In a 1949 telegram to the US consul in Shanghai, Dean Acheson, then secretary of state, delineated possible responses to a Communist victory in China “should Commie commercial policy” disappoint. Among the options: invoking Section 338 of the Trade Act of 1930, which allows presidents to impose tariffs of up to 50 per cent on imports from countries found to “discriminate” against the US.
The telegram marks the last known official mention of the arcane bit of legislation. But when John Veroneau, a top trade lawyer in the administration of George W Bush, uncovered the statute recently he found it was still active and available for use.
For Mr Veroneau, who now leads the trade practice at law firm Covington & Burling, this illustrates a simple point. Buried in US law are plenty of tools to enable Donald Trump to unilaterally deploy new shock tariffs against big US trading partners.
In contrast with his recent predecessors, Mr Trump may well want to use them. By naming an avowed protectionist as his top trade negotiator and convincing companies such as Ford to bring jobs back to America, the president-elect this week has again shown US economic relations with the world are set for a significant shift.
“I think we are in very dangerous waters,” says Robert Zoellick, the former World Bank president and US trade representative.
Robert Lighthizer, the lawyer Mr Trump picked for US trade representative, has for years likened free-trade advocates to political naifs. He will join Peter Navarro, another outspoken China hawk set to lead a new National Trade Council, and Wilbur Ross, the billionaire investor and the president-elect’s pick for commerce secretary, in a triumvirate chosen to deliver on Mr Trump’s campaign promise of an “America First” trade policy.
On the campaign trail that policy amounted to getting tough with China, threatening companies that send factories overseas with punitive tariffs and promising to rip up or renegotiate trade agreements.
But what might Mr Trump really do once he takes office?
Mr Trump has made clear that the main target of US trade policy will be China and in Mr Lighthizer, his new top trade negotiator, he has a man with a plan.
In 2010 testimony to a congressional commission Mr Lighthizer called for the US to adopt a “significantly more aggressive approach [to China] than we have followed thus far”. Among his suggestions was a vigorous challenge to China’s alleged currency manipulation, something Mr Trump has repeatedly griped about.
Besides officially designating China a currency manipulator, which recent US administrations have resisted, Mr Lighthizer called for the imposition of special duties on Chinese imports. He also suggested taking China to the World Trade Organisation, arguing its currency policy represented an illegal export subsidy. “We need strong leaders who are prepared to make tough decisions, and who will not be satisfied until this crisis has been resolved,” Mr Lighthizer wrote.
Economists argue that concerns about China’s currency manipulation are outdated as, if anything, Beijing has in recent years been intervening to prop up the renminbi.
But Mr Lighthizer’s views are echoed by Mr Navarro, the economist and author of Death by China, named to head Mr Trump’s new National Trade Council.
And that is why many fear that Mr Trump could set off a trade war with China. “I think the biggest risk is conflict with China that spins out of control,” says Mr Zoellick.
While much of the discussion about Mr Trump’s trade plans has focused on his threats to impose punitive tariffs, Republican lawmakers are already considering an alternative.
Under a radical overhaul of the US corporate tax system proposed by Republican leaders in the House of Representatives, imports would be taxed while exports would not. The “border-adjusted” tax would come alongside a cut in the corporate tax rate to 20 per cent and would encourage more US production of goods, according to advocates. Steve Moore, a Heritage Foundation economist who advised Mr Trump’s campaign, said the plan would “tilt the playing field” in favour of domestic production. “I personally think [Mr] Trump could be persuaded this is a smart thing to do and if you do it you don’t need any [punitive] tariffs,” he said. Import-intensive companies including retailers have already begun lobbying against it. The tax also faces potential opposition in the Senate and could be challenged at the WTO.
Mr Trump has put renegotiating the 22-year-old North American Free Trade Agreement with Canada and Mexico high on his list of priorities. With his threat this week to impose a “big border tax” on General Motors cars made in Mexico the incoming president also levelled a trade bazooka at the elaborate regional supply chains that have sprung up under Nafta.
Canada and Mexico have said they would be willing to discuss updating Nafta. But that may still be harder than it seems, argues Matt Gold, a former deputy assistant US trade representative for North America who teaches law at Fordham University. All three countries have things they would like to change. But all attempts to negotiate those have failed in the past.
Moreover, Mr Trump’s threat to withdraw from Nafta would present a huge blow to the US economy. “It is simply not realistic for the United States to withdraw from Nafta and the Canadians and Mexicans know that,” Mr Gold says.
Ignore the WTO
For decades Washington has been one of the main backers of the WTO and treated its rules as sacrosanct. Mr Trump has threatened to pull the US out of the trade body. That would be an extreme option. But a Trump administration will test the bounds of WTO rules. In his 2010 testimony, Mr Lighthizer called for Washington to do exactly that, arguing against a “simplistic and slavish dedication to the mantra of ‘WTO-consistency’”.
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