U.S. Trade Policy under Trump: Bad, Worse and Worst – Three Possible Scenarios

During the election campaign, Donald Trump caused a stir with his protectionist rhetoric. Which of his pronouncements will he actually translate into deeds? At least in theory, he could do much of what he said he would do.

That is because in recent decades, the U.S. Congress has transferred far-reaching trade policy powers to the president. There are three possible scenarios for trade policy under Trump.

Best case: Trump’s election campaign rhetoric remains largely rhetoric

Trump has threatened to leave the World Trade Organization (WTO), renegotiate the North American Free Trade Agreement (NAFTA) and impose high tariffs on imports from China and Mexico. In the best-case scenario, he does not carry out those threats. While the rhetoric against China becomes harsher, the Trump administration remains strongly focused on the enforcement of existing WTO rules. The Trans-Pacific Partnership (TPP) does not enter into force in its entirety; rather, there are agreements with individual TPP member states. The negotiations on the Transatlantic Trade and Investment Partnership (TTIP) continue at the end of 2017. However, the agreement with the EU turns out to be less ambitious.

Bad case: Trump does part of what he said he would do

The Trump administration abandons the TPP. NAFTA is renegotiated and the TTIP shelved indefinitely. Moreover, the administration shows no interest in WTO negotiations and further trade agreements. But it does not implement the most radical pronouncements. The United States remains a member of the WTO; however, the administration increasingly resorts to trade defence instruments and significantly stretches WTO rules. And on account of its large trade deficit with the EU, the United States threatens to use protectionist instruments against the union as well.

Worst case: Trump does everything he said he would do

Trump cancels NAFTA. The United States withdraws from the TPP. The TTIP negotiations are disbanded. Trump imposes high punitive tariffs against China and Mexico as well as other countries and regions with which the United States has a trade deficit – including the EU. Trade wars break out: China and Mexico impose similarly high tariffs on U.S. imports. Moreover, Trump revokes his country’s membership of the WTO. The United States can no longer export its products under the most-favoured nation tariff rates of other WTO member states; rather, it is forced to pay significantly higher tariffs in many cases. Exports decline.

The most likely outcome is Scenario No. 2. Trump has long argued that the United States faces unfair competition from countries such as Japan and China. At the same time, he knows that total isolation would not be good for the economy.

A detailed explanation (in German) of the three scenarios can be found in our contribution to the journal ifo Schnelldienst (23/2016), see download below. The article also contains information on transatlantic economic relations and Donald Trump’s trade policy advisers as well as details about the trade policy powers of the U.S. president.