“I don’t know anybody who thinks that trade wars are something you win,” said former US trade chief Michael Froman.
Historically, the United States has focused on staying out of trade wars. Not so under President Donald Trump, who last week announced plans to slap sweeping tariffs on steel and aluminum imports and asserted that trade wars are good and easy to win. (They are not.)
The case the White House is making is that the United States are necessary to protect vulnerable American industries and ultimately their effects won’t be that big of a deal. But there’s actually plenty of cause for concern. “Everybody, all economies, will be adversely affected, the only question is how much,” said Michael Froman, who was the United States Trade Representative under the Obama administration.
I spoke with Froman, currently a fellow at the Council on Foreign Relations who served in President Barack Obama’s cabinet from 2013 to 2017, about Trump’s Thursday proposal to put a 25 percent tariff on imports of steel and a 10 percent tariff on imports of aluminum. He that said the administration’s contention the tariffs are aimed at China are misguided and that Trump’s invocation of national security in its reasoning could open a “Pandora’s box” for other countries to do the same.
Froman, who was also a lead negotiator of the Trans-Pacific Partnership — the multinational trade agreement Trump abandoned soon after his inauguration — said that Trump is right to complain that some countries have higher tariffs and are more restrictive than the US. But implementing across-the-board tariffs while at the same time shunning regional trade agreements and criticizing the World Trade Organization isn’t the solution. “Trade agreements are how you shape globalization, how you level the playing field,” he said.
This interview has been edited and condensed for clarity.
What’s your initial reaction to Trump’s apparent decision on these tariffs?
First of all, I think that the Trump administration is right to want to have a strong steel and aluminum sector in the United States, and I think they’re right to identify that there’s a global problem of overcapacity in steel and aluminum that needs to be dealt with. The question is whether this is the right tool and whether this is the right action to address those challenges.
Most of the unfair trading that’s going on in steel and aluminum is emanating from China, and this action does very little, if anything, to affect China. So instead, we’re hitting our closest allies and partners with a set of tariffs under the justification of national security, while the administration is making it more difficult for those allies and partners to work with us jointly to put pressure on China to reduce its excess capacity. We’re the ones who now look internationally isolated as opposed to the Chinese, which is where the attention of the global economy should be, because that’s where the distorting policies are taking place.
So you mentioned national security there, and I think that’s something that comes up a lot in this tariffs discussion but one that people don’t actually understand. What is the national security angle to all of this?
They’re using Section 232, which is a trade law that says you can restrict imports if those imports pose a threat to national security. It has rarely been used — I believe the last time it was used was 30 years ago or so during Reagan administration, when we were losing our machine tool industry, and machine tools are critical in the manufacturing of precision manufactured products, including a whole range of defense products.
Here, the challenge is a bit trickier, because if you look at — take steel — the top five or six sources of our imports of steel are Canada, Germany, and Turkey, which are in NATO, Japan and South Korea, with whom we have a military alliance, and Mexico. The administration is conceivably arguing that imports from Canada are a threat to our national security. Of course, Canadian troops have fought next to American troops in wars all around the world. If we feel that Canada’s exports pose a threat to our national security, we probably have bigger problems than simply the issue of steel.
The national security exception is one that the US has traditionally, under both Democratic and Republican administrations, been very reluctant to use. In fact, we’ve tried to discourage other countries from using it because we know that you could be opening a Pandora’s box. If the US justifies protectionism under national security, what’s to stop every other country from saying, “Well, our food supply is really a national security issue, and therefore we want to restrict the imports of agricultural products from the United States and elsewhere.” That’s exactly the kind of protectionism under the guise of national security that we have discouraged others from pursuing.
Along those lines of what other countries might do, these tariffs have sparked conversation of retaliation out of Europe and other countries, and you have the president of the United States tweeting that trade wars are good and easy to win. But what does a trade war look like?
A trade war can look like a series of escalatory steps of retaliation: the US imposes 25 percent tariffs on steel and 10 percent tariffs on aluminum; the countries that are affected then impose counter tariffs on products coming from the United States. Europe has talked about Harley Davidsons from Wisconsin, Kentucky bourbon, Levi’s. Other countries might retaliate against Boeing aircraft, or agricultural products — beef, pork, wheat, corn. So it could end up affecting a broad portion of the economy.
Then, as we saw over the last couple of days, the president might escalate it further and say, “Okay, if you retaliate against us, we’re going to keep your cars out of the United States.” And then there could be another cycle of retaliation against US actions.
That’s what a trade war looks like. The challenge is, I don’t know anybody who thinks that trade wars are something you win. Everybody, all economies, will be adversely affected, the only question is how much.
When you look at the history of trade wars, the effort has always been how do we get out of them, how do we deescalate, can we reach an agreement that leads to de-escalation? Because the costs become bigger and broader across the economy. This really is a challenge for any American administration — there’s always a temptation to adopt protectionist policies that provide protection for one sector for another — steelworkers, workers in the aluminum industry. But that comes with a series of costs.
First of all, the cost of the protection itself. The tariff is a tax on imports. Anybody using those imports as a factor in their production — the downstream industries, including the auto sector, the auto parts sector, the beer can manufacturers — they all have to absorb those costs and pass them onto consumers, making their products less competitive in the market. The consumers bear the costs. But then there are two other kinds of costs. One is the cost of retaliation, which goes way beyond steel and aluminum, whether it’s agricultural interests or other interests that other countries will be retaliating against. And then there’s a third layer, which is other countries imitating us and imposing protectionism for their own reasons because the US has opened door to that. We lose our moral high ground to discourage other countries from doing that. Once we’ve given up that position, it’s very hard to reestablish it.
That’s what you’re seeing in the markets and the commentary from across wide sectors of the business community — agriculture, manufacturing, services. It’s the uncertainty that this introduces into the global economy right now. Nobody knows how serious the costs will be. Nobody knows how much this will spread cross the economy.
If you had to go about this, and say, okay, Chinese steel dumping is a real problem, and we need to fix it, what would you do? How would you approach this?
Over the last couple of years we succeeded in generating an international coalition of support — it was manifest at the G20 and other arenas —putting pressure on China to reduce overcapacity. And I think that is ultimately our best way of doing this, because if China doesn’t feel the need to reduce overcapacity, none of this is going to have a long-term impact. I would try to add as much teeth to that as possible but focus on putting global pressure on China — not just the US, but the EU, Japan, Brazil, India, Indonesia, other countries that are affected by China’s distorted policies and to keep that pressure on. My concern is that [Trump’s tariffs] would relieve some of that pressure and put the pressure instead on us rather than on where it belongs.
I would also use the enforcement tools that we have. In the last part of the Obama administration, we filed a WTO case on aluminum, and it was a very innovative, interesting case because it really targeted the heart of the problem, which is the state-owned banking system in China providing subsidized credit to the aluminum sector, which led to the development of overcapacity, depressing global prices and injuring our aluminum industry. The Trump administration has not followed up on that case, they have not pursued the case. It’s in the US’s court to pursue the case, and the US has not followed up. This administration has a critical view of the WTO, but I don’t think it makes a lot of sense not to use every tool at our disposal, and that tool has a legitimacy of the international system behind it.
So you bring up the WTO, which is likely to object to these tariffs. Trump has been critical of it, and his trade adviser, Peter Navarro, on Sunday criticized and said needed to change. He wouldn’t say if the US might even consider leaving the WTO. Can we do that? Is the criticism of the WTO fair?
The WTO is not a perfect organization, and there are certainly areas where it could be updated and reformed. I think the Trump administration is correct in saying that the particular kind of challenge that China’s state capitalist model poses to the open rules-based trading system is one that the WTO isn’t as well suited as we would like to deal with.
