President Trump has put aggressive trade policy at the center of his approach to the economy. No other economic subject has received such sustained presidential attention or generated so much controversy. This is problematic, however, as most economists agree that changes in trade policy are unlikely to have large effects on either employment growth or gross domestic product , and that liberalizing trade is likely to do more for U.S. prosperity than managing trade.
But take as a given the president’s mercantilist premise that the central priority of U.S. economic policy should be achieving more fairness in opening up markets around the world. Even given this dubious judgment about ends, the United States is proceeding in a remarkably unstrategic and ineffective way. Indeed, it is violating almost every strategic canon.
A first rule of strategy is to have well- defined objectives, so success can be judged and your negotiating partners are not confused about what you want. Is the United States’ primary objective to reduce its trade deficit overall, or just with particular countries? Is it to protect employment in politically sensitive sectors, such as steel and automobiles? Is it to stop commercial practices, such as joint- venture requirements, that unfairly penalize American companies doing business in foreign countries? Is it to gain more market access for U.S. companies regardless of how successful they are likely to be, as in the case of increased access for the U.S. auto industry to the Korean market?
From tweet to tweet, and senior official to senior official, it is impossible to know what this administration’s priorities are. When everything is presented as a top priority, as often seems the case, nothing can really be a top priority. No one can be confident that making concessions will resolve disputes. After all, in 2008, when China’s current account balance was approaching 10 percent of GDP, it was a central American priority to bring it down sharply. Today, it is running below 1.5 percent of GDP, and the United States is more truculent than ever toward China on trade.
A second rule of strategy is to unite your friends and divide your potential adversaries. The United States seems to be doing the opposite. Surely, China stands out as a competitor in terms of economic scale, rate of growth, extent of government economic intervention and prowess in cutting-edge areas such as artificial intelligence.
Yet, after alienating its Asian allies by pulling the plug on the Trans-Pacific Partnership, the United States enraged its Group of Seven allies by imposing tariffs on steel and aluminum, as well as by making further threats that have caused them to doubt U.S. commitment to the rule of law in global trade. As with the Obama administration’s disastrous shunning of the China-led Asian Infrastructure Investment Bank, the result has been to cause most of the rest of the world to take China’s side against the United States.
Decades of sustained efforts to foster a benign relationship with Mexico are also being squandered. The current U.S. approach to Mexico could hardly be better designed for the objective of electing a leftist radical as president in Mexico City.
A third rule of strategy is to use as leverage threats that are credible in the sense that carrying them out would hurt those you are negotiating with more than they will hurt you. “Stop, or I will shoot myself in the foot” is a singularly ineffective threat.
Steel tariffs fall into this category. The United States has fewer steelworkers than it has manicurists. The market value of the U.S. steel industry is less than 0.1 percent of the stock market. Yet steel is a key input into industries throughout the economy that employ about 50 times as many people as the steel industry does and compete internationally. By raising the price of steel, the United States hurts much more of its economy than it helps. Why does the White House think this counts as leverage against its competitors? Especially when, in all likelihood, these nations will retaliate in highly strategic ways, with international legal support, by limiting imports from key U.S. industries.
Trump’s trade policies will raise the prices that Americans pay for what they buy. They will reduce the competitiveness of the U.S. economy. They will succeed where our traditional adversaries have failed in uniting much of the rest of the world in opposition to us. They will reduce our legitimacy and power by demonstrating our lack of competence. The sooner they are radically revised, the better off the United States and the rest of the world will be.