Trump’s Trade

President Trump has made headlines recently, with his bombastic trade rhetoric drawing the ire of allies and adversaries on the world stage. Specifically, he has called the North American Free Trade Agreement (NAFTA) “the worst trade deal ever.” This deal, signed three decades ago, reduces tariffs and regulations on produce traded between Canada, the U.S., and Mexico. Outside of the headlines, the Trump Administration has battled nations from South Korea to the tiny African state of Rwanda to, in his words, put America first.

Trump’s main gripe concerning trade is that the U.S. has a trade deficit—it imports more goods than it exports. Imports are goods crossing from other countries into the U.S., and exports are goods or services that the U.S. sends to other nations. Tariffs tax these imports, with the intent of reducing them. The idea behind this is that if goods from another nation become more expensive, people will decide to buy locally produced goods instead. Local workers would be required to produce those goods, creating jobs.

But as many have noted previously, these aggressive trade policies can hurt America both economically and politically. Tariffs translate into higher prices for consumers and manufacturers of goods. If a tariff is placed on steel (as President Trump did earlier this year), then the price of steel increases. As a result, the price of making cars in America increases, and so the price of purchasing a car increases. People might buy fewer cars, and car manufacturers in the U.S. could lose their jobs due to decreased demand.

Another aspect is the issue of trust. When America presents other nations with ultimatums or tries to force them into lowering exports, they become more suspicious of the U.S. These trade relationships with other countries, especially allies, are important. Last year, the U.S. exported $2.4 trillion worth of goods and services to other nations while importing $2.9 trillion, a shortfall that is hardly overwhelming.

Having a trade deficit is to be expected for a population that has immense purchasing power, like that of the U.S. The trade deficit is also not necessarily a bad thing. Sometimes, there are imported goods that cannot be replaced by domestic production. For example, 80 percent of U.S. guacamole is imported from Mexico, a demand that could not be replaced by production from within the U.S. Raw parts for constructions like cars, airplanes, and buildings are often cheaper abroad, and using imported goods lowers the final cost for consumers.

That is not to say that protective tariffs are always detrimental. Protective trade measures in response to unfair action by other nations can be reasonable. For instance, President Obama raised steel tariffs on China by a whopping 500 percent in 2016 in response to China “dumping” massive amounts of steel into the U.S. market.

In this respect, an aggressive trade stance toward China, as the president has displayed so far, could be beneficial. According to a report by Commission on the Theft of American Intellectual Property, the U.S. loses between $225 and $600 billion in intellectual property (IP) yearly, with China accounting for the large majority of those losses. To avoid eye-watering tariffs, many American companies are forced to “partner up” with Chinese firms when selling in China, which often results in the transfer of IP to their Chinese counterparts.

Another more illegal method of IP theft comes from state-sponsored hacking of U.S. corporate secrets, despite an agreement signed in 2015 to prevent that kind of activity. China enacted a new law in 2017 allowing security reviews of tech-related products and services that impact China’s “national security,” a vague definition which regulators in China will likely exploit. This hacking costs the U.S. about $400 billion yearly, according to an estimate by the Office of the Director of National Intelligence.

In an aggressive trade policy, China subsidizes its exports while using tariffs to block imports, a policy that has hurt U.S. manufacturing jobs. Recently, it was forced to decrease subsidies on a wide variety of exports by the World Trade Organization. According to data from The New York Times, America’s average import tariff is just nine percent, among the lowest in the world, whereas China’s is 27 percent. All of this is part of China’s broader economic policy to push exports and limit imports in pursuit of breakneck economic growth, often at the cost of U.S. jobs and environmental conditions in China.

Yet, it appears unlikely that raising tariffs in response to Chinese abuse would lead to a trade war. A trade war would have to be started by China, which knows the risks of provoking one. 3.1 percent of China’s GDP (the total size of a nation’s economy) relies on trade with the U.S., compared to 0.7 percent for U.S. reliance on China. In a serious trade war, China would run out of items to put tariffs on fairly quickly, whereas the U.S. would have no such problem.

Tariffs, bombastic language, and Twitter are all very dangerous tools that President Trump has misused in the past. However, if used properly, they can right wrongs and ensure that trade is conducted in a more fair and equitable manner.