Trump’s trade war will hurt everyone — the only question is how much

Historically, the United States has focused on staying out of trade wars. Not so under President Donald Trump, who last week announced plans to slap sweeping tariffs on steel and aluminum imports and asserted that trade wars are good and easy to win. (They are not.)

The case the White House is making is that the United States are necessary to protect vulnerable American industries and ultimately their effects won’t be that big of a deal. But there’s actually plenty of cause for concern. “Everybody, all economies, will be adversely affected, the only question is how much,” said Michael Froman, who was the United States Trade Representative under the Obama administration.

I spoke with Froman, currently a fellow at the Council on Foreign Relations who served in President Barack Obama’s cabinet from 2013 to 2017, about Trump’s Thursday proposal to put a 25 percent tariff on imports of steel and a 10 percent tariff on imports of aluminum. He that said the administration’s contention the tariffs are aimed at China are misguided and that Trump’s invocation of national security in its reasoning could open a “Pandora’s box” for other countries to do the same.

Froman, who was also a lead negotiator of the Trans-Pacific Partnership — the multinational trade agreement Trump abandoned soon after his inauguration — said that Trump is right to complain that some countries have higher tariffs and are more restrictive than the US. But implementing across-the-board tariffs while at the same time shunning regional trade agreements and criticizing the World Trade Organization isn’t the solution. “Trade agreements are how you shape globalization, how you level the playing field,” he said.

This interview has been edited and condensed for clarity.

Emily Stewart

What’s your initial reaction to Trump’s apparent decision on these tariffs?

Michael Froman

First of all, I think that the Trump administration is right to want to have a strong steel and aluminum sector in the United States, and I think they’re right to identify that there’s a global problem of overcapacity in steel and aluminum that needs to be dealt with. The question is whether this is the right tool and whether this is the right action to address those challenges.

Most of the unfair trading that’s going on in steel and aluminum is emanating from China, and this action does very little, if anything, to affect China. So instead, we’re hitting our closest allies and partners with a set of tariffs under the justification of national security, while the administration is making it more difficult for those allies and partners to work with us jointly to put pressure on China to reduce its excess capacity. We’re the ones who now look internationally isolated as opposed to the Chinese, which is where the attention of the global economy should be, because that’s where the distorting policies are taking place.

Emily Stewart

So you mentioned national security there, and I think that’s something that comes up a lot in this tariffs discussion but one that people don’t actually understand. What is the national security angle to all of this?

Michael Froman

They’re using Section 232, which is a trade law that says you can restrict imports if those imports pose a threat to national security. It has rarely been used — I believe the last time it was used was 30 years ago or so during Reagan administration, when we were losing our machine tool industry, and machine tools are critical in the manufacturing of precision manufactured products, including a whole range of defense products.

Here, the challenge is a bit trickier, because if you look at — take steel — the top five or six sources of our imports of steel are Canada, Germany, and Turkey, which are in NATO, Japan and South Korea, with whom we have a military alliance, and Mexico. The administration is conceivably arguing that imports from Canada are a threat to our national security. Of course, Canadian troops have fought next to American troops in wars all around the world. If we feel that Canada’s exports pose a threat to our national security, we probably have bigger problems than simply the issue of steel.

The national security exception is one that the US has traditionally, under both Democratic and Republican administrations, been very reluctant to use. In fact, we’ve tried to discourage other countries from using it because we know that you could be opening a Pandora’s box. If the US justifies protectionism under national security, what’s to stop every other country from saying, “Well, our food supply is really a national security issue, and therefore we want to restrict the imports of agricultural products from the United States and elsewhere.” That’s exactly the kind of protectionism under the guise of national security that we have discouraged others from pursuing.

Emily Stewart

Along those lines of what other countries might do, these tariffs have sparked conversation of retaliation out of Europe and other countries, and you have the president of the United States tweeting that trade wars are good and easy to win. But what does a trade war look like?

Michael Froman

A trade war can look like a series of escalatory steps of retaliation: the US imposes 25 percent tariffs on steel and 10 percent tariffs on aluminum; the countries that are affected then impose counter tariffs on products coming from the United States. Europe has talked about Harley Davidsons from Wisconsin, Kentucky bourbon, Levi’s. Other countries might retaliate against Boeing aircraft, or agricultural products — beef, pork, wheat, corn. So it could end up affecting a broad portion of the economy.

Then, as we saw over the last couple of days, the president might escalate it further and say, “Okay, if you retaliate against us, we’re going to keep your cars out of the United States.” And then there could be another cycle of retaliation against US actions.

That’s what a trade war looks like. The challenge is, I don’t know anybody who thinks that trade wars are something you win. Everybody, all economies, will be adversely affected, the only question is how much.

When you look at the history of trade wars, the effort has always been how do we get out of them, how do we deescalate, can we reach an agreement that leads to de-escalation? Because the costs become bigger and broader across the economy. This really is a challenge for any American administration — there’s always a temptation to adopt protectionist policies that provide protection for one sector for another — steelworkers, workers in the aluminum industry. But that comes with a series of costs.

First of all, the cost of the protection itself. The tariff is a tax on imports. Anybody using those imports as a factor in their production — the downstream industries, including the auto sector, the auto parts sector, the beer can manufacturers — they all have to absorb those costs and pass them onto consumers, making their products less competitive in the market. The consumers bear the costs. But then there are two other kinds of costs. One is the cost of retaliation, which goes way beyond steel and aluminum, whether it’s agricultural interests or other interests that other countries will be retaliating against. And then there’s a third layer, which is other countries imitating us and imposing protectionism for their own reasons because the US has opened door to that. We lose our moral high ground to discourage other countries from doing that. Once we’ve given up that position, it’s very hard to reestablish it.

That’s what you’re seeing in the markets and the commentary from across wide sectors of the business community — agriculture, manufacturing, services. It’s the uncertainty that this introduces into the global economy right now. Nobody knows how serious the costs will be. Nobody knows how much this will spread cross the economy.

Emily Stewart

If you had to go about this, and say, okay, Chinese steel dumping is a real problem, and we need to fix it, what would you do? How would you approach this?

Michael Froman

Over the last couple of years we succeeded in generating an international coalition of support — it was manifest at the G20 and other arenas —putting pressure on China to reduce overcapacity. And I think that is ultimately our best way of doing this, because if China doesn’t feel the need to reduce overcapacity, none of this is going to have a long-term impact. I would try to add as much teeth to that as possible but focus on putting global pressure on China — not just the US, but the EU, Japan, Brazil, India, Indonesia, other countries that are affected by China’s distorted policies and to keep that pressure on. My concern is that [Trump’s tariffs] would relieve some of that pressure and put the pressure instead on us rather than on where it belongs.

I would also use the enforcement tools that we have. In the last part of the Obama administration, we filed a WTO case on aluminum, and it was a very innovative, interesting case because it really targeted the heart of the problem, which is the state-owned banking system in China providing subsidized credit to the aluminum sector, which led to the development of overcapacity, depressing global prices and injuring our aluminum industry. The Trump administration has not followed up on that case, they have not pursued the case. It’s in the US’s court to pursue the case, and the US has not followed up. This administration has a critical view of the WTO, but I don’t think it makes a lot of sense not to use every tool at our disposal, and that tool has a legitimacy of the international system behind it.

Emily Stewart

So you bring up the WTO, which is likely to object to these tariffs. Trump has been critical of it, and his trade adviser, Peter Navarro, on Sunday criticized and said needed to change. He wouldn’t say if the US might even consider leaving the WTO. Can we do that? Is the criticism of the WTO fair?

Michael Froman

The WTO is not a perfect organization, and there are certainly areas where it could be updated and reformed. I think the Trump administration is correct in saying that the particular kind of challenge that China’s state capitalist model poses to the open rules-based trading system is one that the WTO isn’t as well suited as we would like to deal with. Having said that, it has been tremendously effective.

The US is the one that pushed the system we have now, with binding dispute settlement so we can impose tariffs on other countries, if necessary, if they fail to live up to their WTO obligations with the support of the international community. We’re the most active users of the dispute settlement system. In the Obama administration we brought 26 cases, 16 against China. We won every case that went to conclusion.

I think it’s shortsighted to take actions that undermine the WTO, recognizing that it’s hard to reform an international organization like that. Countries like China have a veto over major reforms, which is precisely why the United States, the EU, and others have pursued regional agreements that can achieve standards that are higher than the WTO. That was what the Trans-Pacific Partnership was all about, which, of course, President Trump withdrew the US from.

It’s a little tricky to argue that the WTO is inadequate but also then also withdraw from the antidote to that, which is using regional agreements to raise standards around the world that may not be achievable at the moment through the WTO itself.

Emily Stewart

To back out a little bit, Trump seems to have this understanding of trade as a zero-sum game, that it should really be about bilateral relationships, trade deficits are terrible, and the United States needs to win all of the time. How do you think about his approach to trade?

Michael Froman

Every legitimate economist will tell you that trade balances, and particularly bilateral trade balances, are not determined by trade policy per se — they’re determined by relative savings and investment rates, differential growth rates, various macroeconomic factors. Using the trade deficit as a measure of whether international economics is working for or against the United States lacks coherence. In fact, if you look at the actions that the Trump administration has taken, including the tax cut, including efforts to achieve 3 to 4 percent growth, those will all dramatically increase the trade deficit, so holding up the trade deficit as the main metric of economic policy may be counterproductive.

Having said that, to the degree that in a bilateral relationship there are either trade barriers preventing our exports from getting into those markets or unfair trade practices by the other country dumping products in our market, and if that’s reflected in some of the trade numbers, well those are legitimate areas of trade policy and should be addressed through all of the mechanisms — through negotiations, through enforcement, and the like. The president rightfully complains that other countries have higher barriers to their markets than we do to ours. But that’s precisely why something like the Trans-Pacific Partnership would have leveled the playing field, because other countries would have had to eliminate tariffs on Harley Davidson motorcycles, would have had to significantly reduce tariffs on our beef exports. And instead, other countries will get the benefits of that market access, and our producers won’t. I think it’s important to focus on the actions that can be taken to level the playing field and how best to achieve that.

The focus on bilateral trade agreements that the administration has, there is nothing wrong with bilateral trade agreements per se. But it does take two to tango, and right now, no other country is willing to engage with the US in that bilateral process other than perhaps the UK, which is not able to engage in negotiations until Brexit is complete. Other countries are watching how the administration is engaging in the renegotiation of NAFTA, and they don’t want to get involved in that process. Instead, they are moving ahead with their own regional agreements. The TPP countries are moving ahead without us to implement TPP, the EU is negotiating a raft of agreements around the world, Latin America is moving forward through the Pacific Alliance to deepen their integration. And other countries have decided just to move on without the United States. Ultimately, it will be American workers and farmers and ranchers and businesses that are adversely affected, because we’ll be on the sidelines while others are getting preferential access to each other’s markets.

Emily Stewart

With Trump withdrawing from the TPP, trying to renegotiate NAFTA, generally taking this sort of protectionist view of trade, how detrimental is this, looking ahead to the future? Are we giving up ground we can’t get back?

Michael Froman

Much of the harm that has been done is not irreparable. Just take TPP as an example, the other countries very much want the US to rejoin at some point in the future. So it would be possible to again achieve those gains that were negotiated there.

But I do think going forward there will be persistent questions about the reliability of American leadership that will make these kinds of initiatives more difficult. There will be concern whether other countries can trust the US to follow through on its commitments.

Historically, very little positive has been achieved internationally without US leadership. That sounds ethnocentric, but it is basically a fact. It’s not that we did it alone, we did it in concert with allies and partners, depending on the issue, but US leadership continues to be key to moving significant issues forward in the global system, and if that leadership is brought into question, as it currently is, it makes it much more difficult to address those challenges.

Emily Stewart

In the 2016 election, you had Bernie Sanders and Donald Trump sort of running on this anti-trade agenda, at least against the TPP, and you do have voters who think trade is the problem. Does trade have a messaging problem that the public doesn’t understand why free trade might be good?

Michael Froman

The concerns that Americans have about their economic well being are real and legitimate. They reflect stagnating wages and widening income inequality. Virtually all legitimate economists will tell you that 80 percent of the impact on wages and jobs is technology, but some portion certainly is globalization. It’s important not to conflate globalization and trade agreements. Globalization is a fact of life, it’s a reflection of the containerization of shipping, the spread of broadband, the integration of economies like China and Eastern Europe into the global trading system.

Trade agreements are how you shape globalization, how you level the playing field. Our economy is already very open — we have an average applied tariff of 1.5 percent, and we don’t use regulations as a disguised barrier to trade. We use trade agreements to get other countries to reduce their barriers. We use trade agreements to raise labor standards, raise environmental standards in other countries, both because that’s a good in and of itself but also as a way of leveling the playing field between our workers and our firms and the workers and firms they compete with around the world.

The challenge is that people have very legitimate economic concerns about living in a society that is going through rapid change. They don’t get to vote on technology. Nobody gets a vote on the next generation of software or robotics or artificial intelligence. They don’t really get to vote on globalization, that is just happening. What they do get to vote on is trade policy, and so trade becomes the vessel into which people pour their legitimate economic concerns. It becomes the scapegoat for other economic concerns.

That’s one reason I think it’s important that we pursue trade policy that really does address issues like labor rights and environmental protections, precisely to use trade agreements to level the playing field for our workers. But it’s also important that we focus on education, training, transition assistance, the kinds of domestic policies that address the concerns of people living in a rapidly changing economy. We don’t do a particularly good job in this country of preparing people to succeed in rapidly changing economy or to help people or communities who are adversely affected by change, whether that change is coming from technology, or immigration, or globalization.

It is remarkable that after 2016 election that there is so little discussion going on in our political system, in Congress and within the executive, about those issues. What are we doing to help address those issues, which are important regardless of trade policy? They’re important because of the advances in technology, if nothing else.