World Economy

Trump’s Trade Gimmickry

US President Donald Trump makes  an announcement of tariffs at the  White House on March 8.US President Donald Trump makes  an announcement of tariffs at the  White House on March 8.

US President Donald Trump’s bark on trade policy has so far been far worse than his bite. But this may be changing. In January, he raised tariffs on imported washing machines and solar cells. Now, he has ordered steep tariffs on imported steel and aluminum (25% and 10%, respectively), basing the move on a rarely used national-security exception to World Trade Organization rules.

Many commentators have overreacted to the possibility of tariffs, predicting a “trade war” and worse. One expert called the steel and aluminum tariffs the most significant trade restrictions since 1971, when President Richard M. Nixon imposed a 10% import surcharge in response to the US trade deficit, and predicted that, “It will have huge consequences for the global trading order,” Nikkei reported.

The Wall Street Journal wrote that Trump’s tariffs were the “biggest policy blunder of his presidency”—a remarkable claim in light of the administration’s missteps over Russia, the FBI, North Korea, immigration, taxation, white nationalism and much else.

The reality is that Trump’s trade measures to date amount to small potatoes. In particular, they pale in comparison to the scale and scope of the protectionist policies of president Ronald Reagan’s administration in the 1980s. Reagan raised tariffs and tightened restrictions on a wide range of industries, including textiles, automobiles, motorcycles, steel, lumber, sugar and electronics.

He famously pressured Japan to accept “voluntary” restraints on car exports. He imposed 100% tariffs on selected Japanese electronics products when Japan allegedly failed to keep exported microchip prices high.

Just as Trump’s policies violate the spirit, if not the letter, of today’s trade agreements, Reagan’s trade restrictions exploited loopholes in existing arrangements. They were such a departure from prevailing practices that fear of a “new protectionism” became widespread. “There is great danger that the system will break down,” one trade lawyer wrote, “or that it will collapse in a grim replay of the 1930s.”

Those warnings proved alarmist. The world economy was not much affected by the temporary reversal during the 1980s of the trend toward trade liberalization. In fact, it may even have benefited. Reagan’s protectionism acted as a safety valve that let off political steam, thereby preventing greater disruptions.

And once the US macroeconomy improved, the pace of globalization accelerated significantly. The North American Free Trade Agreement, the World Trade Organization (which explicitly banned the “voluntary” export restraints used by Reagan), and China’s export boom all followed in the 1990s, as did the removal of remaining restrictions on cross-border finance.

But it is in the domestic arena that the bulk of the work needs to be done. Repairing the domestic social contract requires a range of social, taxation, and innovation policies to lay the groundwork for a 21st century version of the New Deal.

But with his corporate tax cuts and deregulation, Trump is moving in the opposite direction. Sooner or later, the disastrous nature of Trump’s domestic agenda will become evident even to his voters. At that point, an old-fashioned trade war may seem irresistible, to provide distraction and political cover.

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