Toward a Trump Trade Round: Time to Negotiate!

Donald Trump takes pride in breaking all international precedents, especially on trade. The Chinese have decided to respond in kind and only successful negotiations can stop the cycle of retaliation from causing global pain and conflict.

Is there an alternative scenario? If one goes back to the decade of the 1970s, there is precedent for the Trump tariff campaign of 2018. The Nixon/Connally import surcharge was followed by Jimmy Carter’s trigger price mechanism on steel that lasted from 1978 to 1981.

There were lawsuits challenging executive authority and national security was invoked. Federal courts sided with the executive.

This historical precedent is reassuring in some ways. As now, the domestic and international reactions to U.S. trade restrictions in the ‘70s were intense and highly critical. But then the ultimate outcome was very positive. Why?

Successful negotiations

Nixon’s move triggered a series of negotiations, starting in 1973, which resulted in the Smithsonian accord (which reset exchange rate relationships) and by 1978 an amended IMF accord. In 1973, the Tokyo Round of trade negotiations was started and concluded by 1979. This provided the foundation for decades of successful globalization.

Is it conceivable that Donald Trump could pull off a similar wholesale rewrite of the rules of the game for international economic relations? At least his new top economic advisor, Larry Kudlow, suggested as much when he said we are just starting negotiations. The markets took note and settled down.

The real question, of course, is: Can Donald Trump pull off such a feat? Presidential temperament aside, unilateralism has a bad name and perhaps deservedly so. The world order has been built around a multilateral trade regime and the rule of law.

But it is important to note that the rule of law does not apply evenly across all issues of trade, money and finance. Nor has history provided a smooth path for the evolution of rule of law in international economic relations.

The GATT/WTO – from humble beginnings

When the new world order was redesigned at Bretton Woods in the 1940s, the founding parents of globalization envisaged a triumvirate of institutions based in treaties to govern money, finance and trade in the IMF, the World Bank and the International Trade Organization.

As any student of economic history knows, the IMF and World Bank emerged as major international institutions, with budgets and bureaucracies to match their important mandates.

On trade, however, the U.S. Senate never ratified the ITO. The GATT, called upon to take its place, started as a stepchild of the global order. It is worth remembering that the GATT was intended to be transitional and apply only provisionally — “to the fullest extent not inconsistent with existing legislation.” Hardly a promising start.

Over the decades, the rule of law evolved quite differently across trade and money: Through a series of negotiations, trade became more rule oriented, with less policy space, while money set aside the treaty rules on exchange rates under the gold standard in favor of a regime based on cooperation and consultations.

Meanwhile, the World Bank never really tried to set up rules on international finance, instead preferring to evolve its role as a development banker.

Exchange rate reset then, trade reset now?

In 1970, Nixon upended the international trade and financial system in a distinctly unilateral act when the United States abandoned the gold standard and imposed an import surcharge of 10% across the board, but tailored mainly to hit Japanese imports.

The move was intended to reset the global exchange rate order that Nixon saw as disadvantaging the United States and contributing to unsustainable trade deficits. Sound familiar?

To make a long history of international economic negotiations short, unilateralism is never a good thing when cooperation and convergence are available. But history is also replete with examples of good things coming from false starts.

As we now know with the benefit of hindsight, in the 1970s, extraordinary unilateral interventions in finance and trade helped bring about new agreements that provided a more effective basis for international integration.

There is hope for a similar outcome on the trade issue now but all stakeholder countries must step up and play a constructive role.

Trumpian protectionism

Trump said this in his inaugural address: “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protection will lead to great prosperity and strength.”

Behind the rhetorical excess lies a choice: A U.S. retreat from globalization — or global, especially Chinese, willingness to rewrite the rules of trade to create a more level playing field for everyone.

There is no denying that the Chinese have successfully gamed the global trading system and betrayed their promises to evolve away from state control.

One can fault the excessive optimism of the Clinton years or the Chinese reaction to the financial crisis but the pervasive role of state owned enterprises and state mandated technology restrictions mean the WTO rules are in need of a fix.

Of course, China can try to stick to the legalistic position and try to defend the language of its accession clauses. But the leaders in Beijing must realize that they actually have the most at stake in the trading regime remaining open.

That suggests a (still unadmitted) readiness to accept major changes. Otherwise, the country’s economic growth – a barometer as politically important in China (and for the CCP) as anywhere else – will suffer.

As things stand, most Americans feel the proper role for the President is on offense. America’s traditional role has been to step up, sometimes breaking the crockery, but always with an outcome in mind that serves both United States and global interests.

Most Americans believe they can compete anywhere in the world if given an opportunity. China’s future may well depend on that optimism not reversing.

If Larry Kudlow is right, there are tough-minded negotiations ahead. President Trump would have to call on the best and the brightest we have to get a win-win solution for both the United States and our global partners. That may be a challenge for him, but past Presidents have always found the people to do the job.

A Trump Round

One thing is for sure: There will certainly be a Trump Round, either on Trump’s watch (in which case it could bear his name) — or de facto, in his wake, as his successor picks up the pieces and repairs the damage from the U.S. global withdrawal and retreat.

The President needs to decide if he wants to control his own legacy. The world will support him if he makes the right choice.