January 30, 2019
The State of Trade in the World of Trump
Interview with Professor Alan V. Deardorff By Jennifer Chasseur and Will Sims
Alan V. Deardorff is the John W. Sweetland Professor of International Economics and Professor of Public Policy. Alan’s research focuses on international trade. With Bob Stern, he has developed the Michigan Model of World Production and Trade, which is used to estimate the effects of trade agreements. He has served as a consultant to the U.S. Departments of Commerce, Labor, State, and Treasury and to international organizations including the Organization for Economic Cooperation and Development and the World Bank. Alan received his Ph.D. from Cornell University.
Overall, what do people frequently misunderstand about international trade?
The thing that seems not to be understood by a lot of people, including the people that run our country, is the effect tariffs have. They seem to feel we’re taxing the foreigners, and to a small extent that’s true, but to a great extent it’s not. We’re taxing ourselves, our own people, and it seems to be hard to get that message across. The feeling is that by taxing China we are mainly hurting China, and it’s just not true.
Out of the Trump Administration’s trade policies so far, which one do you think will significantly impact trade policy in the future for the U.S.?
One of my worries is that all these tariffs he’s put on will not in fact go away. For example, we have a 25% tariff on light trucks that has been in place for over 50 years. We don’t have a good mechanism for getting rid of tariffs once they’re put on, unless the law has a time limit to get rid of them, but that’s not the case for Trump’s tariffs. In the long term, the only way we’ve managed to reduce tariffs over time has been with negotiations in the General Agreement on Tariffs and Trade, and that’s pretty much not going to happen.
The very optimistic way would be that President Trump will somehow make a deal with China. I’m not quite sure who we could make a deal with on aluminum tariffs since we have them on almost everybody, but we could get a deal where other countries will do something to satisfy Trump; probably limit their exports — and then he will respond by lowering our tariffs and getting them to lower theirs against us in return. That’s kind of the best outcome I think we could hope for under President Trump.
How long do you think it will take before the U.S. attempts another multilateral deal like the Trans-Pacific Partnership (TPP)?
Even before President Trump, I was pretty pessimistic about that [TPP]. The Doha Round of multilateral trade negotiations had died before him, and it was on life support for many years even before it died. So it was pretty clear that multilateral initiatives were not going anywhere. [i] To me, the only sort of hope is that maybe after Trump there might be an ability to move ahead. It would take a strong leader and an enlightened leader — probably from the United States. We let ourselves get driven into a bad situation before Trump came along and then he made it vastly worse. Before [the Trump Administration], the problem was that the two sides, the rich countries and the poor countries, each were being asked to make changes that were going to hurt parts of their populations — as trade liberalization always does — and they weren’t willing to do that.
The only way that it’s going to be fixed is through leadership and I suspect through compensation, but asking the poor countries to do something that’s going to hurt part of their population only in return for greater access to our markets isn’t going to do it. The parts of their population that benefit from greater access are so different from the ones that get hurt, and they don’t have mechanisms to redistribute. But we do; we have the money that the rich countries could be providing the help that the poor countries need. It’s going to take the rich countries with leadership to do that, and maybe they could frame it as a reaction to this terrible period under Trump in the trade war.
As we have discussed, the U.S. has recently started to pull away from multilateral free trade agreements. If multilateral trade agreements are discontinued in the future, how will major economies negotiate trade?
There are lots of moves outside the United States towards more liberal trade. China is leading in that area and various trade agreements in Africa are bringing countries together. There continues to be lots of interest in trade deals all over the world, except here. They’re not going to be including us, although we might join them under a new president. There is a chance that rather than getting rid of tariffs across the board, we start negotiating separate deals with individual countries or groups of countries that have already made trade deals with each other. We’ve done that with Korea already, and it’s surprising that we didn’t do it with Canada or Mexico. Smaller deals could potentially proliferate and end up getting us closer to free trade globally. Prior to Trump, one of the hopes was that since multilateral negotiations had broken down, the proliferation of free trade agreements would take us to a world where everybody is in a free trade agreement with everybody else. It isn’t necessarily the world one wants, but still that may be the way we will end up going.
An issue that’s been in the news a lot lately is the United States Mexico Canada Agreement (USMCA). Is there an aspect of the agreement that you think doesn’t necessarily get the attention that it merits in public discourse around this agreement?
By tightening up the rules of origin and by adding the high-wage rule of origin, production will become more expensive in North America. I don’t hear anybody talking about the fact that we will have a hard time competing abroad with those higher costs and that our exports in those sectors are going to be hurt. Producers also may start just ignoring the rules of origin and could start buying a lot more from abroad, not less, if they just decided to pay the internal tariffs. Those are the hard things to explain to the public, but there’s no question that the USMCA is going to raise costs. We’re going to buy more expensive inputs and pay more for labor, and it’s going to raise costs and therefore make us less competitive. All of that is an inevitable result, not necessarily awful enough to really undermine other things that we’re looking for, but it’s a piece of it that’s got to be a bigger part of the discussion.
One of the prevalent topics in national dialogue surrounding the USMCA is the Democratic opposition due to labor and wage considerations. Do you think that in the future Congress will change mechanisms for implementing free trade deals to better accommodate minimum standards?
They already did. The NAFTA had no labor provisions before they were added by Clinton. Later on, Congress became quite insistent that trade agreements had to have labor provisions, so most of the ones we’ve had since NAFTA have them. There was a deal between Congress and the president to approve a number of trade agreements that included labor standards. The Democrats were clearly the ones that pushed for that and they got it. The problem with labor standards is getting them to follow through on what they said. I suspect that if you can document that countries have violated their promises on labor issues then we will slap big tariffs on them, and the idea is that this will to be enough to change their behavior.
Will the Democrats be able to push for more in future free trade agreements? Probably. If they actually got the Trump administration to be willing to put it in before they had any power then they ought to be able to push for more. I don’t entirely view that as a good thing, because to the extent that it makes it more costly to use the labor in poor countries, they’re not going to use the labor in poor countries and that’s going to hurt those workers. But that’s a different issue.
Photo by David Wilkinson on Flickr
[i] The round of WTO negotiations that started in Doha, Qatar and ran from 2001-2008. They are the most recent round of multilateral WTO trade negotiations.
Jennifer Chasseur is a first-year Master of Public Policy student at the Gerald R. Ford School of Public Policy. Her policy interests include international economics and development. Prior to the Ford School, Jennifer worked at a science policy and medical research advocacy firm to improve national funding for scientific research. Her favorite projects focused on regulation of regenerative medicine and CRISPR therapies, particularly relating to intellectual property rights.
Will Sims is a first-year Master of Public Policy student at the Gerald R. Ford School of Public Policy. His policy interests include international economic development and impact evaluation. Before coming to the Ford School, Will worked as a Strategy Consultant with Accenture and served as a Peace Corps Volunteer in Guatemala.