Should Trumpian trade policy focus upon bilateral deals?

November 23, 2016

By Michael Stumo

President-elect Trump said, in a video yesterday, that the first action he will take as President is to withdraw from the Trans-Pacific Partnership. Thank goodness.

But then he said, "Instead, we will negotiate fair, bilateral trade agreements that bring jobs and industries back onto American shores."

Trump should re-examine whether there is a connection between bilateral trade agreements and the laudable goals he seeks. It may be better to focus upon what can be accomplished with US laws and regulations before spending years negotiating with others. We have bilateral trade deals now. They are not consistently correlated with improved trade performance in that we export more than we import.

Our biggest trade problems, those that cause trade deficits and offshoring, are often outside the scope of the current versions of trade agreements. 

Currency misalignment, for example, could be addressed domestically without asking permission from others. Trump could direct the Commerce Department to consider currency manipulation as a countervailable subsidy under US trade law. Trade enforcement cases could then allege that another country was unfairly subsidizing their exports through currency undervaluation. The remedy would be a countervailing duty to neutralize the price advantage.

If the Trump administration has a question about whether executive action could achieve that result, he could ask Congress to pass the Currency Reform for Fair Trade Act so US law becomes clear on the matter. This is a partial solution because only one industry would get relief for each trade case. What can a Trump administration do to address currency manipulation on a macro level?

The Trump Treasury Department could declare that China or other countries manipulate their currency. But there is not a clear statutory remedy once Treasury does so. 

One question is "how do you determine currency manipulation?" One answer is to use a three part test: (1) Country A has a trade surplus; (2) it also has foreign currency reserves that exceed three months of normal imports or 100% of short term debt; and (3) it is still intervening directly or indirectly.  This test acknowledges that all countries need some reserves to cover obligations, but when they are in surplus and already have foreign reserves beyond practical needs, they are not justified when building up more reserves.

Then the question becomes, what is the remedy? There are at least three possible remedies. First, the US could engage in counter manipulation in the foreign exchange markets to neutralize Country A's efforts.  Second, the US could create a capital inflow tax to damper Country A's accumulation of dollar denominated assets.  Third, the US could create a countervailing tariff as to Country A to neutralize the subsidy impact of the currency manipulation.

Value added taxes are a common way for other countries to replace tariffs with border taxes on US goods. The US is one of the few countries without border adjustable consumption taxes (like VATs or Goods and Services Taxes). A Trump tax plan should add a consumption tax on goods which is border adjustable, then use the proceeds as a credit against payroll taxes.  The payroll tax is a good target because it is regressive, every business and worker pays it, and lowering that tax would both increase wages and reduce business costs. We would then collect taxes on every incoming container ship and our exports would be shipped VAT free.

Supercharged trade enforcement efforts focusing upon foreign subsidies are necessary, but insufficient. The Trump trade plan includes enforcement as a goal. The downside is that trade enforcement efforts are often slow and expensive. They are also targeted to one industry when many industries can be affected. Any remedy may be incomplete in scope.  A tariff on steel can result in Country A halting steel exports, adding value to its cheap steel domestically, then exporting those valued added products like auto parts which then harm our domestic auto parts companies.

Trump could focus upon balanced trade as a national goal.  Currently, federal agencies focus upon "opening export opportunities" for US goods. The State Department proclaims that export only goal. Trade Promotion Authority legislation also focuses upon export opportunities and lower tariffs despite the lack of correlation with improved trade performance. Trump could direct the agencies to pivot their trade agendas towards balancing trade with a special focus upon goods and agriculture.

Some countries are big problems for the US because they contribute to growing global overcapacity looking for someone to buy. They have large trade imbalances with the US in that their exports to us far exceed their imports. Their export-oriented growth strategies rely upon growing from the US consumer market rather than their domestic market. In short, they persistently produce too much and consume too little. As a result, they have excessive savings rates.

For example, China exports 61.3% more to the US than they import.  Other countries include Germany (42.8% trade surplus with the US), Japan (35.6%), Vietnam (68.5%), Ireland (63.1%), Mexico (11.4%), South Korea (24.7%), India (35.1%), and Malaysia (46.9%).

The US needs a special strategy for these countries which are the major cause of US and global imbalances. This would bring our

Lastly, our Buy America laws must be strengthened. The US government is the biggest consumer in the world. Our taxpayers dollars could be used to soak up excess capacity (jobs and goods) in the US. But trade deals require us to treat foreign countries' products as US products for purposes of Buy America laws. Our fiscal strategy needs to target US taxpayer money to US produced goods and labor. Doing so comes into direct conflict with the WTO rules and trade agreements. We need to challenge or alter those rules if we are to fully recover economically.

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