Trump’s cheap bullying tactics could prompt a new Auto Pact

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Andrei Sulzenko is a former Canadian trade negotiator and is currently an executive fellow at the School of Public Policy, University of Calgary.

With last Thursday’s announcement by the Trump administration that it was following through with clearly illegitimate steel and aluminum tariffs, the gloves are off on trade, and the world is venturing into a bare-knuckle slugfest.

The trouble with trade wars is that everyone loses, including companies and workers in newly protected industries. For example, the United States exports more steel and aluminum products to Mexico than it imports. Where is the American win in that if Mexico, as promised, retaliates in kind – not to mention also hitting farm imports from the United States? Canada is piling on too, targeting products in politically sensitive congressional districts.

President Donald Trump obviously does not see it that way, as he seems content to have segments of the U.S. economy hit hard by retaliatory tariffs so long as he remains a winner in the eyes of his electoral base. Maybe this is another tactical ploy to gain some imaginary advantage, subject to being rescinded as part of “the art of the deal.” We will know how that plays out in the coming days as Europe, Canada and Mexico make their moves.

In this same vein, the administration recently announced an inquiry into whether automotive imports are injurious to U.S. national security. The case here is even more far-fetched than that of the steel and aluminum tariffs, but invoking national security and slapping on punitive tariffs is one of the few trade actions that a U.S. president can make unilaterally based on the fig leaf of an “unbiased” U.S. Department of Commerce finding.

The auto inquiry is transparently a shakedown of Canada and Mexico in the stalled North American free-trade talks, where Mr. Trump is mesmerized by the alleged unfair imbalance in auto trade.

One of the factors contributing to the unwillingness of Canada and Mexico to accede to blatantly protectionist, and probably unworkable, U.S. auto demands, is the fact that the default option for companies is simply to pay the low 2.5-per-cent U.S. import tariff under alternative World Trade Organization rules.

The availability of that option greatly reduces U.S. pressure on Canada and Mexico to agree to an asymmetrical new arrangement. However, if the U.S. auto tariff were ratcheted up to the 25-per-cent level being suggested under the national-security inquiry, it would (certainly in the President’s mind) fundamentally change the negotiating calculus.

So, the auto inquiry, like the previous steel and aluminum case, is really all about cheap bullying tactics. There is no underlying strategy other than playing to the electoral base, which will wise up to the fact these actions are against its own economic self-interest once retaliation kicks in.

The risk, however, is that actions and reactions will escalate to the point that there is no good face-saving exit ramp for a president whose instinct, in any event, is to double down. It is certainly not obvious how steel, aluminum and autos can be resolved, because on the merits of the issues – the U.S. is 100-per-cent wrong. At least in the case of the trade dispute with China, the Chinese side seems to acknowledge the United States has some valid points, and it is ready to give the President a modest win.

On autos, U.S. wrong-headedness will leave little room for compromise with its trading partners, and the best face-saving outcome for Mr. Trump would be a report concluding that auto trade does not constitute a threat to national security.

That should be the conclusion for a number of reasons.

First, the link between auto imports and national security is a stretch too far, even for creative protectionists. The United States already has a long-standing 25-per-cent tariff on trucks, the most obvious application to military preparedness.

Second, all auto manufacturers will be lobbying furiously to avoid disruptions to their intricate supply chains, as will politicians seeking election in auto-plant-heavy jurisdictions.

Third, even a cursory look at the data shows that foreign car brands actually out-manufacture GM, Ford and Fiat Chrysler in the United States and are increasingly exporting from the United States – that’s what open trade is about. For example, German auto maker production in the United States exceeds exports to the United States. And yet, Mr. Trump keeps railing about the unfair advantage of German manufacturers – perhaps he is referring to high quality.

Canada and Mexico have a lot at stake in this, since the bulk of both countries’ production is exported to the United States, just as most of their automotive consumption is imported from the United States. But even if the auto inquiry turns out positively, it still leaves the NAFTA impasse extant.

The last time auto trade was deemed a serious problem was in the 1960s when Canada needed help to adjust from an inefficient, protected auto sector to a free-trade regime with the United States. The creative “managed trade” answer was the Auto Pact, which essentially guaranteed Canada production levels equal to sales in Canada. Over time, as production became integrated on both sides of the border, the Auto Pact became unnecessary and was eventually terminated because it was found to be in contravention of World Trade Organization rules following a Japanese-led complaint.

Perhaps in this new Trump-driven world of second best, it is time to revisit some version of managed trade for autos in North America – essentially a production-sharing agreement along the lines of the Auto Pact, but this time for all three NAFTA partners. After all, we have already lost our free trade principles by agreeing to managed trade in other problem sectors such as lumber.

Source: The Globe and Mail