Trump's trade protectionist push was highlighted by the recent imposition of tariffs on solar panels and washing machines.
We have seen a return of the threat of trade protectionism in the United States. President Trump recently placed tariffs on imported solar panels and washing machines, sparking concern that the United States may prompt trade wars. This comes as the administration renegotiates the North American Free Trade Agreement (NAFTA) with Mexico and Canada, and Trump has repeatedly threatened to withdraw from the pact. He has also targeted China in his efforts to seek more favorable trade terms. If Trump does withdraw from NAFTA, we envision considerable economic disruption; and the same is true of the trade relationship with China.
The story of the washing machine
Domestic manufacturers never like losing out to imports. Their first response is always to turn to their governments. And in reaction to complaints from local U.S. manufacturers (the sector accounts for roughly 12% of GDP; the ISM Manufacturing Index is a key indicator for the overall economy), the administration imposed restrictions on imported solar panels and washing machines. While the washing machine story is more important, tariffs on solar panels garnered much press attention given the interests of the fossil fuel industry and the pace that households are adopting solar technology.
There are perhaps 1.5 million solar installations in the United States and about 10 million washing machines sold every year. Domestic manufacturers already enjoy substantial protection since washing machines aren't at the cutting edge of technological development, and they have a poor volume to value ratio. Shipping a washing machine means shipping a lot of air in a product that is not particularly valuable. The tariffs will increase the prices of washing machines in the United States, and a lot of households will be affected.
The tariffs raise the question of whether this is a signal of further developments on the trade front or just a continuation of the pipeline of trade issues. Trade law cases involving steel and aluminum are working their way through the system and are close to the finish line. Shortly after his inauguration, President Trump withdrew the United States from the Trans-Pacific Partnership (TPP), a 12-nation trade deal that included among others Japan, Mexico, Canada, Australia, and New Zealand. The 11 nations, excluding the United States, are expected to sign a pact in March in Chile. And, talks on changing the South Korea–U.S. Free Trade Agreement (Korus) are also underway.
There is a clear divide between Trump and the Republican orthodoxy on trade issues. The Republicans in Congress have been doing all they can to restrain Trump's protectionist instincts. Capitol Hill is highly supportive of both NAFTA and Korus. But unlike health care and taxes, where the decisive factor was the (in)ability of the Republican Party to find some internal unity, the executive branch has more legal autonomy on trade issues.
NAFTA: Good cop versus bad cop
As the NAFTA negotiations get underway, Trump is playing good cop to U.S. Trade Representative Robert Lighthizer's bad cop. It's hard to feel confident about a likely outcome at this stage because all parties have little incentive to compromise. The Canadians are playing hardball. Lighthizer is known as a tough negotiator, but he's not going to withdraw from NAFTA on his own; that's a decision for Trump
Lighthizer is known as a tough negotiator, but he's not going to withdraw from NAFTA on his own.
There's nothing but downside risk to the U.S. economy. Our guess is that NAFTA will survive, and perhaps there will be one or two tweaks that make it a slightly better deal. But there's nothing there to produce a better outlook for the U.S. economy.
Complex relations with China
There are clear links between trade and geopolitics, especially with China. And there is economic risk from disruptions in trade relations with China. It's hard for the "trade is unfair" folks to get anywhere without talking about China because it is the biggest "source" of the U.S. trade deficit. Trump has acknowledged the complexity of the relationship with China given the range of issues that Washington and Beijing need to discuss.
A finely tuned administration may be able to come up with targeted trade measures. These measures would create powerful incentives for the Chinese to adjust some of the practices that U.S. companies find difficult to deal with, without disrupting global supply chains. Can the Trump administration do it? Our guess is that the trade rhetoric will continue, and isolated cases like washing machines will provide a few headlines. However, the administration lacks the determination to change the fundamental direction of global trade policies.
Next: Spotlight on the dollar