“WE are in a trade war,” said Wilbur Ross, Donald Trump’s commerce secretary, on March 31st. That day Mr Trump duly loosed off a couple of warning shots, announcing two trade-related executive orders. (He forgot to sign them in the ceremony itself.) As tactics go, this was hardly shock and awe. Rather, it was supposed to suggest that nastier weaponry is on the way.
The first executive order was aimed at making trade rulebreakers “face the consequences”. Some bits were vague: officials have 90 days to develop and implement a plan to combat customs violations. Others seemed trivial. The government has lost $2.3bn of revenue over 14 years from importers going bankrupt before paying duties; almost half of this relates to imports of fresh garlic and preserved mushrooms.
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The second executive order seemed more in keeping with Mr Trump’s (trade) warmongering. Officials have 90 days to produce an “omnibus” report, naming the trading partners with which America had a “significant” trade deficit in goods in 2016 and shaming them if the reasons for that deficit are “unfair”. Based on what it finds, Mr Trump promised to “take necessary and lawful action”.
Top of the naughty list will be China, which accounts for almost half of America’s trade deficit in goods. Mr Ross already has his eyes on its state-owned enterprises, excess supply of steel and aluminium, and its barriers to American car exports. Academic economists agree that Chinese imports have cut the number of American manufacturing jobs. But it is still unclear what exactly the Trump administration will do about any abuses it finds. Indeed, until Robert Lighthizer, Mr Trump’s chosen trade representative, is confirmed, keeping Congress friendly means holding fire.
For clues as to what might eventually transpire, however, note that Mr Lighthizer and Mr Ross are both veterans of trade battles with Japan in the 1980s. Then, surging car imports prompted union members to stage sledgehammer smashings of Japanese cars. American steelmakers complained about cheap steel imports, and the semiconductor industry moaned about an unfairly closed Japanese market.
Then, as now, industry-wide tariffs and quotas fell foul of international trade commitments but safeguards, including anti-dumping and countervailing duties, were allowed if domestic industry could show it was being injured. The Trump administration seems keen to follow the latter course. On March 28th it announced an investigation into imports of Chinese aluminium foil. But there can be side-effects. In 1984 Ronald Reagan rejected a request from copper producers for protective duties because of the effect on producers of pots and pans.
The Reagan administration favoured “voluntary export restraints”, whereby the Japanese government would promise to curb exports. These were politically easier than a duty, and more legal than a quota. A Japanese promise in 1981 to restrict car exports to America did lead to a temporary halt in their increase. But they too had unintended consequences: the restrictions boosted car prices by almost 40% in 1984, according to calculations by Robert Crandall at the Brookings Institution, a think-tank. Japanese exporters enjoyed fatter profit margins, too—hardly the intention.
Export restraints are now illegal under the rules of the World Trade Organisation (WTO). In any case, for an internationally-traded commodity like steel, a bilateral deal would do nothing to help American producers if steel flows to other markets, depressing world prices. Reagan’s trade team negotiated with both Japan and the EU. Today, a bilateral deal with China alone might work politically but would probably falter economically.
Squashing a trade deficit can involve curbing imports or boosting exports. Peter Navarro, director of the White House National Trade Council, appears to think that trade deals might involve persuading the other country to buy more American goods. Mr Ross has said that his first emphasis will be boosting American exports by removing trade barriers.
The experience of the semiconductor industry could provide a guide. The 1980s disputes had more to do with how supply chains were set up than tariffs or regulations. Without a specific barrier to remove, the Reagan government negotiated a target of 20% for the foreign market share in the Japanese semiconductor market.
The policy drew sharp criticism from economists who worried that this restriction on domestic Japanese companies would lower competition and raise prices. They worried too about the kinds of cronyism it might encourage if American industries worked out that they could lobby for other governments to be pushed into buying more of their stuff.
In the event, foreign market share rose and even Douglas Irwin, a vocal critic of the policy, admits that in practice it was not the disaster he had feared. Ultimately, though, the policy ended, partly because the Japanese government hated poking small companies into buying more American semiconductors (some newspapers reported that Japanese companies dumped the semiconductors into Tokyo Bay), and partly because of the hypocrisy of America simultaneously pushing for economic liberalisation and managed trade.
A deal to buy more American corn, wheat or planes might appeal to the Chinese. But the 1980s has one final lesson. During the first half of the decade, despite tough trade measures, the deficit surged because of loose fiscal policy and tight monetary policy. Amid talk of a fiscal splurge and the Federal Reserve raising rates, Mr Trump should take note. Winning a war means picking the right battles.