A bimonthly magazine on international affairs, edited in Germany's capital

America First

Donald Trump’s protectionist impulses could have disastrous consequences.

From China to Germany to Mexico, US President Donald Trump has not been shy about picking fights with supposed trade adversaries. If he were to follow up on his rhetoric, it could completely undermine the international economy.

© REUTERS/Fabian Bimmer

For all of Donald Trump’s tough talk on security – after a meeting with German Chancellor Angela Merkel last week, he once again mentioned the “vast sums” Germany owes the US for its defense – it is trade where he threatens to upend the international order most dramatically. Trump represents a true break with the past; while previous presidents, Republican and Democrat, have at least paid lip service to the benefits of free trade, Trump is a true mercantilist. Trade is a zero-sum game: Exports are good, imports are bad. Production at home is good, production abroad is bad. Trade deficits are bad, surpluses good; the large surpluses of individual countries, however, are not a sign of competitiveness or supply and demand structures, but of unfair competition – of currency manipulation, subsidies, or dumping. Trade with Germany, for example, would only be “fair” if Germans bought as many American cars as US citizens bought German cars.

And Trump, who ran his campaign based on an “America first” rhetoric, has already begun carrying out his pledges to undo America’s trade ties. The new president wants to bring back well-paid manufacturing jobs to the United States and increase employment – never mind that structural factors, not trade, are responsible for most job losses. He also wants to eliminate the US trade deficit. On his first day in office, Trump formally withdrew from the TPP, and in his trade policy objectives for 2017 he stressed that he wants to strengthen US sovereignty over trade law, implying that the decisions of the WTO dispute settlement system would no longer be implemented.

Trump caters to those who feel left behind. Overall, the US economy is doing well: GDP grew slowly but steadily in 2015 and 2016, and unemployment has fallen to below 5 percent. However, not everyone has benefited to the same extent from the economic recovery since the crisis. Real wages have barely increased in the United States for years, and many middle-class citizens believe that their financial situation has not improved. Moreover, 47 percent of respondents in a 2016 Pew survey believed that overall, free trade agreements (FTA) had damaged the country; among Trump supporters, that figure was even as high as 68 percent. Many feel disconnected with the political elite. Voting for Trump was a vote against the establishment. The presidential elections revealed a deeply divided country. Trump ran his campaign on the basis of identity politics and he is running his presidency on it as well. His slogan “Making America great again” means different things to different people, but it certainly reassures a particular racial and cultural US identity.

It is unlikely that Trump’s plans will do anything to bring manufacturing jobs back to the US – and indeed if manufacturing does return, it will be new, digitalized manufacturing. But his policies could have dramatic consequences for the rest of the world.

Reigning in the President?

Will Trump be able to implement his plans? The US constitution gives Congress power over trade. However, Congress has delegated some of its competency to the president over time. The acts implementing various bilateral and multilateral trade agreements dictate that tariffs will be lowered or phased out through presidential proclamations. Trump could withdraw these and thus roll back previous tariff reductions. Other laws strengthen the president’s powers further: The Trade Expansion Act of 1962, for example, allows the president to introduce tariffs or quotas when imports threaten national security. Section 122 of the Trade Act of 1974 enables the president to implement tariffs of up to 15 percent and/or quotas for up to 150 days if the US has a significant balance of payments deficit with a trading partner. Section 301 allows him or her to introduce retaliatory measures, such as tariffs and quotas, if a trading partner denies the US rights under a free trade agreement or acts in an unreasonable or discriminatory way. Trump explicitly stated in his trade policy agenda for 2017 that he would strictly enforce all US trade laws.

Most experts agree that the president could also unilaterally withdraw from NAFTA. Whether or not the Trump administration needs congressional approval to renegotiate the trade pact with Mexico and Canada depends on what the new agreement would look like. If it required changes to federal statutes, congressional approval would likely be necessary.

And Congress itself is not immune to protectionism fever. Most feared by US trading partners is the border adjustment tax (BAT), an element of a tax reform blueprint introduced by the Republican members of the House Ways and Means Committee in June 2016. Under the proposal, a company’s cash flow would be taxed based on where the company’s goods and services are sold, regardless of where production, management, or income is located. In contrast to import-related costs, export-related costs would be deductible, thus encouraging exports and domestic production while discouraging imports. If implemented this would severely disrupt global and regional value chains. While Republican Speaker of the House Paul Ryan is promoting the proposal, leading Republicans in the Senate are skeptical.

Some of Trumps proposals also resonate well with House and Senate Democrats. Many of them cheered the idea of renegotiating NAFTA. Together with labor unions they have called for stronger labor and environmental standards and an exclusion of investor-state dispute settlement (ISDS), among other elements. Trump could also find allies among Democrats for his plans to go after (alleged) currency manipulators. Senate Minority Leader Chuck Schumer, for example, has repeatedly proposed classifying currency manipulation as an illegal subsidy to allow retaliatory measures.

In the business community, Trump’s trade policy proposals resonate well in industries that struggle to keep up with global competition, such as steel. They have been lobbying for stronger anti-dumping measures for years and seek more protection from foreign competition they claim is unfair. In early February, 25 US companies, including large exporters, launched the “American Made Coalition”, which supports the BAT proposal. General Electric, Boeing, Dow Chemical, Eli Lilly, Pfizer, and Oracle are among its most prominent members. However, Trump also faces stiff opposition. “Americans for Affordable Products”, to which many retailers belong, are lobbying against the BAT. Many companies in Silicon Valley depend heavily on international trade, such as Apple, which produces its iPhone mostly outside of the US. Aside from outsiders like Peter Thiel, Silicon Valley is deeply critical of Trump. So are business leaders in Texas, who have criticized Trump’s threats to end NAFTA or impose tariffs on Mexican imports. Members of Congress will listen to these voices as well.

Hard Times Ahead

What does this mean for Germany? In 2015, the US overtook France as the number one destination for German merchandise exports. Regarding merchandise imports, the US was Germany’s fourth most important trading partner in 2015. German and US companies are also important investors in each other’s markets – in fact, the US is the top destination for German foreign direct investment (FDI). In 2014, about 28 percent of German outward FDI stock was in the US. According to the Bundesbank, there were 4,725 German companies with direct and indirect investments in the US in 2014.

Some of Trump’s proposals, such as lower corporate taxes and investments in infrastructure, could benefit German companies with American subsidiaries. A precondition to participating in a possible infrastructure boom is, however, that government procurement will not be closed through “Buy American” clauses. If the White House slapped tariffs on products from Mexico, this would also hurt German companies. Many German automakers and their suppliers have subsidiaries in Mexico. They export not only cars to the US, but also intermediate goods. A BAT would also be a severe hit to the German export industry. Trump’s opportunities to go after Germany for currency manipulation are, however, limited. The US administration could not impose any trade policy measures against Germany alone, but would have to target the EU as a whole – and it would be hard to prove that the EU is manipulating the euro. But he might make this an issue in the G20, testing the resilience of a governance forum that is needed now more than ever.

Many of Trump’s proposals will also not be compatible with WTO rules. And here lies one of the greatest risks of Trump’s trade policy: Germany depends on open and rules-based trade, and the WTO is still the most important guardian of this, even if there has been little progress regarding further trade liberalization. If Trump adheres to his promises and starts to disregard the decisions of the WTO’s dispute panels, or even worse withdraws from the WTO altogether, this would throw the multilateral trading system in disarray.

Making Trade Great Again

The US is not the only country where anti-globalization sentiment is on the rise. In fact, many countries are resorting to protectionist measures. Since the financial and economic crisis of 2008, the number of protectionist measures has increased every year.

To counter Trump’s protectionist noises, the international community needs to send a strong signal supporting open markets – most importantly in the G20 that Germany is chairing this year. The signs are not promising. At their meeting in Baden-Baden, G20 finance ministers did not repeat their 2016 pledge to “resist all forms of protectionism” in the face of American opposition. Nonetheless, the G20 members need to take their previous commitments not to implement new protectionist barriers seriously, and roll back those which they introduced in the past years. They should also agree on strengthening the WTO’s monitoring capacities, giving it more leeway to classify protectionist measures and to calculate their effect on growth and employment. This will be no easy task, as there is considerable disagreement over what constitutes protectionism.

At home, G20 members need to better explain the benefits of trade. But they also have to address those who feel – and are – left behind and redouble their efforts to improve education and lifelong learning to help people seize new opportunities. Social protection systems to ensure a safety net for people who have lost employment, active labor market policies to support people getting back to work, and a strong social partnership can all help to make economic growth more inclusive. None of this needs to be disruptive to trade. The Trade Adjustment Assistance has never really worked in the US – but it could be a basis for an improved adjustment mechanism in the future.

The European Union also needs to speak out more forcefully for trade. The passage of the FTA with Canada – CETA – in the European Parliament is a good sign. But EU members have to put more effort into overcoming internal blockages to allow the EU to be an assertive actor in global trade. And EU members should speak with one voice vis-á-vis the Trump administration. This is even more important as Trump tries to divide the EU by exploring the possibility of bilateral trade deals with individual countries – which is not even possible under the EU’s common commercial policy.

What’s clear is this: if policy-makers do not address anti-globalization sentiment at home with concrete actions, trade as a basis for prosperity and development might become a thing of the past.