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The Economic Consequences of Trump’s War on Multilateralism
Menzie D. ChinnRobert M. La Follette School of Public Affairs and Department of EconomicsUniversity of Wisconsin and NBER
Presentation at WFAA Global Hot SpotsFluno Center, Madison, WisconsinOctober 18, 2019
The US Has Changed Course
Outline
US Trade Policy Uncertainty and Macro Effects Foreign Direct Investment and
Financial Regulation Concluding Thoughts
The “New” US Trade Policy
It’s not just an increase in the amount of trade restrictions being imposed.
It’s the legal authority under which tariffs being raised.
Typically, we have imposed tariffs for “unfair” trading practices:
MDC1
Slide 4
MDC1 Menzie D. Chinn, 10/16/2019
Conventional Responses to Unfair Trade Practices
Anti-dumping duties: applying taxes to goods that are being sold at prices below those sold in the home markets
Countervailing subsidies: applyingtaxes to goods that have been subsidized in production
“New” US Trade Policy Remedies
National security – “Section 232” Market access/intellectual property
– “Section 301” Both of these have been seldom
used
National Security Rationale
Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. 1862(b)(1)(A))
On aluminum, steel; maybeautomobiles
National security justification is little used pre-Trump:
- 26 investigations- 2 approvals
MDC2
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MDC2 Menzie D. Chinn, 10/16/2019
National Security Rationale
Only successful investigations were petroleum related
Last time investigation launched in 2001, G.W. Bush admin, for steel
Steel report is here: https://www.commerce.gov/sites/default/files/the_effect_of_imports_of_steel_on_the_national_security_-_with_redactions_-_20180111.pdf
From The Policy Game (1984)National Security Benefits and Costs. On the benefit side, protectionism within certain basic industries like autos, steel, and electronics helps to create and sustain and industrial base that, in times of war or national peril, can be shifted to defense purposes. However, this national security argument–and the existence of any benefits resulting from protecting these industries–can legitimately be called into question for several reasons.
First, the existence of any sizable benefits rests on the assumptions that import competition in our defense-related industries would not only reduce the size of these industries but also shrink them to the point where they would be too small to support our defense needs…
From The Policy Game (1984)
Second, it is highly possible that our defense capability might actually be enhanced–not damaged-by import competition. Without the umbrella of protectionism, our defense-related industries would be forced to operate at lowest cost, engage in more research and development, aggressively innovate to stay one step ahead of the competition, and modernize their plants at a faster pace. …
On the national security cost side, the major effect of protectionism is to threaten the stability of the international economic order through a global trade war. …
The Policy Game (1984)
Was written by Peter K. Navarro
The Policy Game (1984)
Was written by Peter K. Navarro Currently, Director, White House
Office of Manufacturing and Trade Policy …and author of
Navarro (2012)
Intellectual Property & Section 301
Sanctions motivated by Chinese violation of intellectual property rights of American firms in China- through counterfeiting, - patent infringement- the forced sharing of technology- industrial espionageAnd subsidies/state owned enterprises (e.g., Made in China 2025)
Intellectual Property & Section 301
Unilateral approach – US is prosecutor, judge, jury
Compare ag multilateral via the World Trade Organization’s Dispute Settlement Mechanism
The WTO’s DSM is why Section 301hasn’t been used since 2001
Intellectual Property & Section 301
Ironic, since US has typically “won” in DSM
Latest example: Airbus More generally, US is refusing to
make new appts to WTO Appellate Board, so no decisions can be rendered on US actions
Will encourage other countries to renege on multilateral approach
Intellectual Property & Section 301
Section 301 of the U.S. Trade Act of 1974 (last edition March 23, 2018), (Pub.L. 93–618, 19 U.S.C. § 2411)
Progress?
Trade deficit has widened Import prices have risen US-China trade deficit has shrunk,
but with decreased exports
Trade Balances
-800
-700
-600
-500
-400
-300
-200
-100
0
10 11 12 13 14 15 16 17 18 19
US tradebalance
US-Chinagoods tradebalance
bn.$,SAAR
Price Effects
Getting China to Buy More…
60
80
100
120
140
160
180
10 11 12 13 14 15 16 17 18 19
US Exports of goods to China,bn.$, AR
Chinesesoybeantariffs
s.a.
Costs Thus Far
Amiti, Redding, Weinstein (2019): $1.4 bn/mo income reduction by end-2018
AAF (Sep 2019): Decreased consumer welfare = $115.3 bn
AAF: Value of US exports affected by retaliation = $104.2 bn
Uncertainty & Macroeconomic Effects
50
100
150
200
250
300
10 11 12 13 14 15 16 17 18 19
Economic Policy Uncertainty index
5 mo ctrdmoving avg
US Trade Policy & GlobalUncertainty
0
400
800
1,200
1,600
2,000
2,400
50
100
150
200
250
300
350
10 11 12 13 14 15 16 17 18 19
US trade[left scale]
Global [right scale]
Economic PolicyUncertainty index
Uncertainty, Investment, Imports
Confidence and the Trade War
IMF World Economic Outlook (10/15)
Darker outlook due to: “…drag from trade tensions with the United States; slowing demand from China and broader global trade policy uncertainty weighing on east Asian economies”
FDI and Financial Regulation
The CFIUS process is strengthened- widening of criteria for nat’l security- might spark imitation Threats to impose capital flow
restrictions on China- delisting Chinese firms on US
exchanges- prohibiting US pension funds from
investing in Chinese bonds, equities
MDC3
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MDC3 Menzie D. Chinn, 10/17/2019
Concluding Thoughts
The administration’s approach to protection has been ill-conceived (based on a Mercantilist conception)
And poorly implemented Tariffs are a blunt means to effect
change (e.g., intellectual property rights)
So far, all we’ve gotten is retaliation
Concluding Thoughts
What might have been better?Maybe a plurilateral ring-fence of China on intellectual property, subsidies/state owned enterprises
I.e., the TPP