Trump Team Floats Protectionist Policies That Will Destroy World Trade

The Trump administration is apparently considering taking steps that would destroy the international trading system as we know it today. There are really two prongs to this attack that would set off a protectionist free-for-all across the world, pretty guaranteeing another global recession.

First, head of the new National Trade Council, Peter Navarro, told the Senate Finance Committee “that the administration also wants to include a provision that would trigger a renegotiation whenever the United States runs a trade deficit with the partner country.” That followed on previous suggestions that the new trade agreements would also include a provision to withdraw with just 30 days notice.

As Jordan Weissmann points out, this effectively neuters any trade deals going forward. If either side can withdraw in just 30 days, what business is going to have the confidence to work with a foreign partner or invest abroad when the terms of the deal can change almost instantly. And, what trading partner is going to agree to a trade deal where they will always have to run a trade deficit to the US or live with the uncertainty that the US will pull out in one month’s time. And that’s ignoring the effects that exchange rates, interest rates, and other external forces can have on the makeup of a specific trading relationship.

The Financial Times is reporting that the Trump administration is also considering ways that it can go about levelling trade sanctions on other countries without going through the World Trade Organization’s (WTO) dispute resolution system. Any attempt to do this will subvert the WTO and again create another global free-for-all as other countries will respond in kind. Yes, the WTO system is sclerotic and time-consuming but it provides the kind of stability that business needs. As one official said, “The administration should focus on how to make the US economy more globally competitive, not abandoning leadership of the rules-based system we have worked for generations getting others to accept.”

The Trump trade team is largely made up of outright protectionists. Trump has called the WTO a “disaster”. The nominees of US Trade Representative, Robert Lighthizer, and Secretary of Commerce, Wilbur Ross, have both attacked the WTO as being unfair to the US and are proponents of increased protectionism. Trump and his team seem to believe that they can restore the US balance of trade back to where it was in the immediate postwar era of the 1950s and 1960s simply by fiat and that the US economy will go back to looking like it did then, with plenty of good paying jobs for non-college educated whites and a healthy trade surplus. But it was the state of the rest of the world 70 years ago that allowed the US economy to look like that. The world has changed dramatically since then, with many more dynamic and competitive economies. In the post war era, we had the dominant world economy and were in the early stages of the baby boom and our working age population was growing quickly. The Trump team seems to think we can mandate a trade surplus and everything will return to 1955. The world doesn’t work that way anymore and, instead,  all these proposed policies will do is take us all back to 1935.