President-elect Donald Trump has called for dramatic changes in U.S. trade policy.
He’s labeled the North American Free Trade Agreement and other U.S. trade deals a disaster. He’s threatened to levy high tariffs on Chinese imports, at times up to 45 percent. He’s promised to charge a 35 percent tax on goods from Mexico. He’s even suggested pulling out of the World Trade Organization, the global body that includes most countries around the world and helps coordinate trade disputes.
“We’re going to renegotiate or we’re going to pull out,” Trump told NBC’s Chuck Todd in July.
Those positions seemed to receive a lot of support Tuesday. Trump’s strong performance in Rust Belt states like Pennsylvania and Wisconsin suggest the depth of frustration among American workers with waning manufacturing jobs – seemingly part of a backlash against globalization that has emboldened populist movements in France, the United Kingdom, Germany and elsewhere.
And while it’s too soon to say whether Trump will do what he promised on trade, he will have a lot of authority to follow through.
“He could do a lot. The presidential powers in the area of restricting trade – not liberalizing trade – are as great as his powers in commander in chief,” says Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics.
According to Hufbauer, there are at least four legal provisions that would allow Trump, as president, to impose tariffs or take retaliatory actions as soon as he enters office. Trade-related acts passed in 1917, 1962, 1974 and 1977 give the president the ability to impose import restrictions, tariffs or other retaliatory measures without the approval of Congress.
However, Hufbauer says, “my guess is that he won’t do all the bad things he talked about in the campaign right off.”
Trump’s trade-related campaign promises have mainly focused on two countries: China and Mexico.
Hufbauer says Trump could stick with his promise of declaring China a currency manipulator on his first day in the White House. That would begin a process of re-evaluating the trade relationship with China. He might be unlikely to follow through on his proposal of a 45 percent tariff on Chinese goods, which would greatly increase the price of many goods for American consumers. But Trump might impose a lower tariff, say 5 percent – which by itself could also spark a trade war with China.
With Mexico, Trump has repeatedly threatened to pull out of NAFTA if Mexico and Canada don’t negotiate with the U.S. and offer it more favorable terms. He’s also threatened to impose a 35 percent tariff on Mexican imports.
As president, Trump would have the authority to renegotiate NAFTA and withdraw if the terms aren’t to his liking. Under the rules of the trade pact, any member can withdraw with six month’s written notice, and the American president can call for additional duties if trade terms unfairly advantage Canada or Mexico.
Hufbauer says Trump could start trying to renegotiate NAFTA immediately, but he’s skeptical that Trump would immediately start the process to exit the agreement, since doing so could be catastrophic for stock markets and the economy.
“We are going to have a financial hit in the markets. And he will be concerned, rightly so, that if you get a big enough financial drop you can go right into a recession, not only in this country, but around the world,” Hufbauer said. “The last thing he’d want to do is start his presidency off with a recession.”
These trade policies are likely to face an immediate outcry from the global business community, including companies like General Motors and Coca-Coca, which manufacture products in Mexico for American consumers. Global businesses are likely to seek an injunction in the courts against tariffs or import restrictions. But it remains to be seen whether their opposition would prevent Trump from pursuing these policies.
If Trump follows through on his trade-related campaign promises, the threat of recession is very real, economists say. The Peterson Institute of Economics has estimated that Trump’s trade policies, if enacted, could cost the U.S. 4 million jobs and start a recession.
Tariffs or import quotas of any kind will translate into higher prices for American consumers, who purchase a lot of imported goods. They could also easily cost American workers, by provoking retaliatory tariffs from other countries and thus lowering purchases of American products around the world.