The Trump administration has introduced widespread changes in US economic policy and public institutions, but perhaps the most significant changes have been made in trade policy. The tariff program introduced in early April represents the most fundamental change in US trade policy in the last 80 years and a major reversal of the leading role that the United States has played in promoting trade liberalization during that period. Jamieson Greer, the US Trade Representative, has called this change a “remaking of the global trade order” that was conceived at the Bretton Woods Conference of 1944, where the IMF, World Bank, and International Trade Organization (later replaced by GATT and the WTO) were created.

The basic motivation behind this attack on the existing trade order is a view that the United States has been the victim of other countries’ unfair trade practices that have disadvantaged the United States and created large trade deficits at both a bilateral and national level. However, there is no economic rationale for the view that trade between the United States and other countries needs to be balanced. In some cases, like Brazil and the UK, the U.S. has a trade surplus; in many others, it has a deficit. At a country level, these outcomes reflect countries’ comparative advantage and domestic demand.

At the national level, however, the main determinant of the chronic large trade deficit of the United States (in goods, but not in services) reflects a basic macroeconomic imbalance and shortfall in domestic savings vis-à-vis investment, associated with the government’s chronic budget deficit. As a result, the tariff program of the government will not lead to a reduction in the trade deficit, which is a basic motivation for the imposition of tariffs, unless there is some correction in the county’s basic macroeconomic imbalance. More likely, tariff increases will lead to a reduction in both imports and exports, lower productivity and growth, and an intensification of inflation.

Another motivation for the government’s tariff program is the desire to restore jobs in the manufacturing sector that have been lost due to the impact of foreign trade, especially the so-called China shock associated with a surge in imports of manufactured goods from China in the first decade of the current century. While it is true that certain regions of the midwestern United States were adversely affected by this phenomenon, economic studies have shown that these job losses were offset by job gains associated with exports of hi-tech goods and services in other parts of the country. The basic failing of government was not to have provided adequate assistance in retraining and relocation for workers most affected by the shock. The loss of manufacturing jobs since the beginning of the current century has mainly been due to increased productivity and automation rather than foreign trade.

While there may be some justification for the use of tariffs and subsidies as a tool of industrial policy to promote an industry of vital national security interest, widespread use of tariffs is not likely to succeed in restoring jobs in traditional manufacturing. The sector will continue to expand, but its share of GDP and employment will continue to decline because of a strong shift in domestic (and foreign) demand in favor of services, where the United States maintains a clear competitive advantage over other countries and a surplus in its services trade.

Can the tariff program of the U.S. serve as a model for other countries in a remaking of the global trade order? The examples we have seen thus far of the framework agreements the government has negotiated for its reciprocal tariffs with other countries suggests that they are very unequal. The United States wants to keep a tariff in place for imports from other countries but expects free entry of its exports and inward foreign investment in return. It is likely that other countries will reject this approach in dealing with their trading partners (other than the U.S.). Instead, they will continue to operate under the WTO rules of reciprocity and most favored nation treatment that have served the global and US economy well under the global trade order that the U.S. has rejected. Countries can also be expected over time to divert their trade away from the United States.

What is missing in the US government’s desire to reform the global trade order is a multilateral (rather than unilateral) approach it could promote to improve the operations of the WTO. Reform efforts, for example, could focus on its voting procedures, the designation of countries for special and differential treatment, and dispute settlement arrangements. However, the fear is that the United States may decide at some point to withdraw from the WTO rather than lead an effort for its reform, because it no longer subscribes to its rules.

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Mr. Elson was a senior staff member of the IMF for many years and is the author of a number of books on global finance and development, including most recently The Global Currency Power of the United States: Problems and Prospects.      

All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.