Trump and Trade – What’s the deal?

By Pedro Sousa

“President of the United States of America, Donald Trump” is a sentence that would have drawn plenty of laughs a year ago. Surprise, surprise, a year later, Trump is the President of the United States of America. With that comes a confusing, unclear, and, considered by most, dangerous economic policy plan. Including threats of protectionism and economic nationalism on trade issues.

Trade was a huge issue in this campaign. The US has been lobbying for trade liberalisation for decades, but if you followed the 2016 election you saw that this year has marked a departure from this pattern. Mainly because the majority of Americans now seem to be against what they perceive are harmful free trade agreements. Jeffrey Sachs, Professor at Columbia University, defends one can believe in expanded international trade, but oppose TPP and TTIP, because gains from trade deals are not, and haven’t been, shared broadly across the society. Cue in a significant part of the population, frustrated with job loss and income loss and inequality.

Trump saw that and used it in his rhetoric against the political establishment. It struck gold in the economically anxious blue collar America. Unemployment, underemployment, job precarity, and a profound frustration towards the Washington politics, fueled the Trump campaign engine. The rise of anti-establishment parties and candidates has been observed also in Europe, case in point, UKIP and its role in Brexit, Marine Le Pen in France, 5 Star Movement in Italy, among other examples.

Trump’s proposals on international trade, if implemented, could unleash what many see as a trade war with Mexico, China, and other nations. These trade threats include ripping up existing trade agreements, renegotiating the North American Free Trade Agreement (NAFTA), and imposing a 35% tariff on imports from Mexico and a 45% tariff on imports from China.

One would think that enacting these measures would be almost impossible to pass through the US Congress. You might want to rethink that. Legally, there might be a way to force these unusual measures on trade. A President Trump could unilaterally deliver on them.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics (PIIE), has recently argued that there is scope for a US president to unilaterally raise tariffs. Hufbauer’s law degree, doctorate in economics, and experience as a former deputy assistant secretary for international trade and investment policy at the Treasury Department under President Carter, gives him credibility to put this topic up for debate.

Hufbauer contends that Trump’s threats to raise tariffs and to withdraw from trade agreements are amply supported by existing statutes and Americans cannot count on the courts or Congress to deter Trump from carrying out trade threats. This may seem surprising, given that the US Constitution explicitly gives Congress the power to regulate Commerce with foreign nations – Article I Section 8. But over the years Congress has delegated much of that power to the president. Getting back the powers back would be hard.

These powers, delegated through old laws, are meant to be used only in national emergencies or times of war. Originally written to give the president the tools to inflict economic sanctions on America’s enemies. These laws are supposed to be exercised only in the wake of an unusual and extraordinary threat, however, Hufbauer suggests that this is a standard that is easily met, and the courts have never questioned presidential declarations of a national emergency. Beyond these emergency powers, the president can raise tariffs as necessary to strengthen national security. Trump could, in theory, use a broad interpretation of reality for raising tariffs against Mexico or China.

The laws that Hufbauer is talking about include the Trading with the Enemy Act of 1917, the Reciprocal Trade Agreements Act of 1934, the Trade Expansion Act of 1962, the Trade Act of 1974 and the International Emergency Economic Powers Act of 1977. Even NAFTA, which Trump loves to mention, allows its members (the United States, Canada and Mexico) to withdraw with six months’ notice. There are similar provisions in other free-trade agreements (FTAs) that the United States has with 18 countries, including Colombia and South Korea.

Domestically, he would face the anger of big agricultural and industrial exporters, who would rush to seek a temporary injunction pending the outcome of a trial. With their businesses hurting, they would fight to defend that it is up for the US Congress to decide on fundamental changes in trade policy. Thing is, any effort to block Trump’s actions through the courts would be difficult, costly, and time-consuming.

Other legal experts have calmed the waters down, basically defending that the room for such unilateral presidential action is limited. Moreover, if Trump were to use that room, the constitutional mess would be unbearable for the former reality TV personality. The reasoning is that if Trump would invoke statutes in such a contentious manner to pursuit his purposes, Trump would have to more worried about other things, other than trade.

In truth, all this talk may simply be Trump bluffing to win votes and to improve his bargaining position with other countries, no doubt. But if threats turn into actual trade restrictions, the US can expect retaliation from other countries – meaning raising their own tariffs – which would create legal battles in the WTO. Retaliations in some parts of the world, China in particular, would derail the global recovery. This scares many economists, but appears not to worry Trump.

Trump has won the US presidency, so there is a possibility of a change of mind and of rhetoric on trade and many other issues. After all, he has changed on policy stances and views many times. But the loopholes are there and with so many different legal rationales, it seems almost certain that a Trump presidency means a more isolated American economy.

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