Trump’s First Adversary: Institutional Free Trade Bias
President-elect must confront entrenched Washington trade mentality and act fast to cut deficits, create jobs
When Donald Trump embarks on his new trade agenda in January, he will face sustained resistance from those who opposed his primary and presidential campaigns — i.e., those whose views working Americans repudiated in the recent election.
Essentially, Trump’s agenda has been criticized from the moment the Establishment realized back in March that he might actually win the primaries. There have been numerous op-eds, blogs, and TV appearances by the free-trade, status-quo crowd suggesting that Trump will destroy the U.S. and world economies if he tries to restore balance to the world trading system.
Time is short. The Trump administration must pursue trade enforcement remedies with a vengeance in cases like that of U.S. Steel.
Trump’s antagonists are Wall Street institutions, multinational corporations, major business organizations, academic economists, editorial boards, business journalists, opinion writers, bloggers, and the generally knowledge-free mainstream media. All are opposed to Trump because they are wedded to a false, out-dated “free trade” dogma, which has decimated the working and middle classes.
On Capitol Hill, a minority of Democrats and majority of Republicans are partial to the same free-trade theories. Speaker Paul Ryan admitted as much in his remarks on the election victory, noting that Trump alone had recognized the dire plight of average Americans.
For the 1-percenters and their shills, nothing in their bedrock beliefs changed with the election, and they will actively oppose Trump’s trade platform with every maneuver and phony, distracting, pseudo-intellectual argument they can muster.
Their arguments include: Trump will start a trade war; he will plunge us into a job-destroying depression; the jobs aren’t coming back anyway; they were all taken by robots; trade deficits don’t matter; U.S. output is near a high; and government handouts in the form of supplemental income payments to manufacturing job losers, plus retraining and vocational education are the real answer.
None of these is accurate and none addresses the continuing economic advances made through the strategic trade/industrial/technology policies of our commercial rivals, who will take every last U.S. manufacturing job if we let them.
In spite of the raft of criticism, the president-elect appears determined to upend 30 years of failed trade policies. In order for Trump to succeed, his trade agenda must be guided by several defining principles:
1) The Trump administration must clean house of all the academically trained, free-trade economists, bureaucrats, and negotiators inhabiting the trade functions of the federal government. Trump has called them stupid; they are in the sense that they keep following the same free-trade template, making the same erroneous assumptions in their models, and piling up the same massive goods trade deficits. Yet they expect the next free trade agreement to turn out to be more beneficial to the United States than the last disaster.
2) Trump needs his new team to develop a strategic vision for the U.S. economy over the next several decades. U.S. trade policy must be based on a comprehensive plan. Balanced trade is necessary because trade deficits have to be financed — by borrowing from foreigners or selling them our domestic assets to pay for their goods. Both practices are problematic, to say the least.
But balance, while desirable, should not be achieved just by selling more soybeans and pork, and importing fewer socks. While that may be part of the approach, the U.S. economy needs to move ahead on technology and productivity growth across a broad spectrum of industries, including high-tech and futuristic sectors in which the country is currently deficient.
There will be howls of objection to a strategic plan and cries of “communist central planning,” but strategic economic objectives are not central planning or “picking winners and losers.” America’s trade adversaries are already far ahead in many areas with next-generation products and prototypes, thanks to their strategic implementation of explicit industrial policies, intellectual property theft, and forced technology transfer.
In contrast, the United States simply doesn’t possess a concerted national manufacturing strategy — in part because, historically, trade was a small part of our large continental economy. But as the nation’s economy has been globalized over the last 20 years by bad trade policy decisions (which are reversible, not set-in-stone, physics-like “laws” as the free-traders would have us believe), a strategic vision is imperative. One can’t fight something with nothing, and our economic fate shouldn’t be left to the randomness of the “free market,” which is in fact manipulated and managed by our competitors through currency manipulation, non-tariff barriers, IP theft, subsidies, dumping, VAT taxes, etc.
3) America’s response to the current situation of global trade imbalances and manipulation must be unilateral, and not dependent on the putative cooperation of foreign governments. Simply put, nothing will change if the United States continues to rely on “the kindness of strangers” — i.e., other countries’ promises to abandon their mercantilist policies by signing unenforceable, “best efforts” agreements. Trump must dictate the new terms of trade — not negotiate them. His leverage: access to the largest market in the world — which he must use before it is overtaken by China.
4) A strict timetable is needed. Trump’s goal should be balanced trade in four years, with America’s trade deficit declining by 25 percent annually to zero. This goal can be accomplished in a number of ways, including limits on the value and type of imports if necessary. Four years gives U.S. companies dependent on parts or sub-assemblies from overseas operations plenty of time to relocate back home. Trump may have to pull out of the World Trade Organization and various trade treaties if our trading partners reject informal cooperation and seek to tie up his plans in trade lawsuits.
5) The U.S. dollar must be kept continuously competitive — priced to help U.S. manufactured goods either in our home market or as exports in foreign markets. Republican Presidents Nixon and Reagan were acutely aware that the price of the dollar had a large effect on our trade deficits and thus negotiated the Smithsonian and Plaza Accords, respectively. But our trading partners soon reverted to their old currency-manipulating ways. The Trump administration must not hesitate to counter currency manipulation via active, continuous Treasury Department involvement in foreign exchange markets to keep American products competitively priced.
6) Trump must impose a Value-Added Tax of 18-20 percent applicable at the border to all imports. Over 150 of our trading partners use such taxes to make American exports pricier in their home markets. We should reciprocate. The great irony is that as succeeding rounds of trade talks have successfully cut tariffs, our trading partners have raised their VAT taxes in response, thus offsetting the tariff cuts. This is a place our trade negotiators have truly been asleep at the switch.
Additionally, on the campaign trail, Trump threatened to punish U.S. companies that move jobs abroad by imposing tariffs on them. The problem is that the competitors of these companies who have already gone overseas, or foreign companies, will remain free to send products made with cheap foreign labor into the U.S. market. Instituting a border VAT will create a big incentive to keep production here or move it here, by making the U.S. a more cost-effective place to manufacture.
Finally, as if all of these issues weren’t enough, President Trump will confront a marketplace wherein commercial cyber warfare has become an almost daily scourge. One example: U.S. Steel has filed a trade case against Chinese companies for stealing their technology for lighter, stronger steel products — and selling ripped-off, competing products in the U.S. market below the cost of manufacture. Thus, protection of intellectual property and trade secrets (especially in the defense arena) must be addressed decisively.
Time is short. The Trump administration must pursue trade enforcement remedies with a vengeance in cases like that of U.S. Steel. America possesses anti-dumping and countervailing duty laws that should be utilized as quickly as expedited trade investigations can allow.
Overall, a new job-creating trade policy is central to Trump’s success as president. He has promised repeatedly that jobs are going to come pouring home — and soon. If they do not materialize, he will forfeit a large portion of his credibility. Yet he faces a dual battle against the entrenched, 1-percent economic interests here and a global trading system rigged by the unfair trade practices of powerhouse, export-oriented economies in East Asia and Europe.
Trump already knows the global trading system is rigged against average working Americans. He has been speaking about the problem since the 1980s. He needs to adopt the above approaches quickly and act decisively in order to blow past his powerful antagonists, domestic and foreign, and bring jobs home.
The task will not be easy; restoring U.S. economic greatness will inevitably involve some amount of painful economic readjustment both at home and abroad. However, the pain is worth enduring because the American and global economies are in a state of advanced imbalance that cannot be sustained. The United States cannot absorb year after year of $800 billion goods trade deficits and remain the world's leading economy. The readjustment toll will be far less painful than a global economic collapse caused by growing trade imbalances.
It's a tricky ride, and one fraught with political and economic conflict. But it's a necessary one in order for President Trump to keep his promises, rebuild a preeminent U.S. economy, and create good jobs and a higher standard of living for all Americans.
Kevin L. Kearns is president of the U.S. Business & Industry Council, a national business organization advocating for domestic U.S. manufacturers since 1933.