Trump Shows How Not to Be a Protectionist

Tariffs are better than quotas and other lessons in how to do protectionism well

President Trump promised this week to restrict Chinese investment and imports over intellectual-property violations, but his record raises doubts about whether he will follow through.
President Trump promised this week to restrict Chinese investment and imports over intellectual-property violations, but his record raises doubts about whether he will follow through. PHOTO: EVAN VUCCI/ASSOCIATED PRESS
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Free trade, for all its virtues, isn’t an easy sell. Every country applies some level of protectionism out of economic or political necessity.

But protectionism can be done well or done badly. Done well, it minimizes costs to taxpayers and consumers, maximizes benefits to domestic industry, and discourages bad behavior by trade partners. President Donald Trump routinely does protectionism badly, using the wrong tools on the wrong behavior and the wrong countries.

On Tuesday, he actually suggested hitting the right target the right way, when he promised to restrict Chinese investment and imports over intellectual-property violations. But his record raises doubts about whether he will actually follow through.

Here are some lessons in how to do protectionism well:

Lesson one: tariffs are better than quotas. Tariffs, which are a tax on imports, are more predictable and transparent than non-tariff barriers such as quotas, which are a quantitative limit on imports.

Protected But Still ShrinkingU.S. steel has enjoyed varying levels of   since the 1990s but total employment has still shrunk.Percentage of steel imports covered    : Chad Bown, Peterson Institute forInternational

Yet Mr. Trump is negotiating quotas on imported steel in lieu of tariffs. Quotas, by restricting supply, raise prices, just as tariffs would. But whereas tariff revenue goes to taxpayers, the higher prices on imports caused by quotas benefit foreign companies.

Quotas have unpredictable effects. If demand for steel softens, imports will fall, the quota will no longer bind, and domestic industry will lose protection at its most vulnerable time.

Allocating the quota also invites lobbying, favor trading and opaque gamesmanship, yielding odd results. Argentina’s steel quota is 35% larger than recent exports, enabling it to take market share from competitors such as South Korea whose quota is 30% smaller.

Lesson two: threatening tariffs is worse than actual tariffs. For months Mr. Trump threatened to impose tariffs without actually enacting them. That prompted steel buyers in the U.S. to stock up, an important reason the volume of imports is up 2% year to date. The Alliance for American Manufacturing, which backs the tariffs, complains the influx of imports during the administration’s drawn-out investigation into whether steel and aluminum imports threaten national security cost 13,500 jobs last year. Yet because demand for steel is strong thanks to a healthy U.S. economy, prices are up nearly 40% this year—as if a tariff were already in place. That means the foreign suppliers of those imports are enjoying a windfall.

Mr. Trump thinks threats are a useful lever in broader negotiations. But domestic manufacturers can’t be sure if the tariff will ever take effect or if it does, will stay. The gamesmanship thus reduces their incentive to invest in new capacity or jobs.

Lesson three: punish bad actors, not good. Presidents typically save their harshest treatment for the most egregious rule breakers in hopes of changing their ways.

Mr. Trump has done the opposite: he has picked fights with Western Europe, Japan, South Korea, Canada and Mexico, all U.S. allies or neighbors that more or less play by the rules. He has thus far been relatively easy on China, which even free traders agree is a serial violator of the rules of free trade and the ultimate cause of global overcapacity in steel and aluminum. He promised tariffs on $150 billion worth of imports then suspended them, announced devastating penalties against telecommunications company ZTE Corp. for violating sanctions on Iran and North Korea then softened them.

On Tuesday, he reiterated a threat to hit $50 billion of imports containing “industrially significant technology” with a 25% tariff, but it might be another negotiating tactic that China doesn’t take seriously.

Mr. Trump sees trade as governed by power and leverage, not rules. Because Japan, South Korea, Canada, Mexico and most of Western Europe depend on the U.S. military, market or both, he counts on them rolling over without retaliating. China, which is a strategic and economic rival, hasn’t hesitated to exercise all the leverage at its disposal, from its sway over North Korea to its agricultural imports from key Republican states.

This calculus may yield short-run wins but at the expense of long-term cooperation. “With friends like that who needs enemies,” European Council President Donald Tusk recently tweeted in response to Mr. Trump’s tariffs on European Union steel and aluminum. “But frankly, EU should be grateful. Thanks to him we got rid of all illusions. We realize that if you need a helping hand, you will find one at the end of your arm.”

Lesson four: have a post-protection plan. China’s protectionism is future-focused, seeking to become globally competitive in industries such as aerospace, renewable energy and robotics. Mr. Trump, by contrast, seems obsessed with the past, when American coal, cars and steel ruled the world.

But protection cannot make an industry grow that is fundamentally in decline: tariffs and quotas didn’t prevent the long-term decline of U.S. clothing manufacturers as production shifted to countries with cheaper labor.

Chad Bown of the Peterson Institute for International Economics notes steel has been protected to varying degrees from European, Japanese, South Korean and other Asian competitors since the 1990s. At the end of 2017, 60% of U.S. steel imports were subject to protection, compared with 4% of all imports in 2016, Mr. Bown has found. In that time, import penetration didn’t change much, but U.S. steel employment fell by half as productivity rose and the relative importance of steel to economic output declined.

Even if several thousand manufacturing workers see their jobs brought back by protection, many thousands who aren’t so fortunate will need skills in growing industries where the U.S. has an advantage. On this, Mr. Trump hasn’t had much to offer.

Write to Greg Ip at greg.ip@wsj.com

https://www.wsj.com/articles/trump-shows-how-not-to-be-a-protectionist-1527692912

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