Let's Expose Trump's Trade Errors By Pursuing Free Trade Minus Trump

Let's Expose Trump's Trade Errors By Pursuing Free Trade Minus Trump
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European Commission chief Jean-Claude Juncker has come up with the perfect description for a trade war: “We can also do stupid.” Maybe there is a way for the EU, Canada and other victims of President Trump’s draconian tariffs on steel and aluminum to “do smart” – to retaliate against the U.S. trade action in a way that helps their own consumers, rather than inflicts more pain on them.

The idea is one that was proposed by former U.S. congressman Jack Kemp, recently channelled by a columnist for Canada’s National Post. Rather than raise tariffs on the country that launches a trade war (in this case the United States), reduce tariffs on every other country except that one. Rather than raise tariffs on imports from the United States, lower them on imports of the same goods from other countries.

The idea seems counter-intuitive – responding to trade pressures by giving improved access to your home market. But giving other countries improved access actually benefits your home market – making goods more cheaply and readily available to end-use consumers, making inputs and technologies cheaper and more readily available to intermediate suppliers, and opening new opportunities for supply chains. The vast majority of a country’s people would be better off if it simply removed all tariff and non-tariff barriers unilaterally, and let goods and services flow freely. The only problem, for most governments, is engaging in such a sensible, market-based move would leave them without a seat at the table. No one would have to negotiate with them, because they would have given up all of their negotiating chips.

The Kemp Idea, if you will, is a way of turning that around: Enjoy the benefits of being able to import freely (or at least considerably more freely than before) while turning the heat up on the country that is trying to prevent you from exporting into their home market – by making it harder for them to export into your market, even as you make it easy for all of their competitors.

The thing to remember about a trade war is that, rather than being easy to win, they are impossible not to lose.  Everyone who takes part in one, whether as the initiator or the respondent, is sure to lose economic ground. Increase tariffs, and you are simply raising taxes on the people of your own country, including companies you are counting on to hire and export. Basically, trade wars are a pair of countries slapping themselves on their own face, and pointlessly saying “take that!”  

Unfortunately, that process can quickly spin out of control, as it did when the legendary Smooth-Hawley tariffs of 1930 prompted retaliation from U.S. trading partners, ending up making much worse the depression that had prompted the support for tariff increases in the first place. Ultimately, beggar-thy-neighbor policies lead to beggar-thyself results.

Toward the end of World War II, the United States led an effort to turn the Smoot-Hawley effect around. All countries that took part in a global trade agreement would lower their tariffs. In return, all other participating countries would lower their own. This mass reciprocity has fostered enormous economic growth for all countries that have participated. The Kemp Idea would take the same principle, and use it to discourage increased tariff barriers. Rather than slap their own consumers in the face and say to another country “take that”, countries can stand up to trade bullies by giving their own consumers a break – reducing the barriers to entry to their own market – while saying “take that” exclusively to the offending nation. Rather than trying to reduce the U.S access to the European market, for example, the EU government can threaten to give everyone else other than the United States increased access.

Companies, regardless of their country of origin, would have to take this into consideration. If they set up a new plant in the United States, would they be left out of the improved access to the European market that every other country in the world will enjoy?

If say, the EU and Canada both lowered tariffs for each other while letting them stand regarding the United States, would DowDuPont, the world’s largest chemical company, decide to make its next major investment in Canada or Argentina instead of the U.S. Gulf Coast, a move they are considering making? As a DowDuPont executive pointed out this week: “We’ve got opportunities in other places like Canada, like Argentina. All of them are on the radar screen.” After all, drive up the price of steel, and you drive up the cost of new investment. DowDuPont last year completed construction spending of $6 billion in new factories along the Texas Gulf Coast. Steel for the plants cost about $1.2 billion. The proposed 25 percent duty on steel imports would have added about $300 million to the project’s cost.

Sweden's Electrolux, Europe's largest home appliance maker, has also said it would delay a planned $250 million investment in Tennessee in light of the tariffs, waiting to see the final details of the U.S. plans before making a final decision, he said.

At this moment, all of the United States’ steel and aluminum trading partners are standing on the verge of entering a war of mutual assured destruction. Why not turn that into a process of mutual assured construction. By embracing Jack Kemp’s idea of isolating trade aggressors by reducing tariffs on everyone else, trade partners can use their heft in the market – without turning it against their own economies.

Allan Golombek is a Senior Director at the White House Writers Group. 

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