US Trade Policy: Is Trump creating World Trade War?

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Donald Trump, the 45th president of the United States came to power in 2017 and his term goes upto 2021. During his election campaign, Trump advocated the policy of Protectionism and ‘Making America Great Again.’ His economic policies follow American Economic Nationalism based on the theory of high tariffs to reduce imports, creating more jobs for Americans, reducing the inflow of immigrants, substantially increasing the exports. 

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The economic policies of Donald Trump therefore, include trade protectionism, immigration reduction, individual and corporate tax reform, the dismantling of the Wall Street Reform, Consumer Protection Act and the repeal of ‘Obamacare’ – the Patient protection and Affordable Care Act. 

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Key Highlights

  • Using the phrase ‘Smart Trade Not Stupid Trade’ Trump's trade policies promote mercantilism.
  • The prime focus of Trump in Trade Policy planning is Protectionism which he uses to defend U.S. industries from foreign competition.
  • His goal is to reduce the U.S. Trade Deficit with other countries especially China and European Union countries.
  • In view of Trump, with the American companies becoming wealthier, they can generate higher taxes to fund the military growth of America.

How America started to Change the Trade Policy: Steps by Trump

  • On September 2, 2017, Trump announced to withdraw from the U.S. Trade Agreement with South Korea. Trump wants South Korea to import more U.S. goods.
  • Trump withdrew from further negotiations on the Trans pacific Partnership by signing an order on January 23, 2017, he promised to replace it with number of bilateral agreements. Responding to this step, Japan and the European Union announced their own trade deal.On July 6, 2017, they agreed to increase Japanese auto exports to the EU and European food exports to Japan.
  • Heavy Tariffs and Quotas were imposed by Trump administration on imported solar panels and washing machines on January 22, 2018. China is the biggest exporter of Solar panels and washing machines to U.S. Then on March 1, 2018, Trump announced 25 percent tariff on steel imports and a 10 percent tariff on aluminum. It may be noted that China and European Union countries are the biggest exporter of these items to USA.
  • The Steel users, like automakers, will see higher costs. They'll pass on this cost to consumers. With the tremendous fall in stock market, analysts felt that Trump's actions might start a trade war.
  • On August 16, 2017, U.S began renegotiating North American Free Trade Agreement (NAFTA) with Canada and Mexico. NAFTA is the world's largest Trade Agreement. Trump had threatened to withdraw from NAFTA and hit Mexican imports with a 35 percent tariff. 
  • Further moving on his plan, Trump announced on May 8, 2018 that he would withdraw the United States from the Iran nuclear deal 
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U.S. Vs China Trade Policy:  War of Tariffs
While U.S. started it, China retaliated the Trade War. The China–United States trade war refers to the ongoing introduction of tariffs on goods traded between the United States and China.

  • On January 23, 2018, President Trump placed a 30% tariff on foreign  Solar panels which was to be reduced to 15% after four years. China, the world leader in solar panel manufacture, decried the tariffs. Again, on the same day tariffs of 20% were placed on washing machines for the first 1.2 million units imported during the year in United States. In 2016, China exported $425 million worth of washers to the United States.
  • On April 3, 2018, Trump announced 25% tariffs on the Chinese imported goods worth $50 billion. The Chinese products consisted of electronics, aerospace, and machinery. The Trump administration wants China to stop requiring U.S. companies to transfer their proprietary technology to Chinese firms. The companies must do this if they want to gain access to China's market. China immediately retaliated hours later. It announced 25 percent tariffs on $50 billion of U.S. exports to China. 
  • Again on April 6, 2018, Trump announced tariffs on $100 billion more of Chinese imports. Interestingly, it covers only one-third of U.S. imports from China. If China retaliates, it could impose tariffs on all U.S. exports to China.  
  • The Trade Negotiations to sort out the issue were going on. However, on April 10, 2018, China said that trade negotiations had broken down. The United States demanded that China should stop subsidizing the 10 industries prioritized in its "Made in China 2025”plan.  On the same day, Xi Jinping, President of China said that he would reduce tariffs on imported vehicles. But it made little impact on trade. Regardless of tariffs, the automakers find it is cheaper to build their products in China.
  • China agreed to remove tariffs on May 15, 2018 on U.S. pork imports. In exchange, the United States will remove tariffs on Chinese telecom company ZTE. The move is seen as a weakness of Trump. This has led many European countries asking U.S. to avoid sanctions on companies that do business with Iran.They may threaten tariffs on U.S. imports as a bargaining tool.
  • Liu He, the Economic Advisor to Chinese President Xi Jinping, visited USA from May 15 to May 19, 2018 for Trade talks. On May 20, it was reported that Chinese officials had agreed to substantially reduce America's trade deficit with China by committing to increase its purchases of American goods.
  • On July 6, 2018, the United States imposed 25% tariffs on $34 billion worth of Chinese goods which led China to respond with similar sized tariffs on U.S. products. Again, on July 10, following an order from U.S. President Donald Trump, the U.S. Trade Representative (USTR) Office published a list of $200 billion in Chinese products to be subject to a newly proposed 10% tariff. China blasted the proposed tariffs as irrational and unacceptable. 
  • The Trump administration said the tariffs were necessary to protect national security and the intellectual property of U.S. businesses, and to help reduce the U.S. trade deficit with China. 
  • In August 2017, Trump had already opened a formal investigation into attacks on the intellectual property of America and its allies, the theft of which had been costing America alone an estimated $225 billion to $600 billion a year.

U.S. Vs European Union Trade Policy
It is not China alone, Trump Trade Policy is creating Trade War with European Union (EU) Counties also. Although, Trump Administration had announced earlier that it would delay the imposition of tariffs on EU countries, Canada, Mexico by another 30 days to renegotiate the trade terms, there was no assurance that more time will yield any breakthroughs.

  • Trump has imposed 25% Import Tariff on steel and 10% on aluminum. This would apply to all of America’s trading partners, including close allies such as EU countries and Canada.
  • Rather than focussing on Chinese producers alone, the White House announced blanket import levies
  • The Secretaries and other trade experts in Trump Administration like Robert Lighthizer, the U.S Trade Representative, and Wilbur Ross, the Commerce Secretary, argue that this blanket approach was necessary to prevent China from shipping steel and aluminum to the United States via third countries. But to the Europeans, in particular, the White House’s move looks like the beginning of a campaign to eliminate the U.S. trade deficit by targeting a broad range of U.S. imports and promoting U.S. exports. In fact, this was the aim that Donald Trump had set out in speeches ever since the start of his Presidential campaign.
  • After meeting with Angela Merkel, the German Chancellor, at the White House, Trump brought up the U.S. steel industry, saying its success was vital to national security. He also talked about the U.S. trade deficit in goods with the E.U., which was $151.4 billion last year. Trump said that he was committed to “remedy these trade balances.”
  • Trump has singled out the auto industry,  oblivious to the fact that General Motors and Ford have for many decades maintained extensive manufacturing operations in Europe, and, since the nineteen-nineties, BMW and Mercedes-Benz have had plants in the United States.
  • To protect their interest and to counter the Trump Trade Policies, Angela Merkel, the German Chancellor, French President Emmanuel Macron, and British Prime Minister Theresa May spoke over telephone. Later, Merkel issued a statement saying that Europe was “resolved to defend its interests.” This was a signal that they wouldn’t be pushed around by Trump.
  • The E.U. has already drawn up a list of retaliatory tariffs—targeted at iconic U.S. goods, such as bourbon and Harley-Davidson motorcycles—that it would put in place if the White House goes ahead with its steel and aluminum tariff hike plans.
  • The Trump Administration reportedly wants the Europeans to agree to a numerical cap on their steel exports, as South Korea has done, as well as other measures designed to enhance access to the European market for American firms.
  • Europeans are resisting the proposals from United States. The European Commission has issued a statement that says, “as a longstanding partner and friend of the U.S., we will not negotiate under threat. Any future transatlantic work program has to be balanced and mutually beneficial.”

United States Vs India Trade Policy
India’s Trade with U.S. has been on the rise. However, with the imposition of tariffs by United States, India has to rethink on some measures to protect its interests. Responding to a question on Indo-US bilateral trade, Deputy US Trade Representative Jeffrey Gerrish said that the progress made in bilateral relationship has been truly historic over the last several years.

  • The two-way trade in 2017 reached $126 billion and that was a landmark.
  • After imposing tariffs on Chinese imports, Washington filed a complaint at the World Trade Organization (WTO)—the first WTO action of this administration—over several export subsidy programmes in India. These include the Merchandise Exports from India Scheme, the Export Oriented Units Scheme, the Electronics Hardware Technology Parks Scheme, Special Economic Zones, and the Export Promotion Capital Goods Scheme. These actions may worry India.
  • India and U.S. have a trade imbalance of US$30 billion and given the current trends, it is yet to be decided how to reduce it.
  • Trump has made it clear that he wanted India to reduce the import tariff on its Harley-Davidson Motorcycles from 100%. He has threatened to impose tariff otherwise on the Motorcycles exported from India to the United States.
  • India-U.S. Trade has been on the rise and at present Trump also wants to flourish it further. The process is to be decided.
  • Trump proposes to make Immigration rules even more strict for Indians also. However, many concessions are under discussion. 
  • US Trade Representative Jeffrey Gerrish said  "We are two of the biggest economies in the world. US biggest economy, India is the sixth largest economy in the world. Given how larger economies are, we think we can grow our trade significantly, we think that it should be much larger than it is.”

Rationales by U.S. for Tariffs - Pros
President Trump during his Presidential campaign spoke to follow the Policy of America First and cancel international trade deals creating deficit for the USA.

  • U.S. Trade deficit is of $500 billion a year and with intellectual property (IP) theft of another $300 billion. Trump wants to eliminate it
  • In January 2018, Trump said he wanted the United States to have a good relationship with China, but insisted that it should treat the United States fairly.
  • In his view, America has also finally turned the page on decades of unfair trade deals that sacrificed its prosperity and shipped away its companies, its jobs, and Nation’s wealth. The era of economic surrender is over. From now on, America expects trading relationships to be fair and to be reciprocal.
  • John Ferriola, the CEO and President of Nucor, America's largest steel producer and its largest metal recycler, claimed that tariffs were not unfair, but were "simply leveling the playing field." He explained that not only the "European Union, but most countries in the world, have a 25 percent or greater VAT, value-added tax, on products going into their countries from the United States. So if we impose a 25 percent tariff, all we are doing is treating them exactly as they treat us.
  • Richard Trumka, president of the AFL-CIO, which represents over 12 million active and retired workers, said that China has stolen U.S. intellectual property and "bullied its way into acquiring critical U.S. advances in technology." According to him, "Tariffs aren’t an end goal, but an important tool to end trade practices that kill American jobs and drive down American pay."
  • A number of experts have focused on China's theft of Intellectual Property, and that it forces U.S. firms that want to do business there into transferring its confidential technology and trade secrets before having access to their market.

Trump Trade Policy: May Turn Ineffective - Cons

  • A July 2018 study indicated Trump's policies have had little impact on the U.S. economy in terms of GDP or employment. For example, more jobs were created in President Obama's last 19 months (3.89 million) than in President Trump's first 19 months (3.69 million), till July 2018.
  • The debt additions projected by CBO for the 2018-2027 period have increased from the $9.4 trillion that Trump inherited from Obama (January 2017 CBO baseline) to $13.7 trillion (CBO current policy baseline), a $4.3 trillion or 46% increase.
  • Trump's trade policy is a rerun of a terrible 1980s policy where 'American consumers were the biggest losers'
  • President Donald Trump's trade policies are similar to protectionist trade policies of the 1980s.
  • The US's trade policies in the 1980s did little to reduce the trade deficit and ended up costing American consumers more than they helped the protected industries.
  • In the 1980s, President Ronald Reagan and US lawmakers were concerned about the rising US trade deficit with Japan, as well as the country's strong entry into areas where the US typically dominated.
  • Much like Trump's focus on autos, steel, and emerging technologies, Reagan focused on autos, steel, and new semiconductor technology. The 1980s policy also employed a series of tariffs, quotas, and other import restrictions to give a leg up to US companies in the fields.
  • The end result of the 1980s-era policy was an inability to slow the growth in the US trade deficit. According to the BAML economists, the deficit widened from $36 billion, or 1.3% of GDP, in 1980 to $170 billion, or 3.7% of GDP, in 1989.
  • Erecting trade barriers do not necessarily decrease the trade deficit. One of the biggest problems with a focus on trade deficits is that they have as much to do with domestic policies as trade policy. Large government spending programs, such as Reagan's and Trump's tax cuts, and deficit spending can help fuel a trade imbalance.
  • The industries that are supposed to be protected may receive little help. It happened in eighties too. The restrictions on cars did shrink the total market share of Japanese autos in the US, but by less than three percentage points. At the same time, the total dollar value of Japanese autos coming into the US rose due to large price increases. Similar experiences occurred in the steel and semiconductor industries, with some small wins that came at substantial cost to the US consumer and American economy.
  • The moves can therefore do little to achieve their goal of reducing the US trade deficit.
  • China has announced retaliatory tariffs on US goods. Even the US's supposed allies - Mexico, Canada, and the EU - have imposed the tariffs of their own.
  • This risk of substantial escalation makes the threats of Trump's potential trade war even greater than the experience three decades ago.  

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