How Trump can get tough on trade — without causing a trade war

One of President-elect Donald Trump’s consistent promises has been his pledge to get tough with America’s trading partners.

Trump’s planned appointments of trade hawks such as Peter Navarro and Wilbur Ross to senior administration positions, and Trump’s own ongoing Twitter broadsides against offshoring jobs, all demonstrate that Trump is serious about following through with a far tougher trade enforcement agenda than any recent presidential administration.

{mosads}The core Trump trade policy promise has been to slap significant tariffs on imports, ranging from his campaign pledge of 45 percent tariffs on imports from China to his post-election pledge to hit U.S. companies that move jobs to Mexico with a 35 percent tariff when they import goods from Mexico into the United States.

As the numerous critics of Trump’s trade agenda have pointed out, these proposed tariffs, if implemented literally, could violate U.S. trade commitments, penalize U.S. consumers, and risk sparking a global trade war.

But there are a number of smart, tough steps that Trump could take to crack down on foreign trade abuses and increase U.S. competitiveness without such adverse consequences.  

First, Trump can better capitalize on the leverage the U.S. has by virtue of being the world’s leading destination for international investment, with nearly $3 trillion of foreign money cumulatively invested in the United States.

As Trump recognizes, investments like the $50 billion that Japanese billionaire Masayoshi Son announced at a press conference with Trump earlier this month create jobs and economic growth in the U.S.

Trump announces that Masayoshi Son, CEO of SoftBank, has agreed to invest $50 billion in U.S., create 50K new jobs. https://t.co/NRYqaLHY4J

— ABC News (@ABC) December 6, 2016

But this inbound investment also offers a point of leverage, particularly relative to China, which invested $15 billion in the U.S. in 2015 and is increasingly seeking to acquire American assets.

The Trump administration and Congress could expand the existing U.S. inbound investment review process known as “CFIUS” to put additional limits on Chinese state-owned investment in the U.S. until China addresses a number of U.S. economic and national security concerns. This would give us negotiating leverage with China as well as an additional tool to screen investments that might pose security threats.  

Trump’s attorney general nominee, Sen. Jeff Sessions (R-Ala.) can also play a greater role in cracking down on trade abuses.

Trump taps Jeff Sessions for attorney general: report https://t.co/mWI1HVRDlw pic.twitter.com/PmbsuvWzWX

— The Hill (@thehill) November 18, 2016

While the U.S. Trade Representative and Commerce Departments are responsible for most traditional trade enforcement actions, such as those at the World Trade Organization, the Department of Justice has a number of tools to combat unfair domestic competition that could also be used internationally.

For example, Justice could prioritize bringing antitrust cases against foreign companies where anticompetitive practices outside the U.S. are having impacts on prices and competition here — much as private U.S. plaintiffs sued a Chinese vitamin pill cartel for antitrust violations several years ago.    

We should also acknowledge important steps that were enacted earlier this year. Notably, Congress passed the Defend Trade Secrets Act of 2016 in April, which enables U.S. companies that are victims of cyber espionage and other trade secret theft to sue companies that steal U.S. intellectual property.

Better enabling private lawsuits against unfair trade practices can be a valuable complement to U.S. government actions.   

As politicians from both parties have pointed out, tax reform offers an opportunity to increase the competitiveness of American manufacturers. Corporate tax reforms to better reward manufacturing in the U.S. rather than overseas should be a central pillar of any comprehensive tax overhaul.  

Finally, Trump needs to figure out a smart, balanced approach to managing international currency manipulation and subsidies for foreign state-owned enterprises, both of which pose a systemic challenge to notions of basic fairness in the global trading system.  

Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into..

— Donald J. Trump (@realDonaldTrump) December 4, 2016

their country (the U.S. doesn’t tax them) or to build a massive military complex in the middle of the South China Sea? I don’t think so!

— Donald J. Trump (@realDonaldTrump) December 4, 2016

A recent economic analysis by Brad Setzer of the Council on Foreign Relations shows that China has ceded its longstanding role as the world’s worst currency manipulator to Taiwan and South Korea, but, irrespective of the identity of today’s leading culprits, currency manipulation remains a major problem.  

But rather than simply unilaterally imposing tariffs on currency manipulators, Trump should take a more gradual, two-track approach:

First, he should work with the G7 or other like-minded group of countries that does not include currency manipulating countries (unlike the G20, which includes several of the leading manipulators) to develop and promulgate a like-minded approach to assessing and combating currency manipulation.

Second, Trump should encourage Congress to pass legislation supported by Sen. Chuck Schumer (D-N.Y.) and others that was left out of a customs enforcement law in early 2016.

The legislation would give the administration discretion, over time, to ramp up economic pressure on countries that do not abate currency manipulation.

This approach to currency — multilateral, and incremental — will mitigate some of the adverse consequences of more immediate, unilateral policies. Trump could take a similar approach on state-owned enterprises.  

Admittedly, none of these ideas has the same Twitter-grabbing pizzazz as Trump’s threats to immediately slap huge tariffs on imports. But for Trump and his incoming administration, they would have the advantage of cracking down on global trade abuses without stumbling into a global trade war.

Peter E. Harrell is an Adjunct Senior Fellow at the Center for a New American Security, where he focuses on the intersection of economics and national security. From 2012-2014, he served as the Deputy Assistant Secretary for Counter Threat Finance and Sanctions in the State Department’s Bureau of Economic and Business Affairs.