war on the rocks

Trump’s Trade Deficit Obsession Hurts National Security

June 7, 2018

This is not another boring economist’s explanation of why the trade deficit is unimportant. It’s a boring economist’s explanation of how President Donald Trump’s focus on the trade deficit is causing specific harms to American national security, including the distortion of U.S. alliance relationships and loss of leverage against China.

The president cares deeply about the trade deficit, and has for 30 years. His view has naturally changed U.S. trade policy. First, his administration launched in April 2017 and has now completed, a Section 232 (of the 1962 Trade Expansion Act) national security investigation into steel and aluminum. This has received a great deal of attention to date but is a comparatively minor action.

Much more serious is the May 2018 start of a second Section 232 inquiry, this time into autos and auto parts. At $324 billion, auto and parts imports in 2017 were six times the size of the metals imports. This amount is a tempting target for trade deficit reduction. In that respect, it makes perfect sense for the administration to move on to autos.

But the administration is simultaneously calling autos potentially vital to national security — questionable on its own — and hitting close allies. Over half of auto and parts imports come into the United States from defense treaty partners, with Canada, Japan, Germany, and South Korea topping the list. Even if the president is right that trade barriers can serve American interests, they will hurt these countries. And their inevitable retaliation will hurt the United States, dwarfing the minor steel fuss.

The looming auto dispute overlaps with NAFTA negotiations, where local content in autos is an ongoing problem. The main issue, however, appears to be the trade deficit. The administration has demanded a “sunset clause,” under which NAFTA could be suspended or terminated after five years, a demand that Canada, Mexico and quite possibly the U.S. Congress reject. The administration’s motive is to ensure an updated NAFTA doesn’t coincide with a rising trade deficit that would be blamed on Trump.

Although the president does not see Mexico as a close partner, economic weakness there would increase illegal immigration, which the administration often treats as a security issue. Trump is right that Canada can be difficult on trade, but, considering both economics and security, it may very well be America’s most important ally.

There is also strategic value to a successful update of NAFTA. The United Kingdom is looking for a trade framework to replace its E.U. membership. The Philippines is a defense treaty ally being swayed by Chinese money. Taiwan is trying to limit the extent of its outright economic dependence on China. A completed NAFTA 2.0 would provide the concrete foundation for rapid conclusion of comprehensive or partial trade agreements with these and other countries, while reassuring partners that the Trump administration is willing and able to move forward on trade if they are willing to meet some American demands. Yet the trade deficit obsession may kill all of this.

Then there’s our not-so-much-friend. Candidate Trump accused, with some cause, President Barack Obama of treating America’s enemies and rivals better than its partners. But President Trump can be accused of the same with regard to China, because, in a perverse sense, it has the most to offer. The Sino-American goods and services deficit in 2017 accounted for three-fifths of the overall U.S. goods and services deficit, so that’s where big gains can be found.

Reports on Tuesday that Beijing offered Secretary of Commerce Wilbur Ross as much as $70 billion in additional American exports are therefore no surprise. Moreover, none of America’s allies can match that kind of offer because (i) they’re not as big as China and (ii) they don’t intervene to distort their economies as much as China does. That the world’s second-largest economy constantly intervenes to get the market outcomes it wants, rather than the outcomes that would result from fair competition, is a compelling reason to confront the People’s Republic of China. Given the president’s goals, however, it has become a reason to negotiate more actively with China than with Japan, the European Union, etc. The squeaky wheel is getting the grease when it should just be swapped out for something better.

This active negotiation with the People’s Republic has more specific security implications. Beijing is trying to head off U.S. sanctions stemming originally from coercion and theft of intellectual property. Rather than directly targeting the Chinese firms involved, Washington brandished tariffs to reduce the deficit. Rather than offering meaningful change on intellectual property, China seeks to placate Trump with deficit reduction. Loss of American intellectual property, including dual-use technology, will thus continue.

Sanctions directly linked to national security are also at risk. The precondition for Beijing’s deficit-reduction offer was lifting the ban on American sales to ZTE. This was imposed because ZTE conducted illegal commerce with Iran and North Korea as late as 2016, then lied about it last year. It seems that if you have a lot to offer on the trade deficit, you can break U.S. law pertaining to national security and face only a punishment that grows more farcical with each passing week.

Please forgive one truly boring economist comment: The president is indeed wrong on the economics of the trade deficit. It does not signify lost jobs, it’s an accounting tool. Chinese offers should be understood as accounting shifts more than anything else. They would temporarily change American trade results with the PRC in large part by just diverting exports from other countries. This is what America is putting ahead of Iran sanctions, intellectual property protection, and strong relationships with its closest allies.

 

Derek Scissors is a resident scholar at the American Enterprise Institute (AEI) and concurrently chief economist of the China Beige Book. He is the author of the China Global Investment Tracker, a series of papers that chronicled the end of pro-market Chinese reform, and multiple papers on the best course for Indian economic development. Dr. Scissors has a bachelor’s degree from the University of Michigan, a master’s degree from the University of Chicago, and a doctorate from Stanford University.

Image: Wikimedia Commons