Talking Trade with Gary Hufbauer

Peterson Institute for International Economics (PIIE) nonresident senior fellow Gary Hufbauer recently spoke with the Adam Smith Project about potential implications of President Donald Trump’s Section 232 tariffs on aluminum and steel, as well as aspects of the ongoing North American Free Trade Agreement (NAFTA) renegotiation, chances that the Trump administration could withdraw from the World Trade Organization (WTO), and potential impacts of the administration’s ongoing investigation of whether China is forcing unfair technology transfers from foreign investors.
Hufbauer has served as a leading trade policy expert at various think tanks since 1979, after working as deputy assistant secretary for international trade and investment policy at the U.S. Treasury from 1977 to 1979, and director of the international tax staff at Treasury from 1974 to 1976.
He was PIIE’s Reginald Jones senior fellow from 1992 to January 2018, after which he started his current position.

Q: You’ve said in several [recent] panel discussions that you think, despite Trump’s bluster, trade policy would probably continue as it was with only tweaks around the edges. This was about a year or so ago. But after President Trump put the Section 232 tariffs on steel and aluminum, do you see the U.S. as potentially being in the beginning of a trade war?

A: Yeah, I would say I was right for the year of 2017, but times have changed and 2018 is very different. I think his aggressive stand, which he took in the campaign, was considerably moderated in 2017 by probably two major forces.
First, the people he surrounded himself with, and his initial cabinet—I know there’s a lot of turnover—but many of them were not in for this big, aggressive trade action.
But the second thing was that Trump really wanted, and I think correctly so, to get the tax bill through, and…we thought [lawmakers he] was depending on in both the Senate and the House were not enthusiastic about his trade agenda. So, I think he decided not to step on his tax bill, in part, by going easier and just being rhetorical, on trade.
OK. 2018, a new year, he’s got his tax bill, parted company with many of the moderates, and going for a more nationalist cabinet. So in 2018, I think it’s an action period, and the symbol was to promote Navarro to be an advisor to the President. These Section 232 tariffs, they had been cooking for quite a while. He had commissioned the report, was obviously slow-walking it, and then he told [Commerce Secretary Wilbur] Ross to give them the report. Ross did in February, and then it went very quickly. But even before the April deadline, he moved on the aluminum and the steel tariffs also, and this is another surprise to me.
[Trump] accelerated the [Section] 301 case [against China, which would authorize the executive branch to impose trade remedies if it finds China is illicitly conducting technology transfers]. He seems to be fastening in on the $60 billion number for trade measures even before the report has been released. It’s been hard to assimilate, I would say, the hard, persuasive evidence—the kind of evidence you might bring in a WTO case, if you brought a WTO case. I think that’s been very hard to come by, but that has not slowed Trump down, and it seems that the 301 is on a pretty fast pace right now.
Yes, it’s a very different agenda [in 2018, compared to 2017].

Q: Now, obviously we’ve heard a lot in the press and from the Washington trade community about the dangers of these tariffs, and how they’ll drive up prices and hurt the consumer, but do you see any potential utility in the tariffs? Perhaps at least in terms of bringing major players to the table to negotiate steel capacity reductions?

A: Well, first of all, yes, I agree with what you say about there is quite a bit of alarmist talk about this. I think the steel and aluminum tariffs amount to a trade skirmish, not a trade battle, and definitely not a trade war. Even before they started talking about exemptions, and it was a very quick evolution from the 25 percent across-the-board statement, and then exemptions for Canada and Mexico, and then further product exemptions for U.S. companies, and maybe other countries. Clearly, Australia’s going to be exempted, I think, but other countries if they pony up in yet to be determined dimensions, but [U.S. Trade Representative Robert] Lighthizer seems to be the principle negotiator there. Even if it’s stuck with the 25 percent, these imports cover about 2.2 percent of U.S. imports of goods, so that’s not a big number, and I think the retaliation would have been of about the same magnitude, in terms of coverage. That’s not great, but it’s a trade skirmish, I would say, still.
Now, with the way things are going, clearly Mexico and Canada will not retaliate. They’ve also said they’re not going to make NAFTA concessions on account of their exemptions. The U.S. published this very long, 10-page, retaliation list with a lot of iconic products, and they will, depending on how the exemption goes, retaliate to some extent, as will some other countries. But I think that remains in the modest trade friction area.
The revolt by the Republicans in Congress seems to have stopped.
The 301 case remains to be unveiled, and that could be pretty big stuff, because…there, the Chinese seem unlikely to be moderate in their response, and given the nature of the complaint, it’s hard to see room for negotiation and exemptions or so forth, so it looks like it could be a fairly brutal, getting up to the level of the trade battle, with China, would seem to be in the offing right now.
And the congressional reaction to that, of course, nobody wants to say they like China. First of all, they say how dreadful China is, but I would guess that there’s some pull for the congressmen and senators who are unhappy, particularly the [agriculture] congressman and senators who will be unhappy, because I think [agricultural interests] will be targeted first.
Then we come to NAFTA. NAFTA, about 30 percent of U.S. trade is with either Canada or Mexico, and so NAFTA is potentially 10 times as large as either steel or what is now, so far, happening with China, though I could see China could ramp up, depending on what the political reception here is with [possible trade action against the] Chinese, and so on.
Anyway, you’re starting with a much bigger base, and I think if there’s a silver lining on what happened with steel and aluminum, the backlash by Republicans there, although it was quelled, was indicative of a much stronger backlash if Trump were to actually move forward, and try to terminate NAFTA. I think, in a way, what’s happened with steel and aluminum has bought time for what promised to be long and acrimonious NAFTA negotiations.

Q: What are your general predictions on NAFTA, considering the flurry of trade activity that we’ve seen going off in several different directions? Do you have any sort of general predictions for if and how NAFTA moves forward?

A: I’ve been thinking about this the last few days, and my current view is that it’s almost impossible to negotiate, and ratify a new NAFTA, because look at the forces who are aligned against it. First of all, I don’t see how Lighthizer and Trump are going to extract from [Canadian Prime Minister Justin] Trudeau and [Canadian Foreign Affairs Minister Chrystia] Freeland, or [Mexican President Enrique Peña] Nieto, and [Mexican Economy Secretary Ildefonso] Guajardo, the kind of concessions they’ve asked on [several contentious proposals made during the deal’s renegotiation]. I just don’t see that those political leaders in Canada and Mexico can exceed without completely destroying their own political base in their respective countries. So, I don’t see the typical negotiated outcome, and I can’t see Trump backing off from those demands, because they’re so essential to the political campaign, which he waged successfully for the battleground states, and a few others as well. It’s just hard to see even coming to an agreement. But suppose I’m wrong there, and suppose they did come to an agreement. First of all, Trump has to get, by April, TPA [Trade Promotion Authority legislation renewed].
He’s asked for it, and neither the House nor the Senate passed a resolution against getting the renewal of TPA, and I think that will happen, but if you were to terminate NAFTA between now and then, issue a letter between now, and [the July 1 renewal deadline]. That would, re-roil the pot in Congress, so I don’t think he’ll be tempted to do anything before he’s clear on the TPA renewal, which means no negative vote by either house of Congress.
With that kind of timeline, could you conclude a NAFTA negotiation before the midterm election? Well, I think it’s very unlikely for the reason I just said before: The differences are too great, but if I’m wrong on that, then the question is: Could it be ratified in the Congress?
First of all, it seems almost impossible that there could be a vote before the midterm election. Mechanically, it’s very hard to see it, even with TPA, because the timeline is short, and so on, and the negotiating differences are so great. I don’t see a vote on it in Congress before the midterm.
After the midterm, it’s possible that the Democrats will get one or both houses. Maybe not likely, but possible. There is no way, in my view, that the Democrats are going to vote for whatever is negotiated trilaterally. They just won’t vote for it, and why not? Well, [Michigan Democrat Rep. Sandy] Levin, who is retiring, but is very influential, basically laid down a marker on union organization and wages in Mexico, which Mexico has not agreed to, and the agreement that is, hypothetically, going to be presented to Congress, is not going to have what he wants in it.
He basically said, “You’re not going to get any Democrat votes without that.” While he doesn’t speak for everybody, I think he speaks for a big majority, and then on top of that, you got all these NGOs, just the other day, come out with really strong demands on how NAFTA ought to contain strong labor provisions along the lines of what Levin said, but environmental provisions, and get rid of ISDS [investor-state dispute settlement], whereas [Utah Republican Senate Finance Committee Chairman Orrin] Hatch has said, “If you get rid of ISDS, we’re going to get rid of NAFTA.”
If the Democrats were controlling either house of Congress with all this NGO antipathy to it, and provisions which are clearly not going to be in because Trump doesn’t want them, Canada doesn’t want them, Mexico doesn’t want them, they won’t be in the text, so you’ve got an almost guaranteed vote against the new NAFTA in the post-November Congress.
Suppose the Republicans actually win, keep both houses.
They have a majority, and so they could, in principle, ratify a new TPA, a new NAFTA agreement with all the provisions. Well, I think, given that there’d be no, I think no Democrat votes—that’s my core assumption here—I don’t think Trump could keep all the Republicans for it. Many are quite hostile to NAFTA, the nationalist-type Republicans, but in addition, there’d be people like—well Hatch won’t be in the next Congress. He said he’s retiring.
But a couple of other senators also agreed with him that ISDS has to be there. Well, it looks to me like if there’s a deal, there won’t be any ISDS, but apart from that, it does seem to me that any deal that’s imaginable, that could be crafted during this calendar year, would have enough features that there will be just a handful of Republicans who don’t like it, and won’t ratify it, so I don’t see a new NAFTA being ratified.
On the other hand, I don’t see Trump taking the political pain that would be required to terminate NAFTA. If he terminated—and I think he has the statutory power—I think it’s muddy what happens if the U.S. does terminate the existing NAFTA. One theory is that the old [World Trade Organization-set] MFN [most-favored nation] tariffs spring back to life automatically. Maybe so, but I think, politically, there will be such an uproar that Congress will insist, I mean even the Democrats, as well as many Republicans, that any change in the tariff agenda, if NAFTA’s terminated, has to be approved by Congress. So, while he might have statutory authority, which the courts would not challenge, I think he would make so many enemies in Congress by using that authority to revert, let’s say, to MFN tariffs that—what am I coming up with?—I’m coming up with a zombie NAFTA, which I’ve been saying for a couple of months now, that maybe in some way, it’s terminated, but at least the tariff provision remains in effect. There are a lot of other provisions, which would be more doubtful: The ISDS, the concessions on services trade, Chapter 19 [binational antidumping/countervailing duty dispute panels], all that, but the basic tariff, zero tariff world, might continue for the rest of the Trump administration.  So that’s my crystal ball today on NAFTA.

Q: You’ve seen this administration talk about sovereignty a lot in the context of trade, and most recently what comes to mind is the very broad challenge against India’s export subsidies at the WTO. Meanwhile, it’s facing off a broad AD/CVD case brought by Canada, and Canada said that it’s bringing the lumber dispute, or it intends to bring the lumber consultations to dispute settlement, for instance. So how real is the threat of U.S. withdrawal from the WTO, and how soon do you think we could see that happen if it is, indeed, a possibility?

A: That’s a great question, and we did, when [PIIE senior fellow] Jeff [Schott] and I, and Tetyana Payosova [of Harvard Law School] did a long policy brief on U.S. complaints about the [WTO] Dispute Settlement Understanding, and the Appellate Body, and we think there’s some justification in some of what I would call somewhat technical issues.
We recommended that other WTO members seriously negotiate with the U.S. on dealing with those issues, but there’s no sign that they will, and if they don’t, the U.S. will continue to block appointments to the Appellate Body.
Anyway, I think it’s quite possible, as we wrote in that policy brief, that by the end of next year, the Appellate Body will be out of business, for lack of sufficient members.
That seems to be the path. We’ve got all these disputes going. The blockbuster dispute, which might provoke the U.S. to actually withdrawal, would, I think, be a challenge by the EU, or someone else on the use of Article 21, the [WTO] security exception, for the steel and aluminum tariffs, and we don’t know that there’ll be a WTO challenge, but if there is a WTO challenge of Article 21, my guess is that WTO will say, “Well, countries define their own security exceptions.” That’s what’s been done in the life of the WTO, and while this case is a true stretch, it’s really a safeguard case, not a security case. But I don’t think the WTO would rule against the U.S. I think it will respect the security, the huge loophole that the security exception article provides.
If I’m wrong there, and they did actually rule, and somewhat limit, or question the U.S. use of the security exception, that would be the point at which the U.S. might actually seriously withdrawal or consider withdrawing. I think that’s a remote chance, but it’s not zero. It’s in the low percentages.
Now more likely, however, is that on some of these other cases, to the extent that they are actually resolved before the Appellate Body kind of goes out of business for lack of members, I think the U.S. will simply ignore adverse rulings.
Other countries will then do the same, and in that sense, not withdraw from the WTO, but essentially withdraw from the Dispute Settlement Body as a means of resolving the disputes, and we’ll go back to the way they were done before.
What does that mean for the WTO? It’s not exactly good. There are some negotiations going on…which are a small bore, but important. They may go on, but as a big negotiating body, the WTO is for the moment, dead, and foreseeably seems dead, and this outcome I’ve sketched on the dispute settlement would seem to put that out of business as well.
So, while the organization continues formally, it’s already lost a third of its punch, which is the new negotiations, and maybe lose another third in terms of meaningful and quick dispute resolution, at least so far as the U.S. is concerned. Maybe other countries would stick with it, and then you have the remaining third, which is the institutional research, and place to meet, and so forth, which is important, but it’s a pretty big blow. It would be a big blow to the WTO, and that is my foreseeable forecast there. Not a bright forecast.

PIIE defines itself as a “private nonpartisan nonprofit institution for rigorous, intellectually open, and in-depth study and discussion of international economic policy.”
PIIE’s founding chairman, Peter George Peterson, had passed away March 20 at the age of 91. Peterson had cofounded the Institute for International Economics and served as its chair of the board of directors from its beginning until his passing. In 2006, the institute was renamed the Peterson Institute for International Economics “in honor of Pete’s unstinting support and longstanding leadership,” PIIE said.