President Trump has delivered on his promise to shake up Washington, arguably nowhere more so than in the policy space of international trade. President Trump's trade agenda has challenged more than seven decades of bipartisan policy commitment to seeking lower trade barriers at home and abroad through negotiated agreements.
While President Trump pays lip service to pursuing free trade and eliminating tariffs, his trade policies so far have been marked by higher U.S.
duties on a range of products, from washing machines to steel. Under Section 301 of the Trade Act of 1974, the administration has imposed duties on $250 billion of imports from China, with those duties set to escalate in 2019 absent an agreement with China. And under Section 232 of the Trade Expansion Act of 1962, the president is threatening to impose a 25 percent duty on imported automobiles in the name of national security.
The Trump administration has renegotiated existing trade agreements with Canada, Mexico, and South Korea, but its modifications are as likely to restrict trade as expand it. One of the president's first actions after assuming office was to withdraw the United States from the pending Trans-Pacific Partnership, which would have eliminated almost all duties with 11 trading partners around the Pacific Rim, including Japan.
President Trump has expressed skepticism about the benefits of trade for more than 30 years. In frequent statements, he asserts that the United States is "losing" hundreds of billions of dollars a year because of the annual deficit in merchandise trade. According to the recent book by Bob Woodward on the Trump presidency, the president told his staff, "Trade is bad" (Woodward 2018: 208). In March 2018, the president tweeted, "When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win" (Franck 2018).
This article will briefly state the case why, contrary to the president's assertions, it has been in America's economic interest to pursue free trade in the postwar era. It will then examine in more detail three main pillars of the Trump trade agenda--reducing the U.S. trade deficit, restricting steel imports, and confronting China with escalating tariffs. And it will conclude with a brief plan to return the United States to the previous path of seeking lower trade barriers through cooperative agreements.
The Blessings of Freer Trade in the Postwar Era
As a nation the United States has been reaping the benefits of freer trade for more than 70 years. For millions of American households, lower trade barriers in the United States have delivered lower prices, more variety, and better quality in the goods and services people buy every day. Because of the increased competition from international trade, Americans can buy more affordable footwear, clothing, electronics, household goods, and food, including fresh fruit in the winter. Lower prices are especially important for lower-income Americans, who spend a higher share of their budget on tradable goods (Furman, Russ, and Shambaugh 2017). For millions of workers, the lower prices from trade translate into higher real wages.
U.S. producers also benefit as importers. Half of U.S. annual imports are not for consumption but for production--raw materials, industrial supplies, capital machinery (U.S. Bureau of Economic Analysis 2018: Exhibit 6). U.S. producers depend on access to globally priced inputs to stay competitive. And more obviously, U.S. firms benefit as exporters to world markets. Freer trade opens opportunities to sell to the 95 percent of the world's people and three-quarters of the world's spending power that is outside the United States (World Bank 2018). In 2017, Americans exported $2.4 trillion worth of goods and services to people in other countries (U.S. Bureau of Economic Analysis 2018: Exhibit 1). American firms sell another $6.0 trillion in goods and services through their affiliates located in foreign countries, with 94 percent of those sales outside the United States (Jennings 2017).
Trade is not about more jobs or fewer jobs. Robust trade is clearly compatible with low unemployment. Through 2018, the U.S. economy has enjoyed the lowest unemployment rate in almost 50 years at a time of record imports. Trade is about better jobs--about specializing in what we do best and doing more of it, while importing what people in other countries are better at making.
As President Trump justifiably touted in the recent mid-year election campaign, the U.S. economy is doing well at the halfway mark of his first term, and trade is an important part of the story. And yet the president also routinely complains about the supposedly damaging effects that trade and trade agreements have imposed on the American economy. His complaints focus on three areas--the persistent U.S. goods deficit, imported steel, and China.
President Trump's Unbalanced View of the Trade Deficit
On the balance of trade, President Trump says that Americans are "losing" $800 billion a year in goods trade. This is the difference between what Americans spend on imported goods and what foreigners spend on U.S. exported goods. To President Trump, the deficit represents money stolen from Americans, the result of bad trade deals that we must change or scrap. But the trade balance is not a scorecard for trade. Trade is a win-win for Americans, the sum total of millions of mutually beneficial transactions. The trade deficit is not the result of trade policy, but of underlying levels of savings and investment in the economy. In the United States, we save less than what is invested, which means a net inflow of foreign capital, resulting in an overall deficit in the current account.
The $800 billion deficit in goods is not a loss, but a gain of useful goods that make our lives better. Almost every American household runs a trade deficit with the neighborhood grocery store. Complaining about the "lost" $800 billion from the U.S. trade deficit is like a shopper grumbling about the $150 he lost at the checkout counter while heading to his car with a cart bulging with groceries.
President Trump also ignores the fact that trade is not just about goods. More than one-third of U.S. exports are services (U.S. Bureau of Economic Analysis...