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Commentary

How Trump Can Make Trade With Mexico and China Work for America

Dec 19, 2016

Congress has long been tougher on international trade than U.S. presidents, but that likely won’t be the case under Donald Trump’s administration. During the campaign and following his election, Trump has threatened he would impose high tariffs against imports from Mexico and China.

Even though Congress gives the president broad authority to retaliate against unfair trade practices and pull out of trade deals, historically it has been Congress that has been more critical of trade. To be sure, U.S. Presidents have on occasion acted aggressively to try to preserve market access abroad. In the 1960s, Lyndon Johnson’s administration placed high retaliatory tariffs on four European products when Europe shut down U.S. exports of chickens. In the 1980s, then President Ronald Reagan retaliated over Japan's market closure for American semiconductors by temporarily imposing 100% tariffs on $300 million of U.S. imported electronic goods from Japan.

Historically, however, Congress has played a bigger role in pushing tariffs —most notably, in the 1930 Smoot Hawley Tariff, which imposed tariffs averaging 59% on dutiable imports. And Congress has been wary of trade liberalizing agreements. In the 1940s and 1950s, Congress refused to go along with President Harry S. Truman by rejecting U.S. participation in the International Trade Organization (a stillborn forerunner of the current World Trade Organization).

That said, the political climate is far different today. The Republican leadership in Congress has expressed its reservations about imposing new U.S. trade restrictions and has urged fixing (rather than scrapping) the Trans-Pacific Partnership, which was poised to be a landmark trade deal with the U.S. and 11 other countries across the Pacific.

Implementing large-scale trade barriers against imports would have very serious costs on the U.S. economy, as companies rely on global supply chains where the parts of many products are likely manufactured in multiple countries. For instance, Apple relies on assembly of its iPhones in China, but retains most of the design work and profits outside of China. And there are many other products that American shoppers depend that come from China — for example, reportedly 80% or more of vitamin C the U.S. consumes comes from China.

As for Mexico, automobile production involves complex inter-relationships of sourcing parts and assembly operations, relying on open borders to create the final product. Steep tariffs on Mexican goods, as with products from China, could disrupt global supply chains and harm consumers, particularly those with low incomes, by driving up prices of imported goods sharply. Economists estimate that the cost to the average American household of the increased duties would be $11,100.

It would also hurt American exporters and investors. U.S. exports of goods to China run at over $9 billion a month and U.S investments in China total over $80 billion. China is well-practiced in the art of trade retaliation. – substantial U.S. exports of Boeing airplanes, agricultural and other goods that rely on China as a major market would be vulnerable. So whether it is reliance on China as a source of supply or as a market, China has the ability and the means to strike back if the U.S. makes any hostile trade moves.

To be sure, Trump is right to criticize China for unfair trade. A vigorous and effective approach is needed to deal with Chinese protectionism.

What’s more, there are a series of practices, currently in force in China or in draft form, that are unacceptable: theft of intellectual property; techno-nationalism in the form of policies and measures designed to replace foreign goods with domestic substitutes; state-owned and state-influenced companies as unreliable business partners or unfair competitors; and Chinese government subsidies to domestic industries of a scale never seen before in world history. All of these are challenges for the incoming administration.

One answer to the series of trade problems with China is litigation at the World Trade Organization (WTO), but that has its limits. The system is overburdened and the WTO has no fact-finding capability, making it difficult to deal well with complicated cases, particularly when subtle means of government intervention are used. For the most part, the WTO rules are not geared to problems characteristic of economies in which market forces do not always determine competitive outcomes.

A satisfactory answer, however, is not to be found in trade cases or in an across-the-board tariff wall that damages both economies. A more targeted approach is needed. The United States is not without leverage. For example, where a Chinese firm has benefitted from cyber-theft, its products could be banned from “public procurement” — purchases for use by government agencies. This could be a proportionate response consistent with U.S. WTO obligations.

The two economies are interdependent. Each needs access to the other's market. Serious negotiations are needed with near term results to create a more balanced and equitable bilateral trade relationship with China. It is in both China's and America's best interests to put their economic relations on a path toward greater mutual benefit. The President-elect favors bilateral deals. The challenges presented by China should be high on the list of needed negotiations.

In the case of Mexico, it along with Canada, has already indicated its willingness to renegotiate its trade relations with the U.S., which is governed by the North American Free Trade Agreement (NAFTA). There is a clear case for updating this 20-year-old agreement. And there are certainly areas where there can be an improvement for American access to the Mexican market. For example, while Americans are allowed to bring in $800 of Mexican goods, Mexicans returning from the U.S. are only allowed to bring in a fraction of that amount. The Trump threat of 35% tariffs has no doubt already gotten Mexico's attention, but imposing high tariffs would not be a good policy. There should be a strong interest on both the U.S. and Mexico to negotiate to improve their trading relationship on the basis of mutual benefit.

Alan Wm. Wolff is a Senior Counsel with the international law firm, Dentons LLP. He serves as Chairman of the National Foreign Trade Council, and was a senior trade negotiator in previous Republican and Democratic administrations.

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