How to Make Sense of President Trump's Call for Zero Tariffs
In more than 40 tweets this year, President Trump has praised tariffs for making Americans richer, reducing trade and budget deficits and restoring U.S. prestige.
“Only fools would disagree,” he tweeted in August.
He also calls himself a free trader who wants to eliminate tariffs altogether as well as industry subsidies and non-tariff trade barriers across countries.
“No tariffs, no barriers. That’s the way it should be,” Mr. Trump said at a press conference after Group of Seven meetings in June.
Is that no-tariff objective serious after all that Mr. Trump has said in favor of them?
Probably not. As recent talks with Europe help show, most nations have industries they are determined to protect—including the U.S.—which makes it hard even for the most ardent free traders to level the global trading field completely. It is one reason the global trade deals that do exist are so complex and often uneven, and why they are likely to stay that way.
The U.S. initially pushed the zero-tariff line in recent talks with Europe, but both sides quickly watered it down.
The U.S. insisted that automotive trade be exempted from the talks, even though the U.S. is pushing Europe to eliminate its car tariffs and has threatened tariffs as high as 25% on European car imports, if they don’t.
The reason vehicles aren’t in the talks: The U.S. auto industry itself relies on 25% tariffs to protect U.S. trucks from import competition, and the Trump administration wanted to preserve that. The European Union, on the other hand, blocked U.S. efforts to consider agricultural subsidies because it wanted to preserve the Common Agricultural Policy, which relies on subsidies. Also off the table: U.S. “Buy America” provisions, which block foreign firms from government contracts.
Negotiators are now largely talking about reducing tariffs on industrial products, which is the usual starting point of most trade deals. But the economic gains of going to zero would be small because tariffs are already low. The average U.S. manufacturing tariff is 2.4%, compared with the EU’s 2.6%.
The zero-zero proposal springs from work done by Larry Kudlow before he was appointed National Economic Council director earlier this year. He and two free-trade economists— Stephen Moore of the Heritage Foundation and Arthur Laffer, a Reagan administration adviser, sought ways to make their views jibe better with Mr. Trump’s belief that trade makes some countries winners at the expense of others, says Mr. Moore.
They latched on to the 2018 Economic Report of the President, which showed that the U.S. had among the lowest tariffs among major trading nations. Zero tariffs would make the U.S. a winner, they argued, because other countries would have to make bigger cuts than the U.S. As NEC director, Mr. Kudlow pushed that line.
In a spring White House discussion with trade advisers, Trump trade hawk Peter Navarro objected, arguing that zero tariffs weren’t sufficient to level the playing field, said individuals familiar with the discussions. The U.S. also needed to push for zero subsidies, non-tariff barriers, currency manipulation and value-added taxes, Mr. Navarro argued, because other countries used those tools to their advantage. The advisers agreed to push for three zeros: tariffs, subsidies and non-tariff barriers.
At the G-7 summit in June Mr. Trump pitched the idea, which was overshadowed by a public feud with the host, Canadian Prime Minister Justin Trudeau and then a summit with North Korean leader Kim Jong Un. The following month, the proposal resurfaced in talks with Europeans.
Though hard to achieve in practice, the zero-tariff initiative still plays a role in U.S. negotiating strategy. In the U.S.-Europe talks, it helped ease relations, which had been strained by U.S. tariffs on EU steel and aluminum exports. The U.S. has pledged to not go ahead with tariffs on European cars as long as the two sides are negotiating. The two sides met in Washington on Aug. 20 for follow-up talks where the zero-tariff initiative remained on the table, said an EU official.
Similarly, the zero-tariff plan could give the U.S. a way to re-engage with trading partners who have dismissed the Trump administration as hopelessly protectionist. “It gives the U.S. the moral high ground,” says Mr. Moore.
If the U.S. cuts deals with allies like the EU, Canada, Mexico and Japan, the Trump administration could then focus on China. Administration trade hard-liners and free-traders alike have been frustrated that fights over steel, aluminum and other issues have made it tougher to mount a coordinated Western offensive against China.
When it comes to China, a push toward zero tariffs and subsidies could produce some clear wins for the U.S., given China’s much greater level of protection. Chinese industrial tariffs, for instance, average 12.1%, the Council of Economic Advisers reports. Cutting them to zero—or at least a lot lower—could be a big win for the U.S.
Getting China to accept dropping all subsidies and other discrimination against foreign firms—now that would be a real long shot.
Write to Bob Davis at bob.davis@wsj.com