Is Trump ready to embark on a trade war?

Recently, the  Trump Administration introduced trade barriers on the imports of washing machines and solar products. This move was based on a World Trade Organization rule that allows countries to re-introduce trade barriers in cases where evidence clearly suggests that “a domestic industry is injured or threatened with injury caused by a surge in imports.”

It is a first move, but could be followed by trade barriers to industries such as steel and aluminum. The introduction of these tariffs was heavily criticized by and South Korea, the two most important exporters of washing machines and solar products to the United States.

Although they have both claimed that they will seek to resolve this issue through the mechanisms offered by WTO, they still could decide to impose trade barriers themselves to products, but primarily services, from the United States. This could lead to a domino effect with bilateral attempts to retaliate.

This is not the first time a U.S. president introduced trade barriers. George W. Bush introduced tariffs on steel in 2002 and Barack Obama put a tariff on tires from China in 2009. The Bush tariffs were raised from other countries to WTO and the ruling of the international organization led to the immediate withdrawal of the measures.

It is highly likely that this is going to be the outcome in the washing machine and solar products case. Donald Trump will have gained brownie points internally by fulfilling his promise to put “America first” but at the same time will put the blame on WTO and its rulings for not being able to maintain the trade restrictions.

But what if this case does not go smoothly and we end up in a trade war? The main losers will be U.S. consumers who will have access to a smaller range of products and potentially higher prices. Whirlpool has already announced an additional investment creating 200 new jobs, but these will come at a significant cost to the American consumer.

It is worth examining whether the U.S. administration has performed a cost-benefit analysis on the measure to protect the white goods (heavy consumer durables: air conditioners, refrigerators, stoves, etc.) industry. In the solar products case, things become even more complicated as a wide range of these products are not final products sold to consumers but intermediate products used as inputs in U.S. production sold domestically or exported as final goods abroad. These companies will face a steep rise to their costs and will lose in the short term any price/cost related competitive advantage.

This could cost jobs instead of creating jobs. The U.S. administration makes the over-simplistic assumption that U.S. production of solar products can increase overnight at a cost and quality that is competitive to the currently imported goods. 

The outcome of Davos is a clear indication of Trump’s view on global trade. This can be directly contrasted with Canadian Prime Minister Justin Trudeau, who began his speech in Davos by announcing the successful conclusion of negotiations among 11 countries to reach the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP). The United States was originally the main driver behind the TPP, the withdrawal from which was one of the first actions of the Trump administration. 

This is indicative of a potential approach to the North American Free Trade Agreement (NAFTA) by President Trump who has repeatedly said that the 24-year-old agreement does not work in the interest of the United States and the current phase of negotiations might be an excellent opportunity to completely renegotiate its terms.

Despite Trump’s attempt to set a reconciliatory tone in his Davos speech by saying “America First does not mean America alone. When the United States grows so does the world;” the message sent by other members of the U.S. administration was not as positive. Obviously, in a global world, all countries fight for their best interests but we cannot forget that trade wars reduce global efficiency and generate winners and losers in all parties involved.

What Trump is trying to achieve, in the current global climate will not come from competition but co-opetition, a quasi-combination of cooperation and competition. 

The Trump move, although politically positive, could have a negative impact geopolitically and on U.S. businesses and consumers. Nowhere in the rhetoric justifying the introduction of tariffs have we seen a solid economic impact analysis or a cost-benefit analysis, therefore both the political and economic outcomes are ambiguous.  

Ed. note: This article was submitted prior to President Trump announcing a 25% tariff on steel and 10% tariff on aluminum.