openpolitics.com

President’s threats against Mexico and others can work in the short run, but global rules could be strained

President Trump’s threat to hit Mexico with tariffs over immigration is the latest and most dramatic step in the weaponization of international economic levers.

In the short run, these moves may serve the U.S. interest. But in the long run, they could do the opposite, by emboldening everyone to ignore international conventions and rules that reserved tariffs and sanctions for specific purposes. The U.S. may also find its “soft power,” the ability to get other countries to cooperate out of shared mutual interest rather than threat, diminished.

Mr. Trump is not the first president to use trade levers to achieve unrelated goals. Congress has granted the president authority to do so in successive statutes, starting with the Trading with the Enemy Act of 1917. These laws enabled Presidents Roosevelt to declare a bank holiday in 1933, Nixon to impose a 10% tariff on foreign imports and Reagan to sanction Nicaragua.

But Mr. Trump’s trade maneuvers have been different in several ways. First, the extent is unprecedented: Last year, he used national-security justifications to impose tariffs on steel and aluminum imports, even from allies, and is threatening the same with autos. He then doubled tariffs on Turkish steel to force that country to release an American pastor. He has imposed new sanctions that would severely penalize any foreign or U.S. company that does business with Iran. A new order barring U.S. companies from doing business with China’s Huawei Technologies Co. because it could be a conduit for spying is ensnaring foreign companies as well.

“There’s nobody like this in the last century,” said Gary Hufbauer, a trade expert at the Peterson Institute for International Economics.

Second, the president has used these powers to achieve narrow goals with little connection to the economic imbalances or national-security threats for which they were intended. In 1985, Mr. Reagan imposed sanctions on Nicaragua using the International Emergency Economic Powers Act of 1977, the same authority Mr. Trump invoked for his tariffs on Mexico. But the U.S. regarded Nicaragua as a hostile client-state of the Soviet Union. Similarly, Mr. Reagan imposed sanctions on construction of a natural-gas pipeline from the Soviet Union to Western Europe for fear it would make American allies vulnerable to Soviet economic blackmail.

Mr. Trump’s actions don’t flow from an overarching geostrategic vision: His tariffs on imports of steel, aluminum and, potentially, autos are designed primarily to shore up favored domestic industries. His threat toward Mexico came because he says it hasn’t done enough to stem the flow of Central American asylum seekers traveling north to the U.S. border. And while his tariffs on China and his sanctions on Huawei superficially resemble Mr. Reagan’s efforts to contain the Soviet Union, Mr. Trump’s calculus is more transactional. He has suggested, for example, that the case against Huawei, which U.S. officials say is motivated by national security, might be dropped as part of a trade deal.

In the near term, these tactics can work. His assumption that other countries will prioritize retaining access to the U.S. market has generally proved correct. Mexico has so far been restrained in responding to his tariff threat. Though U.S. allies haven’t joined its sanctions on Iran—designed to halt all its nuclear activity and support for Syria’s government and groups the U.S. considers terrorists—the threat of American penalties has dissuaded their companies from resuming business there. As a result, Iran’s economy is cratering. Similarly, several Western European companies have suspended business with Huawei even as their governments don’t view it as the threat the U.S. does.

Yet in the long term, these actions, with other trends, likely will weaken ties between the U.S. and its allies and the security and leverage all derive from acting together.

The Pew Research Center has found a growing share of Republican voters, like Mr. Trump, are skeptical that openness to the world or deference to allies serve U.S. interests. And many countries are moving in a similar direction. Nationalists now govern India, Israel, Brazil, the Philippines, Poland, Hungary and Italy, and Chinese President Xi Jinping espouses a more bellicose, China-first agenda than his predecessors. Because they define national interest in the same transactional terms as Mr. Trump, they are more likely to defy the U.S. if it suits their immediate needs. The Philippines, for example, has courted Chinese investment, and Italy has welcomed Huawei. Despite Mr. Trump’s personal fondness for Indian Prime Minister Narendra Modi, India has sought to circumvent the U.S. crackdown on trade with Iran, while the U.S., unhappy with Indian protectionism, has withdrawn tariff preferences from India.

Even countries still ideologically allied with the U.S. will question the value of doing deals if, as with Mexico, they fail to prevent unilateral punishment for nontrade matters.

“As Trump shreds international trust in the U.S., friendly countries have to start preparing Plan Bs: alternatives to relying on America,” said Robert Zoellick, the U.S. trade representative under George W. Bush and later World Bank president. “This shift won’t occur overnight, but the erosion is increasing rapidly, and the negative dynamic weakens U.S. influence.”

Sheng Hong of the Unirule Institute, a pro-market Chinese think tank, recently wrote that U.S. tariffs are falling primarily not on state-owned enterprises but on private and foreign-owned firms: “This is not to correct market distortions, but to punish companies that follow market rules, and make the market more distorted.” This is likely to weaken pro-Western Chinese advocates of economic liberalization.

Trump administration officials note those advocates have little sway in China: It has become increasingly repressive at home and antagonistic abroad despite previous U.S. efforts to accommodate its rise, and thus some decoupling of the two economies, while painful, is inevitable and prudent.

The Iran sanctions are an early sign of this diminished leverage. Other countries, tired of how the U.S. uses the dollar’s role in global payments to enforce unilateral sanctions, are devising workarounds. The U.K., Germany and France are building an alternative payments system for dealing with Iran, which has meanwhile begun expanding its stockpile of enriched uranium.

The political trends weakening U.S. leverage with the world are compounded by economic trends. Since 1985, the U.S. share of global gross domestic product has shrunk to 24% from 35%, while China’s has grown to 16% from 3%. This means other countries have less to gain by cooperating with the U.S. and more to lose from antagonizing China.

If U.S. tariffs, real and threatened, shrink trade and investment flows, that would further diminish economic incentives to cooperate, while also weakening the constituencies in other countries favoring openness and integration with the U.S.

But that argument can’t be applied to other countries targeted by Mr. Trump. Aaron Tornell, a Mexican-born economist at the University of California, Los Angeles, noted that since the 1980s, Mexico has turned away from left-wing isolationism toward liberalized markets and closer cooperation with the U.S. on trade and security issues such as narcotics. Advocates in Mexico of this integration argued American presidents and big business would prevent the U.S. from using its enhanced leverage to punish Mexico.

Mr. Trump’s policies could “destroy the political foundations of a country that has been following liberal economic policies for the last 30 years and give more power to those who want to be like Venezuela,” Mr. Tornell said.