Here's How Donald Trump Can Win a Trade War With China
There are few issues that raised the hackles of mainstream economists in 2016 more than Donald Trump’s all-out attack on U.S. trade policy.
Economists on both sides of the aisle assailed Trump’s threats to raise tariffs and to pull out of trade agreements like NAFTA. Trump says the free trade deal with Canada and Mexico harms U.S. workers.
Mark Zandi of Moody’s Analytics and former John McCain advisor, for one, predicted that if Trump went through with threats to institute 45% and 35% tariffs on goods from China and Mexico, respectively, it could help trigger a trade war and a recession longer than the one we experienced in 2008 and 2009.
But like any economic forecast, Zandi’s and other economists foreboding outlooks make a number of assumptions. How will our trade partners will retaliate, if at all, to the threat or initiation of protectionist tariffs or other measures on them, or others? Who knows?
In the past year, there’s been plenty of people warning that the answer is a trade war and that that would be terrible for the U.S. But its also a possibility that protectionism just might cause our most important trade partners to adjust their policies to America’s benefit.
In fact, before the George W. Bush Administration, Republican White Houses were not afraid to threaten tariffs to cajole trade partners into changing policy in ways that helped American workers. A prime example is the Reagan Administration’s Plaza Accords, a 1985 agreement between the United States, France, Germany, Japan, and the United Kingdom to intervene in currency markets in order to bring about the devaluation of the dollar relative to the Japanese yen and German Deutsche Mark.
According to Fred Bergsten of the Peterson Institute for International Economics, the accord was successful in part because the United States Congress had been threatening stiff protectionist measures against Japan. The threat of higher tariffs or trade quotas brought our trading partners to the table, making them willing to accept changes in the exchange rates that would be detrimental to employment in their own countries in an effort to avoid the U.S. instituting policies that would even more harmful.
Robert Scott, an economist with the Economic Policy Institute concurs that the “threat of broad-based tariffs” was essential to success in the Plaza Accords, and also points out that the most successful exchange-rate negotiation prior to the Plaza Accords was the Smithsonian Agreement when, in 1971, President Nixon forced American trade partners to allow dollar depreciation, instituting a 10% import surcharge to force them to the negotiating table.
The Trump administration appears to be taking a similar tack as these Republican presidents before him. He promoted his skills as a negotiator during his presidential campaign, and has argued that a trade war with partners like China will be avoided because we have necessary leverage over them.
The statistics that back up. The United States is the destination of 18% of all Chinese exports, while China accounts for just 7% of American exports. The United States is much wealthier than China, too, meaning that it has more resources to suffer through any slowdown that may result from a trade war.
What’s more, it has been the explicit goal of China’s leadership to reduce its trade deficit. That hasn’t happened because of the political power of China’s large exporting firms. But Trump’s threats of large tariffs may actually be, perhaps privately, welcomed by some reformers in China. It could force China to through policies that would help the country rebalance.
The EPI’s Scott says that needed reforms in countries with large trade surpluses (like China, Germany, and Japan) include allowing for currency appreciation, the removal of state subsidies for business that enable firms to sell goods at below cost, and the institution of policies that would raise wages and lower savings rates in surplus countries.
It’s quite possible that President Trump will fail to achieve these results. The trade policies maintained by countries like Germany, China, and Japan are done so for good reasons, and those countries have their own complicated politics that will greatly influence their ability to negotiate. But as the richest country in the world and massive export destination, the U.S. has both the leverage and responsibility to reform global trade, and to lead the global system of trade into a place of greater balance.