Trump and Reagan: Whose Trade Policy Wins?

Professor Michael R. Czinkota

After signing the United States – Mexico – Canada agreement and ‘Phase 1’ of the China trade deal, President Trump has now moved his international trade focus onto some of the closest U.S. allies, the European Union. During the World Economic Forum in Davos, Switzerland, he proposed tariffs on auto imports from the EU, on wines, cheese, yogurt, and handbags from France, and on whiskeys from Ireland. 

The international trade policy efforts by Trump are remindful of President Ronald Reagan. Both presidents are stars of the Republican party and very frowned upon by Democrats. Trump and Reagan were focused on reducing the U.S. trade deficit and increasing the global competitiveness of the U.S. industry.  A look onto the past will provide a better understanding on whether Trump’s bold approach to trade policy wins over Reagan’s more sedate procedures. 

The 1980s:

The U.S. trade deficit was significant and growing precipitously. In the early Reagan years, it averaged $30 billion and reached $123 billion by late 1984. 

Reagan’s preference for free trade contributed to the Administration’s initial lassitude on this deficit. Gradually, however, calls for protectionism emerged. Examples were the U.S. automotive and footwear industries. Even clothespins were considered by some worthy of protection against foreign imports. In response, Reagan signed the Trade and Tariff Act of 1984 to reduce unfair global trade practices. There were also additional efforts to increase exports. Reagan announced bilateral trade agreements with Israel, and later with Canada. New rules were implemented to ease U.S. trade with China, yet the trade deficit continued to rise and reached $148 billion in 1985. 

The final, major trade legislation of the Reagan administration was the Omnibus and Competitiveness Act of 1988, which authorized negotiations in the General Agreement on Tariffs and Trade (GATT) and required the U.S. Trade Representative to take aggressive corrective action against countries that had large trade surpluses with the U.S.

The end of the Reagan years coincided with a sharp rise in globalization forces. The emergence of new technologies in transportation, communications, and information dramatically lowered the costs of international business and marked a rise of worldwide competition.

Trade Policy After 2016

Similar to Reagan, Trump has focused on fair trade. Some consider his approach more aggressive and populist. Trump ignited a new fervor in international trade policy. His tariffs have been imposed rapidly and often with little debate. His style has managed to concentrate the focus of trade partners. The constantly hammered message says: trade is now important to the U.S. 

Trump has argued consistently that the U.S. has been ignored or treated unfairly for decades in trade-related matters. He has pushed an “America First” policy with no more ongoing global support from the U.S. He renegotiated the North American Free Trade Agreement (NAFTA), eliminated the Trans-Pacific Partnership (TPP), as well as criticized major companies such as Carrier, Ford, and Mondelez – for selecting their production location without patriotic consideration. 

Trump tariffs of 2018 covered about $304 billion of imports into the U.S. Together with other forms of protection, they have had limited effects on the U.S. trade deficit. Some countries filed formal complaints against the U.S. with the World Trade Organization (WTO).  Trump responded by threatening corrective measures against the WTO if U.S. interests were not considered.

Comparing Reagan and Trump

Reagan’s policy endeavors were initially quite modest but became more assertive over time. Efforts sought to reduce the growing U.S. trade deficit with Japan and bolster American industrial exports. Trump’s trade deficit is significantly larger both in real and relative terms. Trump’s policy uses more harsh, aggressive, and clear approaches stating his expectations and demands, as well as reflecting the consequences of nonconformity.

Efforts by both the Reagan and Trump administrations to “level the playing field” have met with insufficient success. The powers of China and emerging markets are rising. American influence around the world should not become precarious. The time is right for further enlightened action on international trade. Countries need to understand the drivers of U.S. policy, which requires embracement of new approaches, new linkages, and new leadership directions for an entirely new era. 

Professor Michael Czinkota teaches international marketing and business at Georgetown University. His most recent book is In Search for the Soul of International Business, 2019. He served as Deputy Assistant Secretary in the U.S. Department of Commerce in the Reagan and Bush Administrations. 

Key Words: United States – Mexico – Canada agreement, President Trump, President Ronald Reagan, Trump tariffs, World Economic Forum, World Trade Organization (WTO), Omnibus and Competitiveness Act of 1988, General Agreement on Tariffs and Trade (GATT) and international trade policy

Perspectives by Michael R. Czinkota on “Trump trade playbook: Growing uncertainty shifts US economic ties”

Trump administration’s trade strategy is shaking up the global economy. Quitting agreements, talks of new deals and tariffs threats. There is much to keep up with Washington’s changing economic policies.

CGTN’s Daniel Ryntjes reports.

The most recent fast-forming development is that Donald Trump has ordered a national security investigation into automotive imports. That may lead to new tariffs on vehicles from Europe, Japan, and South Korea. The Commerce Department, led by Secretary Wilbur Ross will look into cars, trucks and auto parts. He is using the national security provision in U.S. trade law known as Section 232 also being used in the steel and aluminum cases, which makes it harder to challenge at the World Trade Organization.

Dr. Derek Scissors, an economist, and scholar at the American Enterprise Institute said the administration is not geared up for central planning.

“I think parts of the administration are thinking strategically and other parts are thinking strategically in a different way and it adds up to no strategy,” Scissors said.

It’s a house divided. Peter Navarro is seen as the biggest trade hawk. He’s the Director of the White House National Trade Council and is in favor of direct and sustained confrontation.

Those with a more traditional approach to global trade include U.S. Treasury Secretary Steven Mnuchin and Director of the National Economic Council Larry Kudlow.

Dr. Scissors adds that “the United States doesn’t seem to be sure what we are trying to accomplish. So the tactics of putting China or other countries off balance and that’s worked fine. But if you don’t know what you are trying to win, then you can’t win.”

For a broader perspective, the official responsible for threatening tariffs for the purpose of renegotiating trade under former U.S. President Ronald Reagan was Michael Czinkota, now an associate professor of international business and marketing at Georgetown University’s McDonough School of Business. He thinks tariffs are good “as a tool for attention, for really thinking through, as long as you never use them.”

He thinks the current tariff threats are just that. “I would be amazed if there would be a broad blanket implementation of tariffs.”

The U.S. has continued to send out mixed signals, but the less hawkish in the administration have aligned with China’s statements about backing away from a ‘trade war’ following meetings in Washington with President Xi’s Special Envoy Vice-Premier Liu He. China said it has agreed to further open up its markets to U.S. agricultural products while negotiations continue.

The Case for Cuban Engagement

After six decades of communist rule in Cuba, the island is now governed by someone outside of the Castro family for the first time since the 1959 revolution. The new leader, Miguel Diaz-Canel, was vice president and a provincial party chief.

Many believe that the political and economic status quo of the Caribbean nation is unlikely to change. However, lessons from the business world indicate that any change in an organization’s key leaders ushers in a new era for a company.

Whether it’s an acquisition, merger or the appointment of a new CEO, these transformations usually carry enormous repercussions for key functions.

New priorities are typically manifested by new promotions, new players, new rules and new aims. In turn, this results in shifting financial conditions, new private developments and new service assortments.

When applying such transition effects onto countries, one could argue that there is an opportunity for President Trump to act decisively in formalizing and normalizing trade relations with Cuba if conciliatory and meaningful changes are made.

For example, changes could be made so that there are no longer higher hotel rates for Americans than for Europeans, as well as no more ongoing accusations or regurgitation of historic events that have long passed.

Curative International Marketing, a theory developed at Georgetown University’s McDonough School of Business, directly addresses past errors and focuses on long-term restitution and improvements.

Such a move would advance U.S. businesses and their strategic interests while allowing Cuban citizens to operate in the private sector independent of the communist regime.

So far in the Trump administration, the opposite tactic has been taken by restricting American travel and trade with Cuba, which is a reversal of President Barack Obama’s policies.

A pro-business posture allows for increased commercial relations (beyond cigars) that would be more effective in countering the interests of the Cuban military’s monopoly in business.

This policy would empower private Cuban entrepreneurs by eliminating their dependence on the Cuban state apparatus and open them up to U.S. leadership and influence in the region. Private success over public ventures would speak volumes in favor of new economic and social thinking.

As a first measure, restoring the capacity for U.S. citizens to schedule individual visits to Cuba, which was eliminated in 2017, should be considered.

The potential economic boon for Cuba’s tourist industry could eventually stimulate growth in both the U.S. and Cuban economies. Also, this measure would promote democratization and bolster innovation and an entrepreneurial spirit in Cuba.

The recent promising developments in the Korean Peninsula indicate that diplomacy rather than deterrence can advance American interests in places where ideological and strategic divisions run deep. As the White House approaches a deal in East Asia, it could apply the lessons learned from the North Korean negotiations closer to home in Cuba.

President Trump’s acumen for dealmaking can face an ultimate test in Cuba. Opening conversations — and trade — with the island could mark a vast improvement in the bilateral relationship. Hopefully, the American people can look forward to the use of politics that shapes a future good for all of us.

Michael Czinkota teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent.

Lisa Burgoa of the School of Foreign Service contributed to this commentary.

Offsets: One answer to International Trade Imbalances

Offsets: One answer to International Trade Imbalances

Michael R. Czinkota

When foreign governments shop for defense supplies, they are not solely motivated by price and quality. In light of the trade balance effects of major acquisitions such as aircraft or defense products, international customers often require U.S. vendors to purchase goods from them in order to “offset” the trade balance effects large purchases have on their trade flows. In light of enormous U.S. trade deficits, it is time for the United States to reciprocate with offset demands of our trading partners. Frequently we find ourselves in conditions where foreign sales to us are major and our sales to importers and their nations are minor. This leads to trade relations which are out of kilter.  U.S. firms have accommodated foreign offset demands for decades. Now is the time when some give-back by our trading partners is the right medicine to improve world trade imbalances.

Offsets are industrial compensation arrangements demanded (so far only) by foreign governments as a condition for making major purchases, such as military hardware. Sometimes, these arrangements are directly related to the goods being traded. For instance, the Spanish air force’s planes – American-made McDonnell Douglass F/A-18 Hornets – use rudders, fuselage components, and speed brakes made by Spanish companies. U.S. sellers of the planes have provided the relevant technology information so that Spanish firms are now successful new producers in the industry. Under offset conditions, U.S. companies also often help export a client country’s goods go international, or even support the performance of tourism services. For example, the ‘Cleopatra Scheme’ allowed foreign suppliers to Egypt to meet their agreed upon offset obligations through package tours for international tourists.

In 2015, U.S. firms entered into 38 new offset agreements where they agreed to cause purchases  with 15 countries valued at $3.1 billion. In 2017, the total U.S. trade deficit was $566 billion after it imported $2.895 trillion of goods and services while exporting $2.329 trillion. No country has a bigger trade surplus with the United States than China. In 2017, the U.S. deficit with China climbed to its highest level on record, amounting to a gap of $375 billion.

Eliminating imbalances is a core component of the Trump administration’s international economic policy. One policy approach has been the threat of tariffs against China,.  One effective supplemental strategy could be the instigation of offset agreements with major trade surplus nations.

For instance, many American imports that contribute to the trade deficit are capital goods, such as computers and telecom equipment. An offset agreement between China and the United States could require China to use American-made components, perhaps even from Chinese owned plants.  An example could be the export of Smithfield ham from the U.S. to be served in company cafeterias in China. Then there are excellent opportunities for Chinese tourists, particularly if equipped with high-spend budgets.

The American trade deficit is not easily resolved. Government would be well served to explore non-traditional options in order to develop more than one fulcrum for leverage. New use of  offset agreements – which have provided our trading partners with past success at our expense – could help revitalize American industries and  bring a new sense of balance to trade relationships. Our government should encourage offset commitments by foreign firms and countries who sell a lot to us. America deserves to reap the benefits!

Michael Czinkota (czinkotm@georgetown.edu) teaches international business and trade at Georgetown University’s McDonough School of Business and the University of Kent, U.K. His key book (with Ilkka Ronkainen) is “International Marketing” (10th ed., CENGAGE). Lisa Burgoa contributed to this commentary.

Interview with CGTV about US New Trade Policies

Prof. Czinkota, Interview with CGTV about US New Trade Policies.

– The Admin
https://youtu.be/e5LCrVl9gQ0