The departure of Gary Cohn as the head of the United States’ National Economic Council may be the most consequential personnel change in the Trump administration to date.
Cohn’s presence in the White House had kept in check a trio of trade protectionists — US Commerce Secretary Wilbur Ross, US Trade Representative Robert Lighthizer and National Trade Council director Peter Navarro — from unleashing a global trade war.
It was Cohn, a former Goldman Sachs president, who persuaded President Donald Trump to make a conciliatory speech on trade at the Davos Forum in January, while hinting that the US might rejoin the Trans-Pacific Partnership. These moves suggested that Trump would be willing to modify his hardline “America First” trade policy into “America first, but not alone.”
But Trump’s recent announcement that he plans to slap across-the-board tariffs on imported steel and aluminum, coming on top of tariffs announced in January on Chinese solar panels and South Korean washing machines, have dashed hopes of presidential moderation. Trump recently declared that “trade wars are good, and easy to win.”
Trump’s sudden decision to curb steel and aluminum imports on national security grounds triggered Cohn’s decision to resign in protest. The president based his action on a report from the Commerce Department, led by Ross, that the US needed a self-sufficient steel industry in case of a major war. The real target of the tariffs was China’s massive expansion of its steel industry, which has hurt other producers around the world, including in the US.
But imposing broad tariffs on steel and aluminum imports had the odd effect of hurting producers in friendly countries the most, since China is not a major exporter of steel and aluminum to the US, compared with Canada, South Korea, Brazil and Mexico.
If both America’s friends and foes are already complaining about US trade restrictions, the situation could become rapidly worse in the coming months.
The US president could soon act on other pending trade issues. He might decide to impose more anti-dumping and countervailing duties on Chinese aluminum imports after the US government filed an anti-dumping suit last November.
More importantly, Trump could ask for quotas and tariffs on a wider range of Chinese products, including furniture, auto parts and electronics, if the US government concludes that China has engaged in unfair intellectual property and industrial policy practices.
Although many in Washington would like to see some pushback against China’s unfair trade and industrial policies, they also fear that a global trade war over steel and aluminum is not the right way to deal with the problem.
Even Republican lawmakers are beginning to panic about its possible consequences, including retaliatory trade measures that could cost jobs, as they approach the mid-term elections in November. That has raised the possibility of whether Congress will block Trump’s trade decisions.
For example, Sen. Orrin Hatch, chairman of the Senate Finance Committee – which has jurisdiction over international trade issues – has warned higher prices caused by the steel tariffs could undermine the effects of the recent tax cut bill for middle-class voters. Other congressional leaders have called for measures that would directly target China rather than imposing a blanket steel tariff, which has been pushed by Navarro.
Trump has hinted that he has accepted Navarro’s position, since he can use the steel tariffs as a negotiating ploy to gain concessions from Canada and Mexico – two of the four largest steel exporters to the US – on the renegotiation of the North America Free Trade Agreement. But if the tariff measure is a warning shot to China, it is viewed as falling short while alienating voters at home and allies abroad.
Having already alienated them, Washington may also find it difficult to muster support from its Western trading partners in pressuring China to end its unfair trade practices
Republican congressional leaders are privately considering whether to block a three-year renewal of fast-track trade authority for Trump, although that would likely anger the president. They could also try to pass a veto-proof bill to block the tariffs from going into effect, although getting two-thirds support in both the House and Senate could prove very difficult.
Congressional pressure instead might force Trump to revise his initial proposal to impose a 25% tariff on imported steel and a 10% tariff on aluminum.
Trump has three options. One is cutting the broad tariffs slightly to 24% on steel and 7.7% on aluminum as recommended by the Commerce Department, although that is unlikely to satisfy US trading partners. The second would be to impose import quotas, although Canada would still pay the heaviest price. The third option is a mixture of tariffs and quotas, which would consist of imposing stiff tariffs on South Korea, China and Brazil, while giving relatively lenient quotas to Canada, Mexico and the EU.
But even if Trump agrees to compromise on his current tariff plans, it will still leave a problematic situation for Asia. Talk about reviving a US role in the Trans-Pacific Partnership is as good as dead despite recent comments by US Treasury Secretary Steven Mnuchin. There has been no follow-up on this idea or interagency support.
Going forward, the US emphasis will be on negotiating bilateral trade agreements in Asia, although US credibility has been damaged by the fickleness and uncompromising stance of the Trump administration on trade issues. Cohn’s departure has reduced the chances of flexibility.
Securing a greater balance in trade with China will also be difficult if Trump resorts to punitive measures. China has already threatened to retaliate over solar panel tariffs by acting against imports of US sorghum, which are heavily dependent on the Chinese market and whose producers are concentrated in the Midwest, a core Trump political base.
Having already alienated them, Washington may also find it difficult to muster support from its Western trading partners in pressuring China to end its unfair trade practices. Instead, European and Asian companies might take advantage of a Sino-American trade war to increase their market share in China.
Recent actions by the Trump administration will also set back hopes of a successful renegotiation of the Korea-US Free Trade Agreement (KORUS). US Defense Secretary Jim Mattis has privately warned about the deterioration of the defense alliance with South Korea if KORUS is scrapped.
Trump’s efforts to force Seoul to agree to his trade demands has already drained goodwill. With North Korea now focused on driving a wedge between the US and South Korea with its offer of negotiations on the future of its nuclear and missile program, Beijing may also spot an opportunity to revive closer economic ties with Seoul.