Donald Trump’s Trade Policy Options

In his campaign proposals, Donald Trump summarized his vision for future trade policy in seven main points. Among them is the withdrawal from the Trans-Pacific Partnership (TPP), the intention to renegotiate the North-American Free Trade Agreement (NAFTA), and identifying and reacting to foreign countries' violations of trade agreements.

TPP Withdrawal Has Already Occurred

On 23 January 2017, President Trump formally withdrew from the TPP agreement, which came as little surprise given his strong opposition to it. Among other things, the purpose of this broad trade deal was to strengthen cooperation between the USA 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 was not yet in force, there will likely be little tangible damage done to existing trade relations, and China may actually benefit from the decision. In fact, some countries have already considered including China instead of the USA in a renegotiated TPP.

Attempt to Renegotiate NAFTA Likely as Well

Mr. Trump intends to renegotiate NAFTA, to get a "better deal." However, it remains unclear what he actually means by that. In general terms, NAFTA Article 2205 allows any party to the agreement to withdraw six months after written notice has been submitted. Furthermore, according to the presidential powers over foreign affairs, as well as a long history of legislation that transferred powers in the area of trade from the US Congress to the US president, Mr. Trump may be able to submit written notice without congressional approval (see Hufbauer, 2016). If Mr. Trump were indeed to do so, he could subsequently raise tariffs to the levels specified by the World Trade Organization (WTO) for "most favored nations" – unless he were to pull out of the WTO as well (which he could in fact do), in which case he could impose even higher tariffs.

Wide Trade Authority of US President

According to Hufbauer, there are five additional laws that Mr. Trump could use:

• Section 232(b) of the 1962 Trade Expansion Act, which can be used to put limits on imports, e.g. on national security grounds.
• Section 122 of the 1974 Trade Act, known as the balance-of-payments authority, can be used to impose a maximum tariff of 15 percent for up to 150 days on all imports, with the benefit of not having to be justified by national security reasons.
• Section 301 of the same 1974 Trade Act is an even more powerful tool, which can be used as a retaliatory measure against "unfair trade practices," without setting a timetable or rules about the levels of tariffs.
• The Trading with the Enemy Act of 1917 might be used to impose tariffs "during times of war," whereby the latter can be interpreted in a relatively broad way (e.g. special forces deployed in a foreign country might already suffice).
• The International Emergency Economic Powers Act of 1977 can be used to impose tariffs in situations of "unusual and extraordinary threats," which can again be interpreted relatively broadly by the president.

The aforementioned laws basically give Mr. Trump the power to impose tariffs on countries. Some of these laws may limit the level of intervention (such as point 2), but points 4 and 5 in particular give him significant scope. While any action Mr. Trump undertakes to impose higher tariffs based on these laws could (and indeed are likely to) be challenged in court by private firms, Hufbauer argues that it is far from clear that such court cases would be successful. It also appears that affected foreign nations can quickly refer to the General Agreement on Tariffs and Trade Article XXIII, and make a case against the USA at the WTO. A more likely response might even be that foreign nations retaliate more quickly against US actions, which would in effect be 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 interest of a broad section of the US population, which relies heavily on cheap imports.

Border-Tax Adjustment as a Likely Alternative

While Mr. Trump's inclination toward higher tariffs is quite apparent, the US Congress itself does not seem to be too eager to increase them, 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. Its preferred measure appears to be a general overhaul of the US tax code, including the introduction of a "border adjustment," which would exempt corporate income earned from exports from corporate taxes, while subjecting income earned from imports to such taxes.

The implications of such a policy would depend largely on the specifics, but to the extent that it makes imports more expensive and cheapens exports, a tendency toward a lower US trade deficit and a stronger US dollar appears likely. However, Mr. Trump has already stated that he considers the border adjustment as "too complicated," and that he considers the US dollar as too strong. Given the likely extended time period needed to legislate a border adjustment, Trump's opposition may even increase further, making the prospects of the border adjustment quite uncertain.

Uncertainty Still High, Risk of Trade "Wars" Remains

At this early stage, there is still a heightened degree of uncertainty regarding the outlook for US trade policy under Mr. Trump. The wide range of executive powers that the US president has allows him to cancel treaties such as NAFTA and impose tariffs, with Congress largely unable to prevent him from doing so. Trump's apparent intention to deliver quick results to his voters, in addition to the appointment of protectionist individuals to key trade positions, already signals a shift toward a more protectionist US trade policy. Whether this does indeed lead to trade "wars" between the USA and other economies is difficult to project, but the risk is far from negligible. The US Congress's border adjustment proposal, as part of broader tax reform, might be a way around an overt trade war which applies tariffs and quotas. However, given that it will likely take a long time before tax reform can be passed, Mr. Trump may choose to act earlier if he deems it necessary.