Donald Trump’s victory took most pundits by surprise because of excessive faith in Big Data, which meant the serious unexamined errors in polling will not be corrected. The media is still obsessed with his abusive language and violations of political correctness, largely ignoring the real appeal of his populist policy proposals. From start to finish his campaign reassured economically distressed voters that he would put “America First” using nationalist policies of trade protection and immigrant exclusion, long an anathema among the globalist business establishment of both parties.
Speaker of the House Paul Ryan spoke Wednesday celebrating a unified Republican government, but the Republican Party has been a party of free trade for decades. The last time the Republican Party nominated a protectionist presidential candidate was Alf Landon in 1936. The first big divide between Trump’s protectionist voters and the Republican Party’s pro-business trade commitments will rattle the new government as soon as Trump turns to trade issues.
Trump won enthusiasm in the Rust Belt, the deindustrializing states of the Midwest and Pennsylvania, by promising that he would stop companies like Ford from moving jobs abroad. He further pledges to return jobs to America that have already fled. He promises massive tariff increases to achieve this. He rages against trade treaties. If he sticks to his promises, this will be the largest reversal of U.S. trade policy since 1934 when Franklin Roosevelt initiated a process of pushing for freer trade, reversing the extreme protectionism typical of the Republican Party since its inception in the 1850s, culminating in very high Smoot-Hawley tariff of 1930, often blamed for deepening the Great Depression.
Trump faces a dilemma over trade. If he seeks to unite the Republican Party and conciliate its corporate establishment, he must drop his protectionist promises. However, such a reversal would be a slap in the face to millions of disenchanted voters who were excited by his promise to return jobs to America. The establishment Republican solutions of tax and regulation cuts will not stimulate the economy much. Most big corporations already find numerous ways to avoid taxes and game regulations.
Business is not investing because demand is weak, not because regulations or taxes are too high. If companies are left with even more profits, they will not create millions of new jobs and a 4 percent growth rate, but will further inflate asset values with their speculative games. Trump’s credit policies are not well defined, but he seems to imply he wants a weaker dollar to promote exports and lower interest rates to promote faster growth and relieve debtors. However, we have seen with repeated bubbles that easy credit is more likely to inflate asset values than to promote productive, job-creating investment, which is now a small fraction of the uses of credit. Less business regulation promises more of the same.
If Trump, on the other hand, keeps his protectionist promises and thereby continues to oppose the globalist sympathies of the Republican Congress and party establishment donors, he will arouse enormous opposition from businesses that do not want the expense and disruption of his tariffs to force them back to the U.S. In order to “drain the swamp” he would need to oppose, not unite, most congressional Republicans.
This is not a small task. He could achieve it only by sustaining the movement his election started. He would need to identify protectionist candidates to run in 2018 Republican primaries in hundreds of congressional districts. Some incumbent Republicans, seeing a real threat of losing their seats, might opportunistically come over to his protectionist side. But since corporate donors will not approve of such drastic defections, most will probably stick with their donors and resist Trump. Most Democrats will also continue to oppose the sort of drastic protectionism that Trump would need to implement his promises.
Until he could transform the Republican Congress in 2018 with hundreds more pro-Trump protectionist Republicans, the only way Trump could deliver on protectionist promises would be to use the executive powers of the president within the existing trade treaties, including the General Agreement on Tariffs and Trade and the World Trade Organization. Existing trade rules make it possible for Trump to implement some ad hoc protectionism using anti-dumping lawsuits. If U.S. interests can claim damage from foreign exporters allegedly injured by selling below cost of production, then the law provides for compensatory tariffs until the complaint is resolved. Even if the claims of underpricing are spurious, the tariffs can be implemented during the years it takes to adjudicate a suit.
Anti-dumping suits are neither a fair nor a comprehensive way to punish firms for exporting jobs, however. Only a vote by Congress could establish such a new basis for imposing tariffs. These tariffs would violate existing trade law, requiring, as Trump promises, renegotiating trade treaties and then getting support for the revised treaties from three-fifths of the Senate. This seems extremely unlikely, since there would be broad bipartisan opposition within Congress to such strong protectionism.
Even if Trump could introduce such protectionism by act of Congress or executive fiat, it is not likely to achieve quickly the rapid growth he promises. Foreign countries, as has become commonplace, would retaliate with new tariffs of their own, resulting in trade “wars.” U.S. exports would suffer immediately, long before companies could make new domestic investments. Financial markets would be roiled by the loss of trade-related financial business and the unpredictability of asset value changes. Many companies that oppose protectionism might drag their feet rather than cooperate. They have power to vote with their capital. They may use that vote to frustrate Trump’s efforts to “bring them home.” The result of this opposition is more likely to be a recession than fast growth.
Only if protectionism is established as an irresistible and inevitable policy for a period of years would business finally acquiesce and domestic-oriented growth resume. Meanwhile, the contraction of international trade would have a massively disruptive impact on international finance, which is heavily invested in the existing global economy. A major worldwide financial crisis would be likely.
If I have to guess, I think it is more likely that Trump will betray his voters rather than fight his party and the business establishment that sustains it. He will probably give up on protectionism, other than some token actions. However, tokenism will not bring back jobs or sustain growth.
If he perseveres and forces his protectionism after a sustained movement and protectionist gains in 2018, then expect a worldwide economic and financial crisis in the coming years. This would be the biggest change in political economy since the 1930s. Most political economists recognize that it was the trade wars of the 1930s that transformed the stock market crash of 1929 into a long-lived Great Depression. It seems unlikely that Trump could initiate such a sweeping decline of international trade as occurred then, but it is possible if he tries vigorously to implement what he has promised.
Originally posted on World Policy Institute blog November 10, 2016 – Trump’s Trade Wars.