Trade Policy Under Trump Largely Seen as an Open Question Despite Campaign Promises

President-elect Donald Trump's hard-line trade stance expressed throughout his campaign is seen by some as more of a negotiating tactic than a clear indicator of likely policy changes. While scholars still wonder how Trump would react if such talks don’t meet his goals, there's much debate as to what authority the president has to enact many of the Trump campaign promises. Among other things, Trump has said the U.S. should renegotiate NAFTA (see 1611100040), collect up to 45 percent tariffs to counter alleged Chinese currency manipulation (see 1601150029), and raise tariffs on companies that move operations overseas, withdrawing from the World Trade Organization if it disapproves of that policy (see 1607260043). Withdrawing from the WTO seems the least likely of those proposals, but a greater effort to engage China from a Trump administration is especially likely, observers said.

While it’s not impossible that Trump will attempt to negotiate a free trade agreement with China, bilateral talks will more likely cover a long list of “perceived grievances” after Trump takes office, Bill Reinsch, a distinguished fellow at the Stimson Center, said during an interview. Trump has decried dumping of products from countries including China and Vietnam (see 1610200030), and called China a currency manipulator.

Trump could invoke the Omnibus Trade and Competitiveness Act of 1988 (here) to launch currency negotiations with China, Tradewins President John Magnus said during an interview. Among other things, the law is geared toward improving the exchange rate system and promoting long-term rate flexibility. While the 1988 act does not provide any specific authority to levy retaliatory tariffs for currency manipulation, Trump could likely use the currency manipulator label to justify invoking other special safeguards or national security provisions that allow for the imposition of duties, Brad Setser of the Council of Foreign Relations said in a blog post (here).

Trump would also have currency manipulation retaliation measures under the Trade Facilitation and Trade Enforcement Act (TFTEA) at his disposal. Under that law, countries that meet three criteria -- a significant trade surplus, a "material" current account surplus and "persistent" intervention in currency markets -- may be subject to sanctions, including a ban on Overseas Private Investment Corporation financing and U.S. government procurement, surveillance by the International Monetary Fund, and consideration of currency practices in free trade agreement negotiations (see 1602240071). A May Treasury Department report showed that no country raised the three red flags (see 1605020035).

Most economists likely would agree that China does not currently meet all three criteria, and it would take a much more aggressive interpretation from the Trump administration than the May Treasury report to initiate countermeasures, Reinsch said. “The prevailing view of economists … is that to the extent that the Chinese are intervening, they’re intervening to keep it up, not to force it down,” he said. “And if [they] were not intervening, it would go lower; it would depreciate, because of the slow growth in China and the internal economic situation there." Currently, they’re "doing us a favor,” he said. While most presidents have deferred to the Treasury secretary to determine currency cheaters, Trump could presumably order the Treasury to arrive at a preferred conclusion, if he wants, Reinsch said.

Despite Trump’s dubbing China a currency manipulator during the campaign, he probably won’t slap such an official designation on the country initially, but if he can’t exact desired concessions from China, it’s unclear how he would respond, said Hal Shapiro, head of Akin Gump’s regulatory practice. Despite Trump's campaign positions, it would be legally troublesome to assess tariffs outside of a very targeted scope, Shapiro said. “Anything that would involve more than a rifle shot, a very specific action, would be extraordinarily complicated,” Shapiro said. “Thousands of man-hours went into negotiating [free trade] agreements, and it’s hard to understand how our trading partners would just roll over and say, ‘OK,’” to the U.S. raising tariffs. It would be “uncharted territory” and politically dicey if Trump spiked tariffs on an “after-the-fact basis” on companies that legally move jobs overseas, Shapiro said.

One of the biggest questions surrounding Trump’s approach to trade is how he will respond if other nations “call his bluff,” Reinsch said. “If he does something to [China], you can be sure that they’ll do something back at us, and over the years they’ve gotten very, very good” at figuring out how to disrupt U.S. commerce, Reinsch said. “I think a lot of his thinking on trade seems to be based on: These other guys need us more than we need them. And I think in the global economy, that’s simply not so. It’s more complicated than that.” Currency manipulation, global steel and aluminum overcapacity, and antidumping will be three main parts of the Trump administration’s engagement with China, Magnus said.

Trump's promises to increase tariffs, particularly on China, could take several forms. For example, retaliation against China for perceived manipulation could be more potent if leveled through a round of sanctions, potentially including tariffs, under broad powers accorded by the International Emergency Economic Powers Act (IEEPA), Reinsch said. After determining that a nation presented an international economic emergency, the president would have broad authority to impose sanctions. They would have to be renewed periodically but would not expire unless the president chose to let them. Historically, behavior that qualifies for an emergency has been a pretty low bar, and courts have generally deferred to the president on what is essentially a national security matter, Reinsch said. The IEEPA requires the president to consult with Congress on any actions taken under the law, but does not require congressional approval for counter-emergency efforts, according to a blog post by the Olsson Frank law firm (here).

The Trading With the Enemy Act of 1917 (TWEA) was one law relied upon by President Richard Nixon when he imposed a 10 percent tariff surcharge on imports in 1971, and could be used by Trump to justify higher tariffs as well, the Peterson Institute for International Economics said in a briefing (here). The law does not require a state of war to exist with the country newly subject to higher tariffs -- Nixon cited the ongoing state of war with North Korea as his justification. TWEA and IEEPA would both allow "Trump to take quite drastic action with few limitations," the Peterson report said. More limited provisions include Section 232(b) of the 1962 Trade Expansion Act, which would allow imposition of tariffs or quotas to combat an adverse effect on national security from imports, and Section 122 of the 1974 Trade Act, which allows imposition of tariffs to counter large U.S. "balance of payments" deficits for a limited time, the Peterson report said.

The Senate Finance Committee views tariff policy as residing in Congress per the U.S. Constitution, a committee spokesperson said Nov. 15 in an email. “The Committee would expect that any major decisions undertaken regarding tariffs would be done in close consultation with Congress,” the spokesperson said.

There's some disagreement on whether Trump can unilaterally follow through on threats to withdraw the U.S. from NAFTA (see 1611100040). According to Reinsch, under current laws and WTO rules, the Trump administration could raise tariffs for NAFTA products from the current zero rate under NAFTA to the WTO most-favored nation (MFN) rate. Tariffs wouldn't immediately increase if the U.S. leaves NAFTA, he said. To raise tariffs for NAFTA products, the Trump administration would have to repeal President Bill Clinton’s 1993 NAFTA-implementing duty proclamation or issue a new one, at which point tariffs could rise back up to MFN rates, Reinsch said.

Trump indicated he would raise tariffs to 35 percent for car companies that move jobs to Mexico and export products from there to the U.S., but that would run afoul of WTO rules and disrupt a 40-year-old integrated supply chain that sees constant movement of car parts across the southern border, and between Detroit and Windsor, Ontario, Reinsch said. The authority to sanction U.S. companies moving production to Mexico monetarily or otherwise would require congressional approval, according to a list of Frequently Asked Questions about NAFTA withdrawal, from law firm Miller Canfield (here).

General Motors, Ford and Fiat Chrysler -- known as the U.S. “Big Three” automakers -- would clamor against any tariffs targeting the automotive sector, Reinsch said. “You’re going to cause them an enormous amount of disruption,” Reinsch said. “They’re all going to start making less money. It’s going to be less efficient, and they’re going to start moving things around once they figure out how to take advantage of what he’s done.” Subsidies and tax breaks, rather than punishments like tariffs, might more effectively persuade companies to keep operations on U.S. soil, Reinsch said. It’s “very unlikely” that trade penalties would bring manufacturing jobs back to the U.S., and it’s difficult “to bludgeon” companies into good behavior because “they’ve got too many alternatives,” Reinsch said.

Presidential efforts to garner congressional support to broadly change tariffs after any NAFTA repeal could add political risks, as most of the supporters of such a move would be Democrats and a small group of Republicans, Magnus said. Most Republicans would likely oppose any effort pursuant to a NAFTA repeal, and Trump likely will avoid outright killing NAFTA in hopes of maintaining the maximum support of a Republican House and Senate guaranteed for the next two years, Magnus added. More likely than an effort to change base NAFTA tariffs would be initiation of a delegated tariff authority such as IEEPA or proceedings under Trade Act Section 301, Magnus said, which gives the president the authority to raise duties to rebalance concessions lost through violation of trade agreements or unfair trade practices. “That could produce some real drama, I think, probably of a temporary nature,” Magnus said. “It will enable [Trump] for a period of time to operate through executive action rather than through the ... work of getting legislation passed.”

If the Trump administration opposes the WTO’s rejection of potential U.S. tariff increases of up to 35 percent and 45 percent, it could withdraw from it with six months’ formal notice, Shapiro said. If Trump “pulls us out … you’ve got all this residual stuff that Congress would have to deal with to give effect to our departure,” Reinsch said. The fallout from such a move could be enormous, as the U.S. and other WTO members would no longer be bound to a reciprocal framework with preset tariff levels, Reinsch said. “It’s just classic Smoot-Hawley in the ’30s,” he said. “‘I’m going to raise tariffs against you.’ And all these other countries are going to say, ‘Fine. We’re going to do the same to you, and we’re going to do it bigger.’”