Gary Cohn had one of the toughest jobs in Washington: restraining an impulsive president from waging a trade war he’s been itching to fight. Now that Cohn is leaving as director of Trump’s National Economic Council, the way is clear for the president to slap hefty tariffs on steel and aluminum imports from around the world. Trump also has a freer hand to punish China for its alleged theft of intellectual property. The U.S. is weighing restrictions on Chinese investments and tariffs on a broad range of Chinese imports, people familiar with the matter told Bloomberg News on March 6.
Trump and the nationalists who have his ear, such as Commerce Secretary Wilbur Ross and trade adviser Peter Navarro, have a point. The U.S. steel and aluminum industries really have been devastated by unfair Chinese competition. China has begun closing some of its steel mills under international pressure, but its production capacity remains twice as high as it was in 2006, the year the country issued the State Council Notice Promoting Structural Adjustment for Overcapacity. The pattern with aluminum is similar.
Trump and his advisers are also correct that economic strength is a matter of national security—and that right now China plays that game much more effectively than the U.S. does. China routinely forces foreign companies to turn over their intellectual property—the crown jewels of any corporation—as the price for doing business in the country. The Made in China 2025 project aims to develop domestic sources for a wide array of advanced technologies, something that would reduce its dependence on potential adversaries such as the U.S. and Japan. The 2018 National Defense Strategy document prepared by the Pentagon accuses China and Russia of “undermining the international order from within.”
It’s important to credit Trump on these points, because a lot of commentators have dismissed his promise of metals tariffs as nothing more than a play for votes or an eruption of machismo. They may be that, but they’re not only that. None other than Michael Froman, who was President Obama’s chief trade negotiator and is no friend of Trump’s, said on Feb. 5: “It is in our national interest to have a strong steel and aluminum industry domestically.”
The tragedy is that Trump has made the U.S., rather than China, the focus of the world’s opprobrium. Citing national security as a justification for the metals tariffs will give other countries the excuse to do the same, tearing a hole in the delicate web of trade agreements the U.S. spent decades spinning. And applying the tariffs to all countries, as he has threatened to do, weakens the united front of American trading partners that’s needed to confront China and get it to change its behavior. “This will be seen as the latest, and one of the more significant, signals that the U.S. under Trump is not a reliable economic partner,” says Roland Rajah at the Lowy Institute, a Sydney-based think tank.
As critics are fond of pointing out, China is the 11th-biggest seller of steel to the U.S. and comes in fourth in selling America aluminum. The Trump tariffs are a serious risk for about “zero percent” of the Chinese economy, Bloomberg Economics analyst Tom Orlik wrote on March 1. Far more affected will be Canada, the No. 1 exporter to the U.S. of both metals.
Suddenly we’re discussing possible trade wars between the U.S. and some of its most reliable allies. European Commission President Jean-Claude Juncker adopted some of Trump’s bravado in a talk in Germany on March 2. “We will now impose tariffs on motorcycles, Harley-Davidson, on blue jeans, Levi’s, on bourbon. We can also do stupid. We also have to be this stupid,” the European Union’s highest-ranking official said. The headline in London’s City A.M. riffed on the song American Pie: “Hit the Chevy with a Levy, Tax Your Whiskey Rye.”
Trump, of course, fired back on Twitter that if Europe retaliated, the U.S. would counterretaliate with tariffs on auto imports. On Feb. 5, Trump tweeted that he might exempt Canada and Mexico if they sign a “new fair” North American Free Trade Agreement. That, unfortunately, undercut his argument that the tariffs were necessary for national security.
The spectacle of Western leaders attempting to out-stupid each other plays into China’s hands and may explain why its officials have stayed relatively quiet. Liu He, a high-level emissary of President Xi Jinping, kept a low profile on a visit to Washington, calling for cooperation. As Napoleon is supposed to have said: Never interrupt an opponent who is making a wrong decision.
The reason Trump keeps attacking allies over trade is that despite the best efforts of globalist advisers such as Cohn, he continues to regard trade with a Game of Thrones mindset, as a war in which one side must lose. Exports are good and imports are bad in Trumponomics, and a trade deficit is prima facie evidence that the other side has acted in bad faith.
Whoever taught Trump undergraduate economics at Wharton must be aghast. In fact, both sides win in an international transaction, or they wouldn’t do the deal. What’s more, it’s routine for countries to have surpluses with some trading partners and deficits with others—just as a head of household has “trade deficits” with her supermarket, doctor, and dentist and a “trade surplus” with her employer.
To be sure, though a deficit with any particular country isn’t a sign of trouble, it isn’t healthy for the U.S. to have persistent deficits with the world as a whole. Better trade deals could narrow them by breaking down barriers to exports of world-leading U.S. goods and services. Trump is right about that.
But America’s trade deficits also reflect the country’s failure to save enough money to finance needed investments in factories, housing, roads, etc. The trade deficit is the statistical companion of the savings shortfall: The U.S. is borrowing to finance its consumption instead of paying for imports with exports. On that score, things are getting worse. The Tax Cuts and Jobs Act that Trump triumphantly signed at the end of 2017 will increase the federal budget deficit, which in turn will worsen the national savings shortfall and cause the trade deficit to get bigger, economists say. Like identical twins, the budget and trade deficits come from “the same zygote,” said the headline of a JPMorgan Chase Co. research note on March 2.
By invoking national security under the rarely used Section 232 of the Trade Expansion Act of 1962, the U.S. is setting a precedent for skirting the World Trade Organization’s procedures. The WTO is slow and not always effective, but if countries begin to ignore it and start using high tariffs and quotas against one another, global trade growth could shudder to a halt. That would harm everyone.
“National security has been kind of reserved, as it should be, for special circumstances,” says Nicole Lamb-Hale, who was assistant secretary of commerce for manufacturing and services in the Obama administration. “Other countries will say, ‘The United States did it, so we can do it, too,’ ” says Lamb-Hale, a managing director at Kroll Inc., an investigations and security company.
The idea that the U.S. would need to ramp up metal production to replace ships, tanks, and planes destroyed in battle is World War II-style thinking, says Jeff Bialos, a partner in the law firm Eversheds Sutherland in Washington, who was a deputy undersecretary of defense in the Clinton administration. “Now it’s qualitative superiority, not quantitative superiority,” he says. “We fight wars today with what we have” when the shooting starts.
Aixtron SE to Chinese-controlled Grand Chip Investment GmbH by blocking the acquisition of its U.S. branch. In September, EC President Juncker proposed an EU-wide system for screening incoming direct investment. Last year, Australia ordered the compilation of a registry of key assets to provide regulators with more information when deciding whether deals raise national security concerns. It was surprised when a Chinese investor negotiated directly with the government of the Northern Territory to capture a 99-year lease for the port of Darwin, which is next to a large contingent of U.S. Marines.
Now the U.S. is in danger of losing the moral high ground on trade and investment. Daniel Rosenthal, co-chairman of Kroll’s advisory practice on the Committee on Foreign Investment in the U.S. (CFIUS), says the U.S. has been hammering China for years for using national security as a pretext. Says Rosenthal: “We significantly degrade our argument, because now we’re doing what they’re doing.” —With Enda Curran, Andrew Mayeda, and Joe Deaux