The vast majority of economists have reacted negatively to the imposition of reciprocal tariffs from the Trump administration, and markets are in turmoil.  Reactions have ranged from allegations of having a simple-minded and wrong-headed protectionist approach to various critiques of the way that these reciprocal tariffs have been calculated and the colorful language in which the tariff announcement was couched.

But are there underlying kernels of truth in the president’s rhetoric?  Could this be an emerging Trump Trade Doctrine?

The president’s reciprocal tariff executive order starts off with a discussion of the global trading system to date, including the Cordell Hull–inspired reciprocal tariff of the 1930s, which led to the postwar system.  Allegations of unfairness follow.

Implicit in this discussion is the fact that over the lifetime of the GATT and now WTO system, we have done a good job of reducing tariffs but a terrible job of lowering what I have called anti-competitive market distortions, or what the president calls non-monetary barriers.  Collectively, this falls into three buckets.

First of all and most obviously, the tariffs in many countries (especially large developing ones) have not fallen as steeply as in the U.S.  In other words, their trade openness is less than the U.S.’s.  Included in this bucket are things like customs processes and trade facilitation.

In the second bucket are the behind-the-border regulatory systems that damage competition.  Here the E.U., Japan, Korea, and India are serial offenders.  If anything, the distortions in this second bucket have proliferated over the last thirty years.

The third bucket relates to protection of property, where countries around the world have damaged investor rights, conspired to remove private investors’ rights to get their issues dealt with, and collaborated in violating the intellectual property rights of U.S. firms.

The president is right to say that the National Trade Estimate (the 400-page book produced by USTR, now in its fortieth year) makes for sorry reading.  The USTR’s inventory of foreign trade barriers has only grown over the last forty years, showing that when it comes to these barriers, nothing has improved.

My company, Competere, has developed over the last twenty years an economic model that measures these distortions and their GDP per capita impacts.  Our modeling of these distortions shows that they not only damage U.S. exporters, but also destroy wealth in the country doing them.  Indeed, removal of such barriers increases GDP per capita in those countries significantly — a win-win for the U.S. and the country concerned.  Moreover, and crucially for the U.S. administration, the scale of the competition barriers is about three times the effect of traditional border measures, while property rights violations are about double the scale of these measures.

In other words, over the last eighty years, we have labored hard on only one sixth of the potential wealth-creating gains of reducing all of these distortions, while ignoring the remaining five sixths.  

The president is right to call attention to the five sixths and to seek a holistic approach to these intractable issues.  But if countries could benefit from reducing these barriers, why don’t they?  Why do they need the big stick of President Trump to start to do so?  The reason is that the beneficiaries of these distortions tend to be status quo incumbent interests who manipulate political systems to preserve their ill gotten gains.  The person who suffers is the consumer, and of course the nation as a whole.

Just as Cordell Hull used the power of the negotiation between principal supplier and principal consumer to ratchet down tariffs, so this new presidential action could have the effect of ratcheting down distortions.  In both cases, this mechanism is used to countervail enormous amounts of political power wielded by vested interests.

I say “could” because it won’t have that effect if trading partners, stakeholders, and markets don’t understand what is sought.  The ten-year Treasury yield will surely climb if bond markets think the reaction to this announcement will be a series of retaliatory tariffs and an increase in regulatory barriers (something hinted at by European commission President Ursula von der Leyen).  This could sharply increase the cost of borrowing in the U.S. (it is already high) and take away the president’s room to maneuver on the extension of the Trump tax cuts, as well as other things like shoring up American farmers from inevitable Chinese retaliation.

The emerging Trump Trade Doctrine could succeed in lowering distortions around the world and thus create wealth, but only if the signals coming from the administration are clear to stakeholders, trading partners, and markets.

Shanker Singham is the CEO of Competere, a former trade adviser to the U.K. trade secretary, and a former cleared adviser to the USTR.

Image: Gage Skidmore via Flickr, CC BY-SA 2.0.