Trump’s tariff follies: Making sense out of nonsense

No doubt in the future, multiple economics and political science dissertations and reams of wordy analysis will be devoted to President Trump’s decision to invoke national security as a rationale for imposing tariffs on America’s close allies, the European Union, Canada and Mexico (25 percent on steel products and 10 percent on aluminum products).

Will it signal a definitive turning point for the U.S. to adopt protectionism as a major trade policy? Will it portend the end of the global trading system? 

Here, the focus will be more on the immediate takeaways and consequences of the administration’s action. So let’s get started:

1. For the moment at least, the president’s (foolish) action should silence critics, mostly Democrats, who have charged that Trump’s trade record is “all talk and no action.” Over the past few weeks, the president has in effect declared war on a substantial portion of the trading world — China, Europe, Japan, Canada and Mexico.

In retrospect, this should come as no surprise. To find the origins of Trump’s actions, one need only go back to his election promises and to the economic playbook written by Commerce Secretary Wilbur Ross and White House National Trade Council Director Peter Navarro.

2. We are about to get a defining test of one major tenet of the Trump/Ross/Navarro trade policy premises: that the U.S. has such overwhelming market power that U.S. trading partners — even the equally large EU — will ultimately bow to U.S. economic demands.

It’s early days, but so far that premise is not looking good: Both Canada and Mexico, smaller economies with much less market power, have signaled that they will retaliate and are willing to accept the consequences.

Europe is the wild card: Under the initial vow to retaliate with tariffs on U.S. agriculture products, Harley Davidson bikes, and Kentucky bourbon, there are deep divisions.

Fearful of a U.S. attack on trade in autos and auto parts exports, Germany has pushed for compromise and possible accommodation. Italy’s new populist government introduces another unsettling element.

3. Again, for the moment — White House personnel cycles are quite short — the “America First” economic nationalist faction of Trump’s team is strikingly dominant.

In an extraordinary action, Peter Navarro, who holds no big formal portfolio in the Trump administration, publicly admonished Treasury Secretary Steve Mnuchin, a relative trade moderate. Protectionist Wilbur Ross has replaced Mnuchin as head of a U.S. delegation to China for trade negotiations.

Ironically, just prior to this announcement, the president told associates that Ross was “past his prime” and no longer a “killer” on trade negotiations.

Whatever the personal roller coaster, the decision of throwing down the gauntlet on the steel/aluminum tariffs against America’s closest allies signals just how extended the reach of the hyper-nationalist faction is.

4. By attacking America’s closest political and economic allies, the U.S. has badly undercut any chance of a united front against China’s deeply entrenched system of mercantilist protectionism — which should be the No. 1 priority of U.S. economic diplomacy.

Europe and Japan tentatively agreed to back the U.S. in challenging the most economically damaging elements of Chinese subsidy and protectionist regime.

That alliance is now likely on hold as the U.S., EU and Japan do battle over the Trump administration’s decision to invoke a (bogus) national security rationale for shielding U.S. steel and aluminum (and possibly auto) producers from market competition.

5. Levying 25- and 10-percent tariffs on Canadian and Mexican steel and aluminum products has jeopardized the endgame for completing negotiations to update the North American Free Trade Agreement (NAFTA) agreement. Both Mexico and Canada are putting retaliatory tariffs in place, selected for both economic and political effect.

After Trump’s announcement on steel and aluminum, Canadian Prime Minister Justin Trudeau revealed that two weeks ago, he had offered compromises to conclude the negotiations — only to be faced with a “poison pill” long pushed by U.S. negotiators, to institute a mandatory five-year review of NAFTA.

Trudeau immediately vetoed the proposal, so negotiations were stalemated even before the steel and aluminum decision. At a minimum, the complications from the U.S. steel and aluminum action could throw the NAFTA negotiations over into 2019 and a new Congress.

On trade policy, the U.S. is in uncharted territory — or at least territory not tread upon since the 1930s. But stay tuned, it could all change tomorrow — or even later today.

Claude Barfield, a former consultant to the office of the U.S. Trade Representative, researches international trade policy (including trade policy in China and East Asia), the World Trade Organization (WTO), intellectual property and science and technology policy for American Enterprise Institute.