Gordon L. Weil
President Trump got something right. But he is handling it all wrong. It’s about tariffs and trade.
He understood that world trade no longer obeyed the rules
that grew up after World War II and that the U.S. suffered from its clinging to
the past. Single-handedly, he decided to
end the old order.
After the war, a new trade system was created. It was called the General Agreement on
Tariffs and Trade or simply GATT, and it fostered rounds of multinational trade
negotiations.
The idea was that countries could gain improved access to
foreign markets and to imports they needed and wanted. Rather than benefiting from one-on-one deals
with other countries, they could derive a net gain from a package of multinational
deals.
The GATT system works reasonably well. A so-called “rules based” system, it relied on
all participants having the same commitment to the process and operating through
market systems. Dominated by the U.S.
and Europe, it included countries that accounted for most world trade.
As other major players appeared, GATT was replaced by the World
Trade Organization. It accepted emerging
countries where the government might still control markets, but which were
supposed to evolve into open market economies.
The biggest new participant was China, a supposedly emerging
economy. President Bill Clinton
supported its membership in the belief that its WTO participation would move it
to the market system. But with other state-run
economies, China began to distort the rules-based system.
President Kennedy once said of trade that “a rising tide
lifts all boats.” While that might have
been true of GATT, it became increasingly evident that some big boats ignored
the rules of navigation. The U.S. and
Europe continued to act as if the old rules were still observed. Trump saw they were outmoded, and the U.S.
was becoming a net loser.
Because consumers favor low prices without regard to the
reasons for it, the U.S. trade deficits deepened. Not only did that transfer economic power to
China and other low-wage countries, but it cost the U.S. jobs, especially in
manufacturing, a loss only partially offset by the growth of the service
economy.
Trump promptly stepped outside the structure of rules-based world
trade and destroyed it. A compliant Congress
allowed him to set tariffs that it was supposed to control. Whether he acted legally without
congressional approval is now before the Supreme Court.
Instead of using U.S. power to leverage other countries to
negotiate a new system, Trump immediately raised tariffs on virtually all other
countries (except for Russia). In one
stroke, multilateral deal making in trade was replaced by America First. Existing trade patterns were abruptly
toppled.
Trump’s approach was not exactly the art of the deal. He simply sharply raised tariffs and expected
other countries to come to him with offers to accept more U.S. products and to
increase their investment in the U.S. If
he liked the offers, he lowered their tariffs. The situation became more like an auction than
a negotiation. Flattering Trump personally
also helped deals.
Most countries complied.
They could get tariffs lowered, though they remained well above their
pre-Trump levels, if they made offers to open their own markets and boost their
investment in the U.S. But friendly relations
or even alliances are suffering.
America has reduced both its trade deficit and its partnerships
with others. Reduced trade means prices are
rising in the U.S. and elsewhere, slowing economic growth. The rest of the world has begun developing
new trade relationships to protect against arbitrary U.S. policies. But that
change will take time.
One country has refused to go along with bidding to induce Trump
to lower tariffs. Though Canada is dependent on the U.S., Prime
Minister Mark Carney believes the U.S. relies on some of its key exports and
must eventually negotiate a deal.
Canadians understand their country’s dependence on the U.S. won’t
disappear quickly, but it moves to diversify its trade on the way to long-term independence. It is developing its domestic market, long oriented
to the U.S., and draws closer to Europe.
Beyond trade differences, Trump has crossed a red line. He repeatedly asserts that Canada should
become the 51st state. He ignores the direct
effect of his remarks on future relations with it and as a signal for other
countries to reduce their dependence on the U.S.
Last week, a new book entitled “Elbows Up” appeared in
Canada. It is anti-American. The term
refers to a quasi-illegal jab given to an opposing player while battling for a
hockey puck. Launched by Carney, a
former hockey goalie, it’s a motto that all Canadians understand.
The U.S.-Canada clash symbolizes the change Trump has caused. World trade will be reformed, as certainly was needed. But, thanks to his methods, America’s leadership is beginning to wane.
