The prospects of a trade war have increased. The second year of the Trump Administration has begun with a serious provocation. Duties and quotas on washing machines and solar panels were consistent with the defenses against dumping and unfair subsidies of previous administrations.

However, the tariffs slapped on aluminum and steel were exceptional. The justification was national security, a rarely used defense. Moreover, in the coming months, the US is expected to take stronger actions against China for violating intellectual property rights. 

Nearly every modern US president has put on tariffs. In the recent past, for example, Obama imposed tariffs on vehicle tires and dozens of anti-dumping measures against China. George W. Bush levied a larger tariff on steel that Trump. Fears of a trade war were limited. Europe made some symbolic gestures, but ultimately, the prospects of losing at the World Trade Organization induced the US to drop the steel tariff. 

Investors and foreign officials are viewing Trump’s tariffs through the lens of his rhetoric and those of his senior trade advisers. They view trade as a zero-sum game. The distributional rewards of trade have not been accrued to the United Statesbecause other countries – and not just enemies – have gamed the system. 

The argument is misleadingly simple. Under floating exchange rates and free trade, they argue, the US should not have a large chronic trade deficit. The trade deficit then is the result of measures taken to prevent the foreign exchange market from reaching a clearing price that would bring the trade account into balance. 

The accumulation of US Treasuries in reserves is often a way to resist the upward pressure on currencies of trade surplus countries, including Germany and Japan. Also, many countries find ways to game the system through subsidies, low interest rate loans, and other unfair practices. 

Further, the key trade officials in the Trump Administration deny the existence of an international community. International relations are characterized by competition between nation-states. It is a permanent and multifaceted struggle for contingent advantages. Ideological differences are for intellectuals, and what ultimately drives policy is the national interest. 

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