Trump's Trade Tariff Playbook

Learnt from Ronald Reagan...

TRUMP has been talking tough on trade, writes Dan Denning, co-author of The Bill Bonner Letter.

But is Donald Trump running a trade strategy from Ronald Reagan's playbook? It sure looks that way.

The key man is US Trade Representative Robert Lighthizer. That simply means that he's responsible for developing and recommending trade policy to the president.

And the key legal provision that's making Trump's trade tariffs possible is an obscure section of a 1974 trade law passed by Congress.

Lighthizer was a deputy trade representative for Ronald Reagan in the 1980s. Keep in mind that this was before the World Trade Organization (WTO) rules on settling trade disputes in a multilateral way were passed in 1995.

Reagan described Japanese trade practices as anti-competitive, mostly because of the dumping of Japanese steel, car, and semiconductor products on the US market.

The Japanese, Lighthizer argued, were deliberately producing goods at a loss and selling them into the US market in order to put US competitors out of business and gain market share.

Lighthizer countered by employing Section 301 of the 1974 trade law that gives the president discretion to slap tariffs on selected industries. Lighthizer, ostensibly a free-trading, conservative Republican, later argued for applying Section 301 to China:

"The icon of modern conservatism, Ronald Reagan, imposed quotas on imported steel, protected Harley-Davidson from Japanese competition, restrained import of semiconductors and automobiles, and took myriad similar steps to keep American industry strong. How does allowing China to constantly rig trade in its favor advance the core conservative goal of making markets more efficient? Markets do not run better when manufacturing shifts to China, largely because of the actions of its government."

But I think there's more to Trump's trade strategy than just punishing China.

Trump and Lighthizer are applying tariffs to industries where US companies are, perhaps, located in key districts for the upcoming midterm elections and the 2020 presidential election.

If they can "save" jobs in certain districts, it should lead to votes. And to be fair, it's likely that Trump genuinely considers Chinese (and European Union) trade practices to be unfair and thus, open to unilateral revision (rejecting WTO arbitration mechanisms, which the French and the Chinese flout anyway).

This is what makes the current global trade situation so fragile and political. It was the United States that set up the current system, including the WTO. In the post-Bretton Woods world, the US opened its market to foreign imports because it opened foreign markets to US exports.

The US – with the dominant manufacturing base in the world, undamaged by bombs from the war – shipped cars, washing machines, heavy machinery, airplanes, and more around the world. General Motors, Ford, General Electric, and Boeing were the high-fliers of the stock market.

When the Berlin Wall fell in 1989, Congress passed the North American Free Trade Agreement in 1993, and China entered the WTO in 2001, it changed the impact of "free trade" on the American economy. Goods got cheaper and more abundant. But wages began a structural decline.

And that's where we are today with Trump trying to hold back the tide. If you're a realist, you might argue that what's good for the globe is no longer good for the US This was the essence of Steve Bannon's economic nationalism. It didn't reject free trade. It argued that free trade, as it exists, isn't really free.

Adam Smith was right. Mutually beneficial trade and the division of labor are the backbones of civilization itself. They're the bedrock of win-win relationships.

Only the willfully blind cannot see that we're already engaged in a trade/currency war that could last many years.