Candidate Donald Trump was not an unquestioned free trader. While he harped on China frequently, and Mexico and NAFTA considerably, he claimed he wasn’t against free trade as long as it was fair trade. I have hoped that he would fulfill his promises to recover manufacturing job losses in America’s midwestern Rust Belt with major tax reform and removing regulations. Cutting corporate taxes from 35 to 15 per cent, cutting capital gains taxes and immediate expensing rather than long-term depreciation would do a lot to make U.S. businesses competitive and profitable. But several of the cabinet choices Trump has made are concerning for free traders.
His selection of Robert Lighthizer as U.S. Trade Representative is a case in point. While he was a deputy trade representative for Reagan, he is quick to point out that Reagan used voluntary trade restraint agreements and temporary tariffs several times during his administration, especially regarding autos and steel.
On the other hand, I would point out that one factor that favours free trade is competition to keep domestic producers innovating. In the ’80s, Detroit automakers were still trying to catch up to the German and Japanese quality standards revealed by the gasoline crisis of 1973. U.S. automakers had fallen decades behind while protected from foreign competition.
Writing in both 2008 and 2011, Lighthizer spent considerable time holding the position that being an American conservative does not mean that one had to be a free trader. He points out that the Republican party was the party of protective tariffs for many decades. However, he doesn’t touch on the rest of the history — that the southern farmers and planters resented the northern bankers, traders and merchants from colonial days because they needed export markets and had to trade for manufactured goods imported through New England’s traders. That divide continued through to the Reagan years, with the “solid South” Democrat and needing agricultural trade.
The U.S. federal government was funded primarily for the first 130 years by excise taxes on imports, before the income tax was invented. I doubt the U.S. wants to go back to those days, even though we hate income tax.
Much of Lighthizer’s beef with free trade has to do with China’s non-compliance with trade rules, management of their currency and theft of intellectual property. Yet he mentioned the House of Representatives passage of a bill in 2010 to expand the president’s ability to impose tariffs. In 2016, Congress passed a customs enforcement bill further expanding the president’s ability to impose temporary tariffs to bolster rule enforcement.
If China has been abusing rules for years, my question is, why has neither Republican nor Democrat presidents used the tools they have to do something about it? Why bash all trade because of one trading partner that brings both good and bad to the relationship? Why bash NAFTA if the U.S.’s taxes and regulations make it difficult for American manufacturers to make a profit and Mexico has FTAs with twice the countries the U.S. has?
By some chance, Peter Navarro was the first economist with whom I disagreed viscerally, and it was on the subject of free trade. I bought some of his CDs expecting educational information. Instead what I got was a dose of protectionist theory. Trump nominated Navarro to head his National Trade Council, a new position.
When Trump was proposing 45 per cent tariffs on Chinese goods last July, Navarro wrote that the 45 figure was about right. Navarro’s research shows China’s cheaper labour advantage accounts for about 39 per cent of China’s price advantage. But surprisingly, five other factors Navarro examined — illegal export subsidies, currency manipulation, intellectual property theft, and lax worker safety and environmental regulations add only 4.5 more points to China’s advantage. So Navarro said Trump’s 45 per cent was very close to his 43.5 per cent.
Treasury Secretary nominee and Goldman Sachs alumni Steven Mnuchin has broad experience as a financier but not much history regarding trade. He did say trade pact reform would be a priority but I’m guessing tax reform, removing Wall Street regulation and jump-starting the general economy would command more of his attention.
Commerce Secretary Wilbur Ross could be a moderating factor in cabinet trade debates. Many years ago he used a protective tariff against Chinese steel to make a fortune. But he is a great admirer of Chinese culture and art. He has been a partner in joint ventures with state-owned Chinese companies. He characterized China bashing as “overblown” in 2012. He supported the TPP in 2015. Then he joined Trump’s camp and changed his tone. He co-authored a white paper recently with Peter Navarro.
Gary Huffbauer, noted economist with the Peterson Institute for International Economics, said it is hard to “find a consistent pattern on trade among Trump’s economic team.” Those contradictory stances and past history provide some optimism for trade proponents. Also, there are informal free trade advisers in Trump’s camp plus other appointments with trade influence yet to be made as of our deadline.