Commentary Type

Donald Trump Now Has the Excuse He Needs to Open the Floodgates of Protectionism

Chad P. Bown (PIIE)


President Trump has just been handed two opportunities to impose new trade barriers. By January 12, 2018, he must decide whether to impose "safeguard" tariffs or quotas on $8.5 billion in imports of solar panels. By February 3, he will make the same call regarding $1.8 billion in imports of washing machines.

This is a pivotal moment for US trade relationships. If Trump imposes new tariffs, there could be a tsunami of demands for protection against imports of hundreds of other products. Trade barriers on solar panels and washers also would probably lead to costs for the US economy, a slowing of efforts at climate mitigation, and retaliation by trading partners.

There are already tariffs on solar panels and washing machines

The key feature shared by the solar panel and washer cases is that the United States already imposes special tariffs on these products, but limits these tariffs to only a couple of foreign source countries. In solar, the United States imposed antidumping and countervailing duties on imports from China beginning in 2011 and Taiwan in 2014. The problem for the struggling US industry is that there was a surge of new solar imports from Malaysia, South Korea, Singapore, Mexico, Thailand, and Vietnam.

Similarly, the United States imposed tariffs on washing machine imports from South Korea and Mexico beginning in 2012 and China beginning in 2016, so that products came in from Thailand and Vietnam instead.

It is unsurprising that these country-specific tariffs—imposed under antidumping and countervailing duty laws—impeded imports only from the initial foreign sources. Research talks about how tariffs may lead to "trade diversion," in which the overall volume of trade does not necessarily change that much—all that changes is that the supplier moves from one country to another.

This is important because there are hundreds of other goods out there just like solar panels and washing machines. The United States has both already imposed similar special import tariffs on those products, but only on selected foreign sources. Depending on Trump's actions here, those could be next up to ask for much more protection.

The law now allows Trump to choose between different options

Trump's current tariff decisions on solar panels and washing machines fall under Section 201 of the US Trade Act of 1974. Under this law, the US International Trade Commission, or ITC, investigates whether imports cause injury to a US industry. If a majority of the commissioners finds that there is a problem, the president then has the legal authority to take action.

Because the panel has found that there are problems with both solar panels and washing machines, Trump now has the legal authority to choose a policy response. He could opt for an import tariff of up to 50 percentage points more than current levels. Alternatively, he could impose a quota on imports, which cannot be smaller than the level of imports over the previous three years. Finally, he can negotiate a deal with major foreign sources whereby they "voluntarily" agree to limit export sales to the US market (although WTO rules seek to discourage countries from using this approach).

Any trade barriers that Trump applies are temporary and limited to four years under this law; many trade barriers have been implemented for only three. This is because WTO rules say that after three years, adversely affected trading partners can receive "compensation" by retaliating against the tariffs.

The law also allows the president to take a completely different approach. One is to avoid trade protection by instead offering "adjustment assistance" to employees in the affected industry, helping them to move out of struggling industries and into growth sectors. It is unlikely that Trump will adopt this option. Or as a final possibility, even when the ITC finds evidence of injury, the law also allows for Trump not to implement any policy at all.

Section 201 has rarely been used in modern history

Before the current two investigations, the United States initiated only 74 cases under Section 201, although it has gotten involved in more than 2,000 of the other special tariff cases—under antidumping and countervailing duty laws—over the 42 years of the law's existence. The last time a president imposed trade restrictions under the law was 2001, when President George W. Bush slapped tariffs and quotas on $17 billion of imported steel.

In 40 of the 74 historical cases, the ITC voted to provide the president authority and discretion over whether and how to impose trade protection. Yet, since 1974, the president has chosen to implement trade restrictions in only 19 of those 40 occasions.

If Trump imposes protection, expect many more cases

The Section 201 law has been used rarely because US companies seeking protection didn't know whether the president would grant it.

Companies and unions have therefore turned to other laws that were purely bureaucratic and do not involve presidential discretion. Special tariffs have been requested and granted much more frequently under those laws. However, the main drawback for the industries is that the tariffs do not cover imports from all foreign sources and could result in trade diversion rather than protection.

If Trump implements trade barriers in the solar panel and washing machine cases, he will shatter any remaining uncertainty about his protectionist and antiglobalist inclinations. There are hundreds of other products with US special import tariffs currently imposed against countries such as China.

Such a decision could trigger a tsunami of new requests for trade barriers under this Section 201 law. Like solar panels and washing machines, the affected industries would ask to further extend existing American trade barriers to import sources beyond China, to include South Korea, Japan, Mexico, Canada, Europe, and others.

Climate mitigation and other worries if Trump imposes import protection

Economic theory also suggests that Trump's new import restrictions would result in higher consumer prices and fewer purchases, thus imposing costs on the US economy.

Other parts of the US renewable energy industry would suffer from trade action against solar panel imports. The Solar Foundation finds that 85 percent of the 260,000 US industry jobs are outside of manufacturing. Employment in distribution and installation of panels would be put at risk if the price of solar energy increases and consumers—such as utilities—switch to different forms of electricity, such as wind, coal, or natural gas.

Solar trade restrictions might also slow the advance of US climate mitigation industries and its clean energy future. Increasing the US price of solar panels creates the incentive for utilities to switch to more carbon-intensive coal or natural gas.

Finally, like any new US trade barrier, foreign retaliation could arise that would hurt unwitting US exporting companies and their workers. This could lead to further tit-for-tat actions and even a trade war.

How Trump handles these two dangerous, but politically enticing, opportunities to impose trade protection could be a watershed moment for US trade policy.

Chad P. Bown cohosts Trade Talks, a weekly podcast on the economics of international trade policy, with Soumaya Kenyes. Follow @ChadBown on Twitter.

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