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President Trump's dangerous free trade retreat

President Trump's dangerous free trade retreat
© JIM WATSON/AFP/Getty Images

All does not bode well for the United States’ long-term commitment to free trade or to its traditional role as leader of an open global economic order.

At a time when President Trump’s America first policy is causing real damage to the U.S. and global economies, and at a time when it is failing to produce its desired results, the Democratic Party’s presidential hopefuls are choosing to steer a wide berth from criticizing Trump’s trade policies.

Even in Iowa, where farmers are reeling from lower farm prices and slumping manufacturing activity, candidates are displaying a remarkable reluctance to challenge Trump’s America first policy. 

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Over the past three years, a defining feature of the Trump administration’s economic policies has been its embrace of international trade protection. This has included the widespread imposition of aluminum and steel tariffs, a trade war with China, the renegotiation of NAFTA and the threat of a 25 percent import tariff on European and Japanese automobiles. It has also included repeated refusals to sign G-20 communique’s committing countries, including the United States, to refrain from intensifying trade protection. 

The abrupt shift towards a more protectionist U.S. trade policy has caused great investor uncertainty as to the stability of global supply chains as well as serious damage to the global economy. That in turn has contributed to lower U.S. farm prices, a slump in U.S. investment levels despite the large 2017 corporate tax cut, and a marked deceleration in U.S. manufacturing activity.

The IMF estimates that the cost of more restrictive trade policies to the world economy in terms of lost output has been around $700 billion. The IMF also reports that largely as a result of the various trade wars, the word economy has moved from a situation where 75 percent of the world’s economies were experiencing economic upswings in 2018 to one in which 90 percent of the world’s economies are now experiencing economic slowdowns.

While the economic costs of an America first trade policy have been all too evident, the benefits have been far from clear. The purported rationale for that policy was to level the international economic playing field and to eliminate the U.S. trade deficit. Yet, under President Trump’s watch, the U.S. dollar has continued to be strong thereby disadvantaging U.S. exporters.  Meanwhile, far from being eliminated, the U.S. trade deficit has widened by around 40 percent.

Worse yet, the Trump administration’s trade policy has constituted a dangerous step towards an economic policy more characteristic of Latin America than that which has been traditionally the case in the United States. By embracing a highly transactional trade policy, which involves the granting of specific tariff exemptions at the administration’s sole discretion, Trump has further opened the door to the corruption and crony capitalism that is all too prevalent south of our border.

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Perhaps one should not be surprised by the Democratic Party’s reluctance to challenge President Trump’s America first policy. After all, the Democratic Party has traditionally close links with labor, which has the most to lose from free trade.

Rather, if there is cause for surprise, it is that the Republican Party has gone along all too readily with Trump’s lurch towards a more protectionist trade policy and with his retreat from globalization. In so doing, it seems to have abandoned its former position as the champion of free trade and it seems to have forgotten the past painful lessons of the Smoot-Hawley tariffs in the 1930s.

When all is said and done, there is not much room for optimism on the U.S. trade front. Trump’s recent phase-one Chinese trade deal is but a truce with China to get him though the 2020 election before he is likely to revert to his protectionist instincts. Meanwhile, in the event of a Democratic victory in 2020, I would not hold my breath for a return to the U.S. post-war-led free world trade order.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.