“Make in U.S.A. or pay big border tax” is one of the latest tweets to emerge from President-elect Trump’s smart phone as a warning to the global automaker General Motors, who exports some of its Mexico products to the United States. As the automotive industry gathers in Detroit for the annual auto show, a collective shuddering can be heard.
Yet, despite Trump’s commitment to put “America First” – and his recent selection of avowed protectionist Robert Lighthizer as chief trade negotiator – competing priorities and the structure of the international economy could make this an unrealistic pledge.
Many economists point to the strengthening of the U.S. dollar as a sign of the country’s stable economic growth. A strong dollar makes it cheaper to manufacture products abroad and then import into the United States. This trend might accelerate due to another Trump priority that maintains across-the-aisle support: infrastructure investment.
During the campaign and throughout the transition, President-elect Trump has often spoken about America’s decrepit infrastructure, from highways to airports, and has pledged to pass a $1 trillion spending bill to invest in projects across the country. Several prominent Democrats, including Senate Minority Leader Charles Schumer, have spoken favorably of the President-elect’s proposal. If such a bill passes Congress, it would likely spur Janet Yellen and the Federal Reserve to continue raising interest rates, which would likely in turn further increase the cost of the American dollar.
Despite these pressures, the President-elect’s appointments and statements indicate there will be efforts to reduce imports. President-elect Trump and his team have been eyeing three tactics to achieve this aim.
First, the Trump transition team has floated the possibility of a 5 percent or 10 percent tariff on all goods coming into the United States, most likely in the form of a border adjustment tax. However, obtaining the approval of Republicans and business leaders for a universal tariff will be hard to come by, making the imposition of this tax unlikely. What is more likely is the passage of a tax that would target American businesses that manufacture goods abroad for the American consumer.
Second, despite a lack of media coverage on the subject, Trump’s team might also seek to reform international trade bodies such as the World Trade Organization (WTO). In July, Trump’s choice for Commerce Secretary, Wilbur Ross, along with the head of his newly created National Trade Council, Peter Navarro, penned an op-ed on CNBC’s website that called for:
- Reducing the time it takes for the WTO to arbitrate trade disputes. Ross and Navarro argue companies from countries that flout provisions can essentially corner the market and drive out competition in the time it takes to implement penalties on the offending party.
- Removing the unfair advantage that countries with VAT taxes offer exporters. As it stands, countries with VAT taxes offer VAT export rebates, providing exporters with an unfair tax advantage against countries without VAT, like the United States.
- Bolstering WTO capabilities to enforce penalties against countries that engage in currency manipulation, intellectual property theft, and ignore labor rights and environmental protections.
Navarro is especially critical of China and Chinese trade policies. He wrote “Death by China,” and published a documentary by the same name, where he lays out claims against China’s disregard for global trading norms. President-elect Trump has threatened to label China a currency manipulator and is exploring options to place a special tax on goods imported from China to the United States.
The third tactic likely to limit imports is the threat issued by the President-elect to either renegotiate or repeal preferential trading agreements that he claims do not “work” for American workers. Most notably, the North American Free Trade Agreement (NAFTA) has been in Trump’s crosshairs throughout the election and the transition. Trump has blamed the agreement – and the government of Mexico – for the loss of American jobs. Interestingly, since NAFTA went into effect in 1994, the United States has had more trade disputes with Canada than with Mexico.
The severe economic consequences of a repeal between America’s largest trading partner (Canada) and Mexico make it unlikely a unilateral withdrawal will occur. The consequences would involve untangling and re-establishing supply chains, as many goods are produced using pieces assembled in Mexico and Canada. Further, investors would lose key protections granted by NAFTA.
A more likely scenario is that President-elect Trump will use the threat of a repeal to force the renegotiation of provisions in the agreement. Both Mexican and Canadian leadership have said that they are open to renegotiating NAFTA. In fact, President Enrique Peña Nieto of Mexico just announced his close confidante Luis Videgaray as the new Foreign Minister and called upon Videgaray to “accelerate dialogue and contacts so that from Day One of the new administration, the basis of a constructive working relationship can [be] established.”
Although the move would not be upheld by the courts, President-elect Trump might also undermine NAFTA by targeting companies that move jobs to Mexico through company-specific tariffs.
Whether the President-elect decides to apply tariffs, reform multilateral institutions, or renegotiate NAFTA and/or other trade agreements, what is certain is that negotiations will invariably impact industries and companies that rely on global trade.
Already, President-elect Trump’s impact is being felt. With the Trans-Pacific Partnership essentially dead, Pacific rim countries are now looking to China’s alternative trading agreement as a way to gain access to more consumers. Companies, including Ford, are seemingly making decisions to keep jobs in American in order to insulate against negative attention from the Trump Administration.
Robert Lighthizer’s appointment will likely lead to a protectionist trade policy and a tough stance on China. Lighthizer has a strong background both in the public and private sectors as someone seeking tough sanctions against China. Despite the role of the United States Trade Ambassador being a cabinet level position, it’s likely that the role will be diminished with enhanced powers for setting the course on American trade policy in the hands of the Commerce Department.
Wilbur Ross is a billionaire distressed-debt investor who has been advising the President-elect on economic and trade policies since the outset of the campaign. Although a professed Sinophile at heart, Ross espoused hardline rhetoric against China. In his few media encounters, Ross has viewed trade policy in terms of “winning” and “losing,” which he judges by the size of a trade deficit or surplus.
Although key individuals that the President-elect surrounds himself with are protectionist, despite commentary and skepticism on trade deals, the President-elect has said he is not an anti-free trader. Because trade agreements with Europe might eschew negative impacts on manufacturing in the United States, the stalled negotiations for the Transatlantic Trade and Investment Partnership might come back to life. Another potential agreement focusing on services rather than goods – Trade in Services Agreement – among the Really Good Friends might also be revived. Following Brexit, a UK-US free trade agreement is also a possibility.
Trade will not cease, and imports to the United States might experience growth thanks to the appreciation of the U.S. dollar. At the same time, companies dependent on global trade should consider investments in public affairs campaigns that provide a complement to pursuing business objectives. The incoming Administration is extremely attuned to public opinion and media coverage. As such, companies with proactive campaigns that set agendas rather than respond have the best chance at being among the new set of “winners.”
Jere Sullivan is vice chairman, international Public Affairs. He is based in Washington, D.C.