was high on the agenda in Donald Trump’s election campaign. According to the now President-elect, a generation of politicians have mistakenly allowed foreign countries to subsidise their exported goods, devalue their currencies and violate trade agreements, with jobs and wealth moving overseas as a result.
A blog we posted last week showed that Mr. Trump’s arguments are not without foundation. The evidence on the impact of free trade on the US economy shows that preferential deals have only boosted trade by a small amount but had damaging consequences for the workers it has displaced.
Trump’s campaign made seven promises on trade reform. Arguably the most important ones were the threats to withdraw the US from NAFTA, and the introduction of tariffs on Chinese imports if they do not end their unfair export subsidies.
A recent study by the Peterson Institute for International Economics (PIIE) has examined the feasibility of Mr. Trump following through on these commitments. In short, the paper argues that a Trump Administration would have the Executive discretion to follow through on many of these promises without the prior approval of Congress. There are a number of routes by which a Trump Administration could pursue this agenda.
Section 201 of NAFTA, for example, allows the President to introduce additional duties on imports if it is determined necessary to maintain the ‘general level of reciprocal and mutually advantageous concessions’ with Canada and Mexico. This could be used as a trigger for a return to Most Favoured Nation (MFN) tariffs on imports from Mexico. Conceivably, Mr. Trump’s lawyers could argue that the reciprocal concessions clause justifies the introduction of MFN tariffs on the grounds that Mexico imposes its value added tax on imports from the US but not vice versa, since the US has no value added tax. This would almost certainly mean the end of NAFTA. Canada could be exempted from MFN tariffs as the President can continue to honour the tariff provisions in the 1989 Canada-US Free Trade Agreement.
A Trump Administration can also rely on a number of ‘limited statutes’ to unilaterally impose tariffs on other countries. The Trade Expansion Act of 1962, for example, allows the President to raise tariffs or regulate imports to protect national security. Theoretically, the new President could ask his officials to investigate the national security implications for US industry from thousands of Chinese and Mexican imports. The courts defer to the executive on determinations of national security so following such an investigation President Trump could impose tariffs on several lines of imported goods from China and Mexico.
Section 122 of the US Trade Act of 1974 also gives the President the power to deal with large and serious balance of payments deficits. To remedy this, the Executive is allowed to impose tariffs of up to 15 per cent of quantitative restrictions for up to 150 days against one or more countries with whom it has a balance of payments deficit.
Alternatively, the new Administration’s lawyers’ could invoke Section 301 of the 1974 Act, which enables the Executive to impose duties on a foreign country on the grounds that it is carrying out practices that are discriminatory and restrict US commerce. Under this clause, Trump’s Administration could impose tariffs unilaterally on China on the grounds of a manipulated exchange rate.
The use of these Executive discretionary powers would almost certainly be exposed to legal challenges in the US Courts. Moreover, the foreign countries who have to pay the new duties may have the opportunity to challenge the introduction of tariffs on the grounds that they are inconsistent with the obligations of the US under the WTO. US exporters to countries such as China and Mexico may also face higher tariffs and other trade barriers in response to the US.
Another study by the PIIE has attempted to quantify what the impact of any resultant trade war might be on the US economy. At the extreme, in the full trade war scenario – where the US imposes a 45% on tariff Chinese imports, a 35% tariff on Mexican imports and both countries respond symmetrically – it is predicted that the US economy would see a fall in output, with the US entering a modest and shallow fall in output of -0.1 per cent of GDP. The loss of some 4.8 million private sector jobs, roughly 3% of the total number of people employed in the US, would follow.
All of this is highly speculative. Trade experts believe that some of Mr. Trump’s reforms, particularly the introduction of a 45% tariff on Chinese goods, are empty threats. It also very difficult to know how Mr. Trump will give effect to his campaign pledges when his Administration takes office. In the 2008 Presidential election, for example, President Obama pledged he would renegotiate NAFTA to strengthen its labour laws but did not follow through on this pledge even when both houses of Congress were controlled by his Democrat Party. The Trump campaign made much bolder pledges and revitalising industries in the Rustbelt was a central part of his platform. US legislation would appear to offer the Trump Administration greater discretion in trade matters than the general perception of many commentators. Conventional economic wisdom would also suggest that an audacious trade agenda that exploits this discretion would reduce output and lower American economic welfare.