Trump’s trade policy uncertainty discourages investment

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President Donald Trump has turned US trade policy upside down: details include a US withdrawal from the Trans-Pacific Partnership (TPP), threats to get rid of the North American Free Trade Agreement, a refusal to affirm new World Trade Organization judges, tariff hikes on steel and other goods, frequent rhetorical attacks on major trading partners, and a mistaken obsession with bilateral trade deficits.

Trade policy under the Trump administration also has a back and forth quality that undermines a rules-based trade order. Less than three months after pulling out of the TPP, the president said he would consider joining it for a much better deal, to throw cold water on the idea days later. Initially, the administration justified steel tariffs on ridiculous grounds that Canada, for example, poses a threat to national security. President Trump later tweeted that the tariffs on Canadian steel were a response to its tariffs on dairy products. On August 10, the president tweeted that he “has just authorized a doubling of tariffs on steel and aluminum compared to Turkey” for unclear reasons. (For a fuller account of tariff back-and-forth under the Trump administration, read the Peterson Institute’s “The Trump Trade War Timeline: An Updated Guide. “)

The rhetorical attacks and the capricious nature of the Trumpian approach to tariff policy also invite retaliation. The spot tariff increases between the United States and China are well underway. Canada, Mexico and the European Union have also imposed new tariffs on US imports. Numerous retaliatory tariffs weigh on American farmers, prompting the administration to pledge up to $ 12 billion in aid to help farmers cope with the fallout from the president’s trade policy battles.

Another feature of the Trump administration’s trade policy is unnecessary and additional complexity. The Commerce Department has put in place a slow and tedious process to seek exemptions from the new steel and aluminum tariffs, as one carefully explained the Wall Street newspaper editorial:

. . . companies must submit an application that their imports are not manufactured in the United States of “satisfactory quality” or “sufficient and reasonably available quality amount. “Companies must declare the uses for their steel product, their average annual consumption of the product, as well as the number of days required to take delivery, manufacture and ship the product. They must also estimate the maximum and minimum composition of 24 chemical elements in their products, including molybdenum, antimony and vanadium. There are dozens of others questions, but we’ll spare you.

Oh, and separate request is required for each width, length, grade shape, and shape of steel or aluminum product. A single company, Primrose Alloys, has submitted more than 1,200 requests for steel products, according to the Commerce database. All 14 that have been reviewed so far have been refused.

Companies can also submit declarations to support their demands, which naturally become political. . .

Crony capitalism, political patronage and extra sand in the cogs of commerce, here we are!

One of the consequences of all of this is a tremendous rise in anxiety and uncertainty about trade policy and its economic fallout. The graph below displays a United States Trade Policy Uncertainty Index (TPU) that I developed with Scott R. Baker of Northwestern and Nicholas Bloom of Stanford. It reflects the monthly frequency of articles in American newspapers that deal with both the uncertainty of economic policy and Exchange policy. Since Trump’s election in November 2016, the average value of the TPU index has almost quintupled from 2013-15. The full history of the US TPU Index (available through 1985 on policyuncertainty.com) shows no other comparable increase, except from 1992 to 1994, which was due to concerns surrounding the introduction of NAFTA.

The graph also shows a similar TPU index for Japan that I developed with Elif C. Arbatli of the International Monetary Fund, Naoko Miake and Ikuo Saito and Arata Ito, member of the Institute for Research on Economics, Trade and industry. The movements of the two TPU indices have been remarkably consistent since Trump’s election. Both countries’ TPU indices surged following Trump’s surprise election victory in November 2016, his presidential inauguration and withdrawal from the TPP in January 2017, and as tensions over trade policy escalated since February. 2018.


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