Trump’s Trade War Begins

The costs of U.S. President Donald Trump’s trade strategy are no longer theoretical. During the 2016 presidential campaign, economists warned that Trump’s aggressive approach—threats to abandon the United States’ formal commitments and introduce new trade barriers—would alienate key U.S. partners. Now, the escalating dispute over Canadian and British subsidies of Bombardier, the multi-billion dollar aerospace company with operations on both sides of the Atlantic, is turning the possibility of a trade war into a reality.

In late September, the U.S. Department of Commerce issued a preliminary finding against Bombardier. The investigation found that the company benefits unfairly from the subsidies it receives from Canada and the United Kingdom. These subsidies allow it to sell its jets in the United States at artificially low prices. Under U.S. statutes, such behavior constitutes “dumping,” which means that certain Bombardier imports could be subject to duties totaling almost 210 percent. To put that number in perspective, the current U.S. trade-weighted average tariff is two percent for industrial imports.

The decision against Bombardier evoked harsh replies. Referring to Boeing, the firm that initiated the investigation, Canadian Prime Minster Justin Trudeau stated that he “won’t do business with a company that’s busy trying to sue us.” Moreover, both Trudeau and British Prime Minister Theresa May threatened to cancel pending orders for new Boeing military aircraft.

The White House claims that it is reasonable to defend U.S. economic interests with targeted trade remedies. Trump asserts that American firms suffer from discriminatory policies abroad—including foreign government subsidies like those paid to Bombardier. In the past, the U.S. government has often increased duties when it believes that foreign subsidies provide competitors an unfair advantage. In fact, the United States is one of the world’s most frequent users of anti-dumping and countervailing duties. But Trump is taking things a step further. His solution to any act of protectionism is to respond in kind. Most recently, he raised the possibility of a series of trade barriers targeting Chinese tinfoil and Canadian softwood lumber.

Now Trump’s trade barriers are limiting market access enjoyed by America’s few remaining export-oriented industries.

This type of retaliatory behavior, along with Trump’s caustic rhetoric, is creating new tensions. Trump previously stated that he “does not fear” a trade war. But his economic nationalism is risky and counterproductive, particularly for an administration so preoccupied with America’s growing trade deficit and the wellbeing of working-class citizens.

At stake is the ability of U.S. firms to do business abroad. This August, Beijing responded to Trump’s proposed tinfoil duties by threatening to restrict soybean imports. China is a $16 billion market for American soybean growers, and it is the United States’ number-one buyer of agricultural goods more generally. For now, fevers have cooled on this issue. Washington announced that it would postpone a final decision on whether China dumped foil in the U.S. market.

Yet it is clear from the Bombardier case that Trump’s administration has not learned the lesson. If duties are increased after the final Department of Commerce ruling and Trudeau sticks to his word, Canada will cancel orders for Boeing-built F-18s totaling $5 billion.

The possibility of this type of tit-for-tat is exactly why trade economists criticized Trump’s campaign promises as myopic and self-defeating. Economic nationalism is a two-way street. The White House can’t slap new duties on imports without jeopardizing key U.S. export markets. Now Trump’s trade barriers are limiting market access enjoyed by America’s few remaining export-oriented industries.

These decisions have serious repercussions at home. The introduction of duties on softwood lumber in April drew the ire of the National Association of Home Builders, who said the move would “negatively harm American consumers,” raising the price of new homes by over $3,000. The Bombardier dispute has a similar downside. In 2016, Bombardier spent $2.4 billion across 800 suppliers in 47 states. If Bombardier is shut out of the market, firms reliant on the U.S. aircraft industry will lose one of their most important consumers. As a result, it’s far too simple to say that trade remedies promote welfare in the United States at other countries’ expense. These policies directly affect firms and consumers in key industries.

Of course, it isn’t only Trump who has vowed to protect the U.S. market. The United States initiated approximately 200 anti-dumping investigations each during the Bush and Obama administrations. But there’s a reason most of these policies didn’t make the news. Trump’s recent predecessors understood the importance of a rules-based approach. As evidence, they both leaned heavily on the World Trade Organization to defend U.S. interests from trade discrimination and oversaw a significant expansion in America’s trade agreement portfolio.

Trump is a playing a very different game. The White House alleges that other countries openly flout trade rules while the United States is handcuffed by trade law. True to his campaign promise, Trump now seeks to redress the imbalance. His main goal in the current NAFTA renegotiations is loosening restrictions on the use of trade remedies. Specifically, he wants to abandon Chapter 19, the agreement stating that anti-dumping measures and countervailing duties are subject to dispute settlement. In other words, Trump wants to do away with the agreement that may allow Canada to sue in response to recent activities.

Trump’s approach to NAFTA matches his statements on the World Trade Organization. Last spring, the White House cast doubt on the WTO’s legal authority, stating that it will not respect decisions that infringe on U.S. sovereignty. It’s the first time that an American president has openly threatened to ignore the organization’s authority.

All of this comes at a bad time for the United States. Trump’s unpredictability is motivating America’s largest trade partners to search for alternative markets. Canada recently completed a new trade agreement with the European Union. Mexico is in bilateral talks with China. And the remaining 11 members of the Trans-Pacific Partnership, which Trump abandoned on his first day in office, met to negotiate moving forward. At this point, all of the country’s top trade partners are forming new agreements. And none of these deals involves the United States.

This highlights what might be the single biggest cost to Trump’s approach. His contemporaries are losing patience. No longer able to lean on the United States for economic leadership, countries are looking elsewhere for reliable commitments. It is all the more evidence that Trump’s economic nationalism is backfiring. Bombardier is just the latest example of a growing trend. Putting “America First”—at the expense of economic cooperation—is going to leave the U.S. economy even further behind.