Trade Friction a Key Risk as Trump Takes Power
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Trade Friction a Key Risk as Trump Takes Power

The incoming US president Donald Trump has often struck a belligerent tone with regard to trade relations. Much of his anti-trade narrative – made public in tweets and remarks made on the campaign trail – has focused on China, raising concerns over trade frictions, if not an outright trade war. Yet what powers does the US president have in the area of trade? How unilaterally can he act? We look at some of the underlying facts. 

So far there is little clarity about what specific trade policies Donald Trump will pursue as US president, but this will likely change quickly as he takes office. He has already provided some first indications, appointing protectionist individuals to leading trade-related positions. It is highly likely that these nominees will also bring like-minded followers into crucial positions.

Broad trade authority

According to the renowned international relations expert Gary Hufbauer of the Peterson Institute for International Economics, there are several laws that Mr. Trump could use to impose tariffs and quotas without congressional approval. While all of them require certain conditions to be met, these conditions can in some cases be interpreted in a very broad manner. And although some laws stipulate limits regarding the length and size of trade restrictions, others give the US president far-reaching powers.

Any steps Mr. Trump takes to impose higher tariffs are likely to be challenged in court by private firms, but Gary Hufbauer argues that it is far from clear whether such court cases would be successful. How would the affected foreign nations react? Likely through complaints to the World Trade Organization, but given that the related proceedings take time, they might simply choose to retaliate against US actions, which would in effect herald the start of a trade war. On the whole, we continue to regard such an outcome as fairly unlikely, as it would clearly run counter to the wishes of a large part of the US population that relies heavily on cheap imports.

Border-tax adjustment as a likely alternative

The US Congress itself does not seem to be too eager to increase tariffs, according to statements from both House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell since the US elections; on the whole, the Republican party is in favor of relatively free trade. Their preferred measure would likely be a general overhaul of the US tax code, including the introduction of a "border adjustment." The latter would exempt corporate income earned from exports from corporate taxes, while subjecting income earned from imports to corporate taxes. The implications of such a policy would depend largely on the specifics. To the extent that it makes imports more expensive and cheapens exports, however, a tendency to a lower US trade deficit and a stronger US dollar appears likely.

Withdrawal from TPP, renegotiations of NAFTA likely

Despite the substantial uncertainty regarding the outlook for US trade policy, it can almost be taken for granted that Mr. Trump will withdraw from the Trans Pacific Partnership (TPP). Among other things, the purpose of this broad trade deal was to strengthen cooperation between the US and many large trading nations around the Pacific. By excluding China, it was to some extent also meant to create a counterweight to Chinese dominance in the region. As the agreement is not yet in force, there will likely be little tangible damage done to existing trade relations, and China may actually benefit if the TPP does not enter into force.

More damagingly, the wide range of executive powers of the US president allows Mr. Trump to cancel treaties such as the North American Free Trade Agreement (NAFTA), with Congress largely unable to step in. With regard to NAFTA, Mr. Trump has vowed to renegotiate the agreement and secure "a better deal" for the USA. However, it remains unclear what he actually means by that.

Risk of trade "wars" remains

Mr. Trump's apparent intention to deliver quick results and the appointment of protectionist individuals to key trade positions already signal a shift to more protectionism. Whether this does indeed lead to trade "wars" between the USA and other economies is difficult to project, but the risk is real. Congress's border adjustment proposal as part of broader tax reform might be a way around an overt trade war by applying tariffs and quotas. However, given that it will likely take a long time before a tax reform can be passed, Mr. Trump may choose to act earlier if he deems it necessary.