The strategy behind Trump’s tariff and free trade war policy and goals
WASHINGTON, March 4, 2018. — Contrary to the views of almost every economist and probably most Americans, President Trump’s plan is to impose tariffs on some imported goods is not welcome. Examples are steel, aluminum, and solar panels. Structuring a trade war policy is exactly the wrong action to take for someone who supposedly believes in Free Trade.
He does, however, have a strategy that he believes will allow him the reach his goals in the shortest time possible.
What are President Trump’s trade war policy goals?
President Trump is a businessperson with skills in the art of making a deal. And making sure the deal made allows him to reach his goals. Examining Trump in that manner, which is far different than how we usually examine presidential policy, will explain his actions on foreign trade.
His goals are to reach deals with major trading partners that encourage free trade. However, ensuring that the US is playing the game with a fair and equally beneficial policy.
The problem, as Trump sees it, is that the current trade deals commit the US to free trade, but often allow the other countries to tip the trade balance heavily in their favor. For instance, China manipulates the exchange rate of its currency so that their goods are always inexpensive for foreigners.
It also means American goods are more expensive in China.
Some countries, China included, subsidize some of their industries, like Steel. For years, US manufacturers have been saying that subsidized foreign steel is ruining the entire US steel industry.
There is also the issue of the environment. US laws are to prevent manufacturers from adding pollution to the air. As a result, factories are more costly to build in the US and more costly to operate than in Mexico which does not have these environmental protection laws.
Currently, free trade is not fair to the US.
Trump believes that the current deals have been poorly negotiated and have resulted in an unfair trade for the US. That, he says, explains our large trade imbalance. He believes this is a problem that requires fixing and certainly not at the snail’s pace of typical politicians.
To take any concrete steps to get China to stop manipulating its currency, the law requires one year of negotiation. If that fails it moves to the World Trade Organization for often time-consuming deliberation. Trump wants the problem solved quickly.
As a businessperson, he knows two important facts about negotiating a deal. First, if someone is highly motivated to make a deal, as Trump now is, then the other side must be highly motivated too, which China or Mexico or any other trading partner is not. If that’s the case a businessperson would create a sense of urgency.
Trump’s trade war policy strategy.
In addition, Trump knows that a skilled dealmaker will enter a negotiation from a position that is as strong as possible. Usually, if a negotiator is in a weak position, the outcome is unfavorable. With a strong position, the outcome is likely to be more favorable.
The President could achieve both goals with his recent actions calling for tariffs on steel and aluminum. He has already placed tariffs on solar panels. When our trading partners in Asia or Europe threaten retaliation, he comes back with more tariffs, perhaps on cars. Many believe this is the start of a trade war.
It is true that the US purchases nearly $3 trillion of foreign goods. Therefore it is easy to conclude that a trade war will be harmful to the US. However, those who supply the goods to the US have entire industries and major parts of their economy dependent on selling goods in the US.
They can’t afford a trade war. So what happens now?
The Chinese see tariffs about to be placed on their products and now feel a sense of urgency. The Chinese are dealing in a weaker position and the US position is strengthened now that a tariff has turned from a simple threat to a reality.
Since Trump will quickly bring our trading partners to the negotiating table and since the US is now dealing with a strengthened position, we are probably going to see a continuation of free trade.
Now though, the free trade deals will be fair for the US. Trump will quickly bring our trading partners to the negotiating table. With the US now dealing with a strengthened policy position, we will see a continuation of free trade.
For now though, the free trade war will be fair for the US.
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years. www.facebook.com/fundingdemocracy @mbusler