Perspective on Multilateral Trade Deals and Trade Wars

President Trump’s intention to impose tariffs on imported steel and aluminum caused ripples on Wall Street, outcries from companies that depend on global supply chains and warnings from economists who cited the cost of trade wars.

President Trump’s intention to impose tariffs on imported steel and aluminum caused ripples on Wall Street, outcries from companies that depend on global supply chains and warnings from economists who cited the cost of trade wars.

President Trump’s threat to impose a 25 percent tariff on steel imports and 10 percent on aluminum imports stunned Wall Street, infuriated US international trading partners and confounded economists.

Trump defended his proposed tariffs as campaign promises he intends to keep. More fundamentally, they reflect his view that bilateral trade deals that his administration would negotiate would be better for Americans than multilateral trade pacts, which he has deplored as unfair to US workers. So far, few nations have shown much interest in bilateral trade deals. The United States and a post-Brexit United Kingdom will need to work out bilateral trade arrangements, but that can’t occur until the UK is officially out of the European Union.

Stunned Wall Street investors worry about the ripple effects of a trade war on the broader US economy. International trading partners are contemplating retaliation. Economists point to the unpleasant history of trade wars. Trump says trade wars can be good and winnable.

Like immigrant bans and border walls, unilateral tariffs have gone out of favor in the globalized economy. Since tariffs levied as a cure to the Great Depression, which in actuality deepened and lengthened the depression, industrialized nations have moved toward multilateral military, diplomatic and trade arrangements. NATO, the United Nations, the European Union and the North American Free Trade Agreement are prime examples.

The motivation for multilateral arrangements is to provide for greater security and enhanced economic opportunity at the expense of some domestic industries and workers. The underlying macroeconomic theory is that allowing countries to realize their competitive advantages on a greater scale will create more prosperity than protecting domestic markets. The winners tend to be consumers and global companies that have clear rules to follow for their international supply chains. The losers are industries and economic sectors that can’t compete globally.

The losses are not insignificant and can be enormously destructive in regional or state economies such as the Rust Belt. Politicians and organized labor have responded to abandoned factories, displaced workers and failing farms by blaming “free trade” and taking aim at NAFTA and the proposed Trans-Pacific Partnership, which was intended to connect US economic interests into an Asian Pacific trading community.

Even though Trump withdrew from the TPP, the other 11 nations involved have continued to pursue a trade pact among themselves, for among other reasons self-protection against China’s growing economic power and its interest in pursuing separate trade deals with Japan, Indian and South Korea. European nations created an economic union, including a common currency, to leverage their collective market in the face of a dominating US economy, which now boasts a $17 trillion annual gross domestic product.

Along the way, the globalization of finance overwhelmed global trade in goods. Capital sloshes across national borders thanks to creative finance and the advent of shell companies, almost without regard to national banking regulations or tax policy.

One of the largest ironies in the current trade dispute is that China’s excess capacity in steel and aluminum production has driven down prices globally, as China has until recently encouraged its corporations and wealthy individuals to invest billions in overseas businesses and real estate. Lower prices and a stream of investment capital have fueled economic growth from Africa to America.

The United Kingdom’s vote in 2016 to exit the European Union a year from now has revealed how difficult it is to depart from a multinational economic arrangement. Currency exchange restrictions, foreign worker status, border crossings and trade are complex issues and, depending on final Brexit agreements, could crimp international investment in the UK, discourage immigrant labor and require a hard border with Ireland.

Trump officials say US steel and aluminum producers need protection because they are vital to American security interests, which is akin to developing countries defending tariffs to protect their infant industries. One challenge with selective tariffs is they have a habit of spreading. For example, Trump threatened to impose tariffs on European autos if the EU retaliated to his steel and aluminum exports.

Former US trade officials say the Trump tariffs violate international trade agreements and lead to litigation before the World Trade Organization. Trump might consider withdrawing from the 160-member WTO, but trade officials warn that could risk unraveling the global economic order, which dates back to the 1994 General Agreement on Tariffs and Trade. One of the GATT principles is preventing countries with excess capacity in a commodity from dumping products on the international market at below cost. Some have argued the United States should pursue an anti-dumping case against China. U.S. Steel argued for that approach as far back as 2016.

Trump’s call for tariffs surprised Republican leaders on Capitol Hill. Over the weekend on Face the Nation, South Carolina GOP Senator Lindsey Graham said Trump should reconsider imposing tariffs because they raise consumer prices and “let China off the hook.” “China wins when we fight with Europe. China wins when the American consumer has higher prices because of tariffs that don't affect Chinese behavior. If you want to affect China get back in the Trans-Pacific Partnership, be present in Asia, hit them on intellectual property theft, hit them on currency manipulation, hit them about steel dumping. China is winning and we're losing with this tariff regime.”