Is America Ready for the Coming Trade Wars?
“From this day forward, it’s going to be only America First.”
– President Donald Trump
With these words during his inaugural address, and a flurry of executive actions, policy memoranda and tweets during his first full week in office, President Donald J. Trump has begun to alter the United States’ policy of global economic leadership. This is a significant change in doctrine and its implementation is likely to include tariffs or taxes on U.S. imports and renegotiation of existing trade agreements, all of which could contribute to a wave of global protectionism. The consequences could be severe. Not only would the U.S. be abandoning its traditional role in the global trading system, but the country could also face reciprocal measures from its trading partners and arbitration cases at the World Trade Organization. Chinese analysts have already indicated that any move to put tariffs on exports from China to the U.S. would face a disproportionate response and could kick off a full-fledged trade war.
Supporters of America’s global economic leadership, free trade, and our existing rules, must take action now to avoid this outcome.
America’s Global Economic Leadership
Since the end of World War II, American economic principles of free market capitalism and open trade have shaped the global economy, defeat communism and win the Cold War. Under American leadership, an international system of treaties and agreements was enacted to codify the rules that govern commerce and trade around the globe. These bipartisan principles have spanned the presidencies of Harry Truman and Dwight Eisenhower, George W. Bush and Barack Obama.
Along the way trillions of dollars of economic growth was created and hundreds of millions of people were lifted out of poverty. Just as the laws of economics would predict, the American economy benefited from both access to foreign markets for our export goods and from imported goods made by our trading partners.
Today, however, the tangible benefits from trade aren’t felt or understood by the American electorate. In fact, it’s just the opposite. Over 70 percent of American voters believe that trade deals, like the North American Free Trade Agreement (NAFTA), harm the economy and should be renegotiated according to recent polling by FTI Consulting.
Politicization of Trade
As a candidate, President Trump grasped this dynamic and effectively campaigned on an agenda against what he called “disastrous trade deals.” Specifically, Trump promised to withdraw from ongoing trade negotiations, appoint tougher negotiators and instruct government agencies to use “every tool” available to stop “abuses” of American trade policies by our partners. He promised to take swift action to renegotiate NAFTA, label China a currency manipulator, and impose tariffs on Chinese imports. Just weeks into his administration, President Trump is beginning to deliver on these campaign promises.
On his first Monday in office, President Trump signed an executive order withdrawing the U.S. from the 12-nation Trans-Pacific Partnership (TPP) negotiated by the Obama administration. By the end of the week he had embraced the idea of adding a 20 percent tax on all goods imported into the United States, reaffirmed his intention to reopen NAFTA and caused a diplomatic dust-up that led Mexican President Enrique Peña Nieto to cancel a planned meeting in Washington.
This may be just the beginning. Trump has assembled a team wary of previous U.S. trade policy to serve in his cabinet and as senior advisors. Wilber Ross, the President’s choice for Secretary of Commerce, authored a white paper in September stating, “If America's trading partners continue to cheat, a President Trump will use all available means to defend American workers and American manufacturing facilities from such cheating, including tariffs.” The presumption that our trading partners are cheating, and getting away with it, portends trade enforcement with a renewed vigor and a pre-determined conclusion: imposing tariffs.
The white paper’s co-author, Peter Navarro, will advise the President on trade strategies to boost domestic manufacturing as the head of a newly formed National Trade Council. Navarro is an economist who has routinely criticized the system of global trade and specifically, U.S. trade with China as the author of books on Chinese-U.S. trade and the documentary “DEATH BY CHINA: How America Lost its Manufacturing Base.” Both Ross and Navarro have indicated that new tariffs are on the U.S. trade agenda and CNN has reported that an across-the-board five percent tariff on U.S. imports is under consideration.
It’s clear that the Trump administration is re-examining America’s traditional economic leadership and re-assessing its facilitation of global commerce. By contrast, a recent speech by China's President Xi Jinping in Davos asserted that Beijing will be a reliable champion of expanded trade if the United States steps back. This prompted one fund manager to posit that he just “heard a Chinese president becoming the leader of the free world."
President Trump’s trade agenda is a direct appeal to the voters who elected him. CNN exit polls found that 64 percent of Trump voters believe that the effect of international trade has been to send U.S. jobs abroad. Amongst the entire electorate, 42 percent believe international trade cost the United States jobs while only 38 percent believe that trade has created jobs.
Specific trade deals, like NAFTA, poll even worse. Polling conducted after the election by FTI Consulting found that 71 percent of all 2016 voters — and 88 percent of Trump voters — agreed that renegotiating NAFTA with better terms for the U.S. should be a top priority for Trump in his first year.
It’s important to note that anti-NAFTA sentiment is not an election-created phenomenon, however. Trade and trade agreements were highly controversial well before November 8th. A survey conducted in March by Bloomberg News found that a plurality of Americans, 44 percent, believed that NAFTA has been bad for the U.S. economy, while a majority of Republicans, 53 percent, held that belief.
Alignment of Anti-Trade Forces
With such high levels of public antipathy towards trade, President Trump believes that he has a mandate to deliver results on his vision of America’s role in the global economy. There is a real possibility that Trump can unite a coalition of traditional anti-trade groups — labor unions, anti-globalization organizations and environmental groups for instance — with Republican constituencies that are increasingly nationalistic and hostile towards foreign competition.
Whatever form these new policies take — cancelled trade agreements, tariffs, a border adjusted tax or even import quotas — they are likely to be met with a corresponding response from U.S. trading partners that will drastically impact the economies of everyone involved (and some that aren’t).
Unfortunately, the root cause of American attitudes towards trade is a misunderstanding of its many benefits. The benefits of trade are distributed, almost imperceptibly, amongst all American consumers in the form of greater variety and lower cost goods, and amongst American businesses, like farms, that export U.S.-made products. Meanwhile, the downside of trade, principally the global specialization of labor that has caused U.S. jobs to shift between sectors, is felt acutely by those who have lost jobs. Moreover, Americans inflate the role of trade in declining U.S. manufacturing jobs, underestimating the impact of automation on decreasing the requirements for manpower in the manufacturing sector. The Brookings Institution recently demonstrated this key point in a single graph.
Caught in the midst of the rhetoric over trade are U.S. producers, exporters and importers whose enterprises — from large corporations to small businesses — rely on the movement of goods and services across international borders. Nearly every American industry, from automobile manufacturers and oil refiners to technology and pharmaceutical companies, participate in a global supply chain that has inputs and intermediate goods crisscrossing borders before becoming final products. These companies also benefit from investment protections and intellectual property rights that are key aspects of international trade agreements. These same enterprises will face the brunt of the consequences from policies that restrict trade, like revisions to the NAFTA agreement, imposition of tariffs or trade disputes at the WTO.
Fortunately, there is another way to move forward with a pro-trade agenda that aligns with the interest of the American electorate. When the trade debate is framed to acknowledge that we live in a global economy and that we must maintain America’s position of global leadership, a plurality of respondents support it. And, when the true benefits of international trade are explained to Americans, they overwhelmingly support it. FTI Consulting research found that when voters were asked about “negotiating new trade deals that open foreign markets for goods produced in the U.S.,” 70 percent agree this should be a priority for the Trump administration, including 83 percent of Trump voters. Further, Americans are fundamentally aware that if the U.S. were to withdraw from the global economy and shut down trade with our allies, we would also suffer.
However, the current discourse about trade does not tap into these fundamental and intrinsically believable truths. Instead, the public hears rhetoric about manufacturing plants moving to Mexico, cheap foreign imports and currency manipulation. It’s critical that the terms of this debate be changed by public and private sector stakeholders that rely on trade. Principally, three things must happen:
- Reframe the argument about trade deals to demonstrate that they in fact put Americans first and create U.S. jobs.
- Show that our existing trade deals are fair and how violations are enforced.
- Change the message about trade to one of protecting American global economic leadership.
As previous FTI research demonstrates, there is a clear mandate from both shareholders and the broader public for CEOs to play a proactive role in shaping public policy. The case for doing this in the trade debate could not be stronger. Effective communications must explain simplified economic theory with practical examples of how America’s ability to trade with partners and allies helps to grow the U.S. economy, improve economic and national security and raise our standard of living. Ultimately, trade allows us to maintain our position of global leadership and keep putting America first.