As President Trump prepares to head to a summit with NATO allies in Belgium July 11 and another summit with Russian President Vladimir Putin in Finland July 16, he’s drawing criticism from Democrats, some Republicans and many foreign governments for imposing tariffs on imported goods.
The president’s critics accuse him of recklessly starting a trade war that will be bad for America and the global economy. They couldn’t be more wrong – and here’s why.
President Trump imposed 10 percent tariffs on aluminum imports and 25 percent tariffs on steel imports in June and has threatened to impose tariffs on autos and other products. In retaliation, Canada imposed $12.6 billion in tariffs on a broad range of U.S. products Sunday, joining other nations – including China, Mexico, and European countries – that have slapped retaliatory tariffs on goods imported from the U.S.
It’s understandable that our foreign trading partners are upset by President Trump’s trade actions – they had good deals going before he took office, with many racking up many billions of dollars in trade surpluses with the U.S. each year.
The better and fairer trade deals the president wants to negotiate are designed to level the playing field on trade. This will benefit the U.S. because the current playing field is distinctly tilted in favor of our trading partners.
President Trump’s actions on trade shouldn’t surprise anyone who followed his 2016 presidential campaign. Again and again as he crisscrossed the U.S., the author of “The Art of the Deal” told crowds and the media that negotiating better trade deals was a key part of his Make America Great Again agenda.
While all Americans have benefitted from imported low-priced products, the costs in lost jobs and reduced incomes have primarily fallen on America’s working class. They noticed. They heard candidate Trump’s trade message and elected a president who promised to use his negotiating skills to improve the trade dynamic.
Discussing presidential candidate Trump’s pledge to negotiate better trade deals during the presidential campaign, President Obama asked: “How exactly are you going to negotiate that? What magic wand do you have?”
President Trump has since explained what “magic wand” he will use. But it’s not magic at all. It’s smart negotiating. In simplified terms, here’s how it works: With a trade deficit over $500 billion running in their favor, we need to create incentives for our trading partners to renegotiate our current relationships. That’s because nations – like people – rarely give up economic benefits they’ve grown used to having simply because doing so would be fair. They operate in their self-interest. However, given this current trade imbalance, our trading partners have more to lose from reduced trade than we do. Using the potential of fairer and more balanced – but still lucrative – trade relationships as the carrot and economically punitive tariffs as the stick isn’t a magic wand. However, it could be a very effective approach in the hands of a skilled negotiator willing to do what it takes to convince our trading partners that we are serious – but open to negotiation.
When considering trade policy, it is important to recognize the difference between using tariffs to tilt the international playing field in favor of American businesses and using them as a negotiating tool.
The U.S. objective in such negotiations would be to level a playing field tilted against American businesses, prevent a flood of foreign products designed to destroy American industrial sectors from pouring into our country, and protect our crown jewels of technology.
Like President Trump, I am a strong believer that more trade is better than less trade – assuming balanced and reciprocal trade relationships. But, with all due respect for the benefits of free trade, it isn’t truly free if it isn’t truly fair.
Times have changed, and the playing field needs to change with them. Looking back at history can help us understand the situation America faces now on trade.
Following the horrible devastation of World War II, the United States was the only economic power on Earth with undamaged industrial and agricultural sectors. To rebuild the world economy, the U.S. worked to reduce trade barriers and spread free-market capitalism.
At the same time, our trading partners imposed high trade barriers on certain products, while we allowed their goods to flow more freely into the U.S.
While socialist governments in the Soviet Union, Eastern Europe and China restrained worldwide economic growth during the Cold War, the capitalist economies in Western Europe and Japan rapidly thrived. But following the Soviet Union’s collapse in 1991 and China’s transition from pure socialism to a limited form of free market capitalism in the 1990s, the world economy soared.
Since 1995, the Heritage Foundation and the Wall Street Journal have published an annual Index of Economic Freedom. According to the 2018 edition, with rising economic freedom, including trade freedom, “by a great many measures, the past two decades have been the most prosperous in the history of human kind.” Over this period, “world GDP (gross domestic product) has nearly doubled” cutting “the global poverty rate by two-thirds.”
This unprecedented growth dramatically improved the economic condition of America’s trading partners. According to the World Bank, as a region, North America now accounts for about 27 percent of the world’s overall GDP of $87.5 trillion. The U.S., as the world’s largest economy, is responsible for just over 23 percent. However, Asia accounts for 36 percent, with China at about 16 percent and Japan at about 6 percent. Europe accounts for 26 percent.
The economic fortunes of our trading partners have clearly recovered. Our trade policy needs to recognize this indisputable fact.
In fact, looking forward, a study by the private services firm PwC projects that by 2050, China will be world’s largest economy, India will be second and the United States will drop to third, with fourth place going to Indonesia. This would be a dramatic drop from our traditional position as the world richest economy.
Changing times require changing policies. Just because America’s trade practices made sense decades ago does not mean these same trade practices make sense in the 21st century. We have moved beyond the post-World War II and Cold War period when America’s economic dominance was unchallenged and trade concessions were essential to worldwide economic growth. While our trading partners’ economies have meaningfully improved, America’s approach to trade failed to adjust, leading to increasingly large trade deficits.
For example, the U.S. imposes a 2.5 percent tariff on car imports. But American car manufacturers must pay a 10 percent tariff to sell their cars in Europe – four times higher than Europeans must pay to sell their cars in the U.S. This helps explain why German manufacturers sell three cars in America for every car we sell in Germany. It also helps explain why our trade in goods deficit with Germany was $64 billion in 2017.
Japan’s protectionist trade barriers are so restrictive that in 1989 the Reagan administration labeled Japan an unfair trading partner. Today those protectionist policies largely remain in place. As a result, Japanese car manufacturers sell 100 cars in the U.S. for every car we sell in Japan. Our trade deficit in goods with Japan stood at $49 billion in 1989. It jumped to $69 billion in 2017. While China is not as yet a major auto exporting nation, since 2008 it has manufactured more cars annually than any other nation. It primarily sells those cars inexpensively within China, while imposing a 25 percent tariff on American cars imported into the country.
Although it has been a member of the World Trade Organization since 2001, China nonetheless continues to engage in predatory trade practices and intellectual property theft. In 2001, our trade in goods deficit with China was $83 billion. In 2017, it was a staggering $376 billion.
While the U.S. has its own protectionist tariffs (for example, a 25 percent tariff on imported trucks), our competitors generally have higher tariff and non-tariff trade barriers than we do. And in some cases, our foreign competitors benefit from much cheaper labor costs and other lower operating costs because of lax regulation and state subsidized industries.
As a result, America’s total annual trade deficit in goods with countries around the world was $810 billion in 2017. Even including services (where we have a trade surplus of over $200 billion), our trade deficit has ballooned to $568 billion. We should at least consider the possibility that it’s time to level the playing field.
President Trump has done what any president should do – he’s made it clear that America will not allow the unfair trade practices that have led to enormous trade deficits to continue. No one can say for certain what the outcome of President Trump’s tariffs and other trade policies will be. But it’s in America’s interest for the president to do his best to eliminate trade barriers, level the playing field and shrink our trade deficit.
This article originally appeared on Fox News on July 2, 2018