Trump favours tariffs, to the delight of U.S. companies
Many observers believe that the ongoing “Montreal Round” of NAFTA negotiations, which started last week, represent a make-or-break moment for a “successful” renegotiation of NAFTA.
Some reports say Canadian and Mexican trade officials have vowed to be flexible and cooperative in trying to address the toughest U.S. demands. Statements from the Trump administration, on the other hand, remain (unsurprisingly) conflicting. While President Trump said before the Montreal Round began that talks were moving along quite well, he more recently tweeted that NAFTA is a bad joke.
Any optimism about the benefits of a renegotiated NAFTA, assuming that event emerges, should be strongly tempered by recent U.S. actions to impose tariffs on solar panels and washing machines.
This initiative was undertaken using the prerogative under U.S. trade law for the United States to impose tariffs in the event of import surges that harm U.S. manufacturers. This prerogative amounts to an open door for inefficient U.S. companies to seek government protection against more efficient foreign competitors and represents a threat to Canadian manufacturers who may not be the direct targets of the trade action. The Trump administration seems receptive, even solicitous, of opportunities to impose protective tariffs, and U.S. companies seem very willing to provide those opportunities by complaining about unfair and damaging foreign trade practises.
As well-known trade expert Gary Hufbauer puts it: “If you are an industry with a plausible complaint, come to Uncle Trump because he will take care of you.”
At the same time as it indulges in protectionist trade actions, the U.S. government is blocking appointments to the World Trade Organization’s court responsible for adjudicating trade disputes between member countries, thereby undermining a basic feature of the international trade regime.
The U.S. effort to diminish the WTO’s ability to settle trade disputes is consistent with the Trump administration’s position that trade disputes initiated by U.S. companies be adjudicated in U.S. courts and suggests that the U.S. government is willing to court anarchy in the world trading system in pursuit of its narrow and arguably incoherent trade policy. The economic illiteracy (or extreme cynicism) of President Trump, insofar as trade policy is concerned, was underscored by his observation that the recently imposed tariffs on trade panels and washing machines would create a lot of jobs and benefit consumers.
The jobs claim is disputable given that economic activity “downstream” of manufacturing will be discouraged by higher input prices while the anticipated higher prices for solar installations and washing machines makes Trump’s claim that consumers will benefit laughable.
Trump’s “America First” rampage will also probably include more attempts to block inward foreign direct investments on the vague grounds of protecting national security. After all, if tariffs thwart foreign companies from selling their products in the U.S. market, they will be tempted to hurdle the tariffs by establishing affiliates in the U.S. One might think that the Trump administration would welcome investment, even by foreigners.
However, U.S.-based companies can be expected to object to direct competition from foreign affiliates in the U.S. market, and historical experience suggests that the likelihood of U.S. government intervention into foreign investments in the U.S. increases when the foreign investor represents a competitive threat to U.S.-owned companies. The commercial interests of American companies will likely dominate any consideration of how restrictions on foreign investments will affect the welfare of consumers and other segments of U.S. society.
However accommodating Canadian and Mexican officials are to U.S. negotiating demands in the Montreal Round, and even if NAFTA is renegotiated to the U.S. government’s satisfaction, the end game is clear and its bad news for Canada.
The Trump administration, under the meaningless guise of seeking “fair trade,” will continue to escalate its mercantilist actions by opening the door ever wider to self-interested complaints by U.S.-based companies about unfair trade and investment practises by foreign companies. It’s difficult to imagine how any renegotiated NAFTA will provide Canada with broadly effective safeguards against an out-of-control mercantilist U.S. regime.
It’s politically impractical for Canadian trade officials to abandon negotiating a new trade agreement with the U.S., as long as the U.S. government is willing to remain in the negotiations. At the same time, it’s clearly prudent for Canada to escalate its efforts, in conjunction with other dismayed U.S. trade partners, to strengthen the WTO’s capability to act as the main bulwark against actions by the Trump administration to undermine international economic rules that have been instrumental in raising living standards around the world.