Trump Undermines Himself on Trade
America's president seems utterly convinced that a trade war would be good for the US (and presumably for him politically). But his behavior on trade may quickly also become counterproductive, for three reasons.
WASHINGTON, DC – US President Donald Trump recently launched a tirade against Harley-Davidson, the iconic American manufacturer of motorcycles. The cause of his outburst – accompanied by threats to impose taxes “like never before” on the company – was the news that Harley plans to invest in new manufacturing operations outside of the United States.
The company’s reasoning is straightforward and compelling. Trump has threatened to raise tariffs on imports from Europe, and some of those higher duties are already in place. The Europeans, in response, are imposing higher tariffs on imports from the US, such as motorcycles (as well as bourbon, orange juice, and playing cards). Harley-Davidson would like to avoid those extra European taxes – and it can do that by locating some of its production in places not subject to such high European tariffs.
Trump’s anger is thus misplaced and unfair: he forced the company’s hand. But his behavior on trade may quickly also become counterproductive, for three reasons.
First, this is how trade wars work. Trump has decided to increase the level of protection for various industries in the US, such as steel and aluminum. Those tariffs increase costs for companies that use metal as an input. For example, the impact on Harley-Davidson is to raise costs by about $20 million (or more than $2,000 per bike). The European Union’s retaliatory tariffs could cost the company another $45 million.
Trump’s signature theme is that, by helping business, he will help all Americans. When government policies reduce the profitability – or threaten the existence – of a company, it is only reasonable that the people running that business should respond as they see fit. Higher tariffs fragment markets and limit trade, precisely because companies want to reduce the taxes they pay – and allocate production accordingly around the world. Harley-Davidson is only responding as any company accountable to its investors would.
Second, Trump has tipped his hand. By now it should be clear to world leaders that being nice to Trump and flattering him may get you a photo opportunity at the White House, but it does not change policy. The Trump administration is all about realpolitik – meaning, in this case, who can actually get away with what.
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The countries that Trump is trying to intimidate – particularly China and the EU – have substantial spending power and are run by experienced and tough people. They now see clearly how to get Trump’s attention: target their retaliatory tariffs at companies that have been praised by Trump.
It is of course easy to identify such companies – just look at Trump’s Twitter feed and who has been seen at the White House. Or target the companies of people who are known to be close to the president, such as Carl Icahn or Commerce Secretary Wilbur Ross.
This might seem like a cynical response, and a few years ago it would have been regarded as unacceptable. But Trump has undermined all the norms around international trade and how top world leaders relate to one another. Even in his behavior toward other leaders of G7 industrial countries, he has managed to baffle and offend. Every Twitter tirade enables strategists in foreign capitals to focus more clearly on what exactly will next get the US president’s attention.
And with Trump, you don’t have to wait long to see if you have pressed his buttons. His Twitter account provides instant feedback. And the more he rants, the more it encourages targeted retaliation.
Third, Trump has a major vulnerability in his incipient trade wars: American agriculture. Not only is the sector a major exporter ($133 billion of foods, feed, and beverages in 2017), but many rural areas are bastions of support for Trump and the Republicans in general. During the negotiation of the Trans-Pacific Partnership – which would have lowered tariffs and non-tariff barriers faced by US agricultural exports in participating countries – Republican members of Congress representing such districts were among the strongest supporters of freer trade (including at a House Ways and Means Committee meeting at which I testified).
The smart strategy for countries targeted by Trump includes targeting US exports of crops and food. America’s major trading partners may not want to do this in one fell swoop; sometimes threats are just as unsettling – and thus just as effective as a bargaining chip. But, given Trump’s love of brinkmanship and confrontation, it is reasonable to expect further escalation, as with China’s tariffs on US soy beans, pork, and wine.
The good news is that no one except Trump wants a trade war – so these tariffs could easily and quickly be reduced. The bad news is that Trump seems utterly convinced that a trade war would be good for the US (and presumably for him politically). Trump is apparently unwilling to listen to reason – or even to sensible companies like Harley-Davidson. A larger-scale trade war (or wars), with a significant negative impact on US manufacturing and agriculture, appears ever more likely.