Chilly Trade Winds

One of the big questions surrounding the Trump presidency is just how aggressively he’ll advance protectionism. The new Republican president, who has changed his party affiliation five times as an adult, is famous for his bluster and shifting political views. But his mercantilist position that international trade is a zero-sum game is perhaps the most consistent political belief he’s ever held. Back in the 1980s he warned that Japan was ripping us off. Now China and Mexico are the two biggest threats. “I’d love to have a trade war with China,” Trump said in a 2010 interview on Fox Business. “If we did no business with China, frankly, we’ll save a lot of money.”

During the election, Trump advocated a 45 percent tariff on Chinese imports and vowed to slap a 35 percent tariff on any company that leaves the United States or builds a new factory outside of the United States. Three days after taking office, Trump fulfilled one protectionist campaign promise by signing an executive order withdrawing the United States from the Trans-Pacific Partnership (a trade deal that President Obama negotiated but Congress never held a vote to ratify). Right now, the markets seem confident that Trump won’t spark a global trade war: The Dow Jones industrial average hummed right along to a record 20,000 points on January 25 (up nearly 2,000 points since Election Day).

But it’s possible that the markets are either underestimating Trump’s willingness to follow through on his more aggressive promises or overestimating Congress’s ability to block the president from doing anything disastrous. Senator Mike Lee argues that Congress has ceded too much power to the executive to raise tariffs. The Utah Republican points to a 1974 law that allows the president to enact temporary tariffs of 15 percent and a 1930 law that might have transfered to the president even broader authority.

“The Tariff Act of 1930 in section 338A allows the president, when he finds that the public interest will be served, to declare new or additional duties for as long as he sees fit,” Lee tells The Weekly Standard. So President Trump could unilaterally enact a 35 percent tariff on a particular company’s imports under the Smoot-Hawley Tariff, as the act is better known? “That is a concern,” Lee says. “One could read this provision in a way that would suggest a president could take an action like that. I’m not certain there isn’t another limit in the law that might complicate that.” World Trade Organization agreements, for example, could theoretically block some executive actions, but it’s not clear to Lee that any private party could successfully challenge the administration.

In Lee’s view, it’s too dangerous for Congress to leave any chance of a trade war up to the whims of any president, and just before the close of business on January 20, Lee’s office announced that he had introduced the Global Trade Accountability Act, which would subject executive actions on trade to congressional approval.

When asked why placing tariffs on companies that move factories overseas is such a bad idea, Lee recalls that his grandfather, a “T-Man” or federal agent employed by the Treasury Department in the 1930s, “used to bemoan the fact that he as a T-Man was involved in the enforcement of the Smoot-Hawley Tariff Act, which he blamed—and many economists have blamed—for creating the set of conditions that led to the Great Depression. The minute we start to look at job losses that occur here in the United States as something that requires action that would kick off a trade war, we have to take into account those risks.”

Lee insists his bill isn’t targeting Trump. “We’ve made clear that this is part of a much broader effort, one that I’ve undertaken for the last few years to try to restore power to Congress that properly belongs to Congress. It has nothing to do with this particular president,” Lee says. “We started this effort long before we had any idea who was going to be in the White House or what their position might be on trade.” Lee points out that Trump has expressed support for the REINS Act, a bill that requires congressional approval of major executive regulations, and the senator hopes that Trump will see his trade bill in a similar light.

It’s hard to imagine Trump relinquishing power on an issue he cares so much about, and Lee’s effort is just getting off the ground. It doesn’t have any cosponsors yet. “It’s not the kind of thing that’s exciting immediately to everyone,” Lee says. “Most senators I know don’t stay up late at night worrying about section 338A of the Tariff Act.”

Right now in Washington, trade policy matters are wrapped up in a broader effort to reform the tax code. The House GOP proposal calls for switching from a corporate income tax rate of 35 percent to a business consumption tax of 20 percent. The plan would allow full and immediate expensing of investments—making the tax on investment effectively zero—and would eliminate the deduction for interest, thus favoring equity over debt. The tax is “border adjustable,” meaning that it applies to imports but not exports.

That last piece of the reform, “border adjustment,” has been the subject of some controversy since Trump was quoted in the Wall Street Journal January 16 calling the idea “too complicated.” The president quickly walked that comment back and told the news website Axios on January 18 that his comments in the Journal “didn’t totally reflect [his views] accurately” and said that the idea is “certainly something that is going to be discussed.”

Senior GOP sources say that Trump’s top White House advisers are united behind the proposal. On January 19, Breitbart News, a reliable barometer of populist sentiment in the White House, reported that Paul Ryan had called border adjustment “responsible nationalism.” The headline blared: “ ’Responsible Nationalism’: Paul Ryan Warming to Donald Trump’s Ideology with ‘Border Adjustment Tax.’ ” Breitbart did not note that Ryan’s Roadmap for America’s Future Act called for a “border-adjustable business consumption tax” as far back as 2008, but it did report, “Sources close to the Trump transition team described the coming fight for a border adjustment tax as one of the key policy battles the president-elect and his team will aim to tackle early on in his administration.”

It certainly fueled some overblown headlines Trump’s first week in office. Because the United States imports far more than it exports, the border-adjustment part of tax reform would generate $1 trillion in revenue over a decade, according to the Tax Foundation. White House press secretary Sean Spicer suggested that therefore the portion of revenue collected on Mexican imports could be used to cover the cost of a border wall. The media erupted with reports the administration was ready to slap a 20 percent tariff on Mexico, though the corporate tax replacement would apply to all goods, of domestic or foreign origin, consumed in the United States. Spicer’s suggestion was something of an accounting fiction anyway. Kyle Pomerleau and Stephen J. Entin of the Tax Foundation write that “the plan also lowers the corporate tax rate and enacts full expensing, so on net the tax changes will likely reduce overall business tax revenue.” In other words, the revenue from border adjustment can’t both finance a tax reform and pay for a wall.

Of course, even if tax reform passes and spurs high growth among American businesses, Trump could still pursue a protectionist policy of raising tariffs. If Trump’s actions on trade go beyond penny-ante squabbling with air-conditioning companies, Mike Lee’s bill could become very exciting, very quickly. Overriding a presidential veto with bipartisan support would be difficult but it isn’t unthinkable. Democratic senator Jon Tester of Montana told The Weekly Standard last week that Congress should “absolutely” have the final say over raising tariffs. The politics of trade isn’t easy for members of Congress, but the politics—and consequences—of a trade war could be far worse.

John McCormack is a senior writer at The Weekly Standard.