by Paul Dietrich, CEO Fairfax Global Markets, September 3. 2018
On Wall Street, you always hear traders saying there is an “arbitrage profit” to be made between what President Trump “says” vs. “what he ends up doing.”
Cynics in Washington DC believe that Trump abruptly announced that he was ordering 25% tariffs on all steel and 10% tariffs on all aluminum imported into the United States on June 14, 2018, as a way to shoot a “symbolic shot across the bow” to all of our world trading partners.
WTO Slow-Moving Bureaucracy!
Trump is frustrated with the World Trade Organization (WTO). For decades the US has formally protested unfair trade practices on steel and technology by China and unfair automobile and agricultural tariffs by Japan, Canada and Europe. They have languished in the WTO bureaucratic committees for decades and NOTHING EVER GETS DONE.
Under WTO rules, the “National Security Tariff” can be imposed on another country immediately. However, it is supposed to only be used in times of war or when there is a direct threat to the country. Trump is arguing that a nation can determine on its own what is a national security threat. This argument would essentially allow any country to erect trade barriers whenever it wanted. George Bush tried this in 2002 and the WTO eventually ruled it illegal.
But this tactic gives Trump an advantage. He can impose the tariffs immediately and then force the other countries to go through the burdensome WTO process and years from now the WTO will rule what Trump has done is illegal.
The bottom line is that Trump will force China, Japan, Canada and Europe into serious negotiations now to avert an all-out trade war.
Trump is using this National Security provision to force other countries to negotiate now and outside of the slow-moving bureaucracy of the WTO.
Here Is The Real Issue:
For years, Trump has felt that other countries were treating America unfairly on trade issues. He is not completely wrong!
In the US, we have the lowest tariffs in the world, and we also have the lowest non-tariff barriers in the world.
If one compares trade as a percentage of GDP, the US has the lowest percentage of the seven largest advanced economies according to the World Bank. That means the other largest economies would be hit harder by a trade war than the US.
Trump’s advisors have also made the tactical determination that having a short-term trade war in a booming economy is the best timing for the US to force other countries to lower their tariffs and stop cheating.
This injustice of high tariffs and global trade cheating has been a major reason for U.S. manufacturing jobs moving offshore.
The Free Trade Globalists (traditional Republicans) who are for free trade and low global tariffs have been reluctant to use the immense trading power of the US government and US economy to punish countries that break the rules or directly hurt US companies. They have taken a somewhat “amoral” position of “global trade Darwinism,” where the strongest survive, even if other countries are “tipping the scale in their favor.”
Why This Is Important?
Unfortunately, the workers and companies who have been decimated by these “free trade policies and out-right cheating” and who have loss good-paying jobs and have faced factory closures were the victims who became the political underpinnings of Trump’s presidential victory.
They are no longer silent victims, and they now have to be reckoned with by Democrats and Republicans alike.
It is impossible to underestimate the hatred and patronizing feelings felt by victims of “global trade Darwinism” when they hear elite Free Trade Globalists express their amoral argument that “whatever will be, will be.”
The Fair-Trade Nativists/Protectionists (the Bannon Republicans and the Warren/Sanders Progressive Democrats) believe that every American job should be protected against foreign competition, no matter what it cost the American consumer in higher costs and trade wars around the world. This attitude was behind the Smoot Hawley Tariff Act in the 1930’s that deepened the Great Depression and initiated a worldwide depression.
Is It Possible To Be A Free Trader And Still Fight For Fair Trade?
The answer is YES!
It is imperative that the Free-Trade Globalists actively and persuasively take up the cause of those workers and companies unfairly hurt by the unfair trade policies of other countries. Free traders can no longer sit on the sidelines and silently do nothing against other countries unfair trade practices.
The Dorn-Hanson study in 2016 concluded that roughly 40% of the decline in US manufacturing between 2000 and 2007 was due to a surge in imports from China primarily after it joined the World Trade Organization (WTO), which led to the sudden loss of one million factory jobs in Ohio, Michigan, Wisconsin and Pennsylvania. The unfair trade policies used at the time by China caused mass unemployment, social disintegration, and more people dropping out of the labor market and requiring government aid. Trump won all of those states!
If the elite, Free-Trade Globalists, want to regain and maintain broad public support for free trade, which is declining in both political parties, they need to “be seen” as fighting back against unfair trade practices.
What Now Must Be Done?
The WTO allows, what it calls “rebalancing,” whereby a country that is hurt by an unfair trade practice can levy a tariff against another of their products to offset the damage done by the unfair trade practice.
For example, US cars imported into China pay a 25% tariff, compared to a 2.5% tariff for foreign cars imported into the US. Canada subsidizes its dairy industry and charges a 270% tariff on US milk producers importing into Canada. Worse, Canada dumps milk at below production prices onto the US market, hurting the US dairy industry.
The Free-Trade Globalists need to keep fighting for free trade, but also to be the champion in identifying and fighting unfair trade practices through the use of the WTO rule on “rebalancing.” They can argue that the “rebalancing tariff” will be immediately taken off the minute the other country stops their unfair trade practices.
The Bottom Line:
This strategy is fair and proportional, and this policy would get the support of both liberals and conservatives and corporations and trade unions. Someone has to fight against China and other countries intellectual property theft and dumping products like steel and solar panels at below market prices on US markets.
This is a Trump trade strategy everyone could support!