Trump Got Trade Right at the G-7: All Tariffs Must Go

(Bloomberg Opinion) -- President Donald Trump’s unexpected call to remove all trade barriers didn’t gain much traction with other Group of Seven leaders, perhaps because they were fuming about the U.S. president’s behavior during the summit in Canada this weekend. But a partial implementation of the idea would be a good way to defuse the brewing trade war without preventing nations from protecting certain markets.

Trump’s demands for fairer terms of trade for the U.S. has focused on tariffs. On average, these levies don’t put the U.S. at much of a disadvantage: even though those imposed by the European Union and Canada are generally slightly higher than America’s.

The averages hide some aberrations. The EU taxes U.S. cars at 10 percent, 7.5 percentage points higher than the U.S. tariff on European autos. But the U.S. levy on railroad cars is 14 percent, compared with 1.7 percent in the EU. Every imbalance represents some industry’s pet peeve, which creates a near-endless potential for clashes as interest groups exert pressure.

Removing tariffs altogether would get rid of the uneven headline numbers. At the same time, it would leave nations with ample tools to protect specific markets with more finely tuned non-tariff barriers, such as quotas, sanitary regulations and quality requirements, which can be far costlier, and far more unequal, than tariffs when applied among Western allies.

These measures are difficult to quantify because assessments of the effects of trade restrictions on the final prices of goods can vary widely. One attempt, during the early discussions over the now-dead Transatlantic Trade and Investment Partnership in 2015, provided a comparison of previous efforts to calculate the tariff equivalents of non-tariff barriers. The authors, Koen Berden and Joseph Francois, cited a 2009 study showing  that the regulations in place at the time added the equivalent of a tariff of up to a 48.2 percent to the price of U.S. fruit and vegetables in Europe; the U.S. effectively imposed a 60.2 percent tariff on European fruit and vegetables through import regulations.

Another 2015 study calculated that U.S. non-tariff measures added 25 percent to the cost of European air transport services, while EU regulations added 11 percent to the U.S. cost. 

That’s why reducing non-tariff barriers between Western allies was a more important sticking point in the TTIP negotiations. Europeans were worried, for example, that their market would quickly fill with inferior American food (“chlorinated chicken” was a rallying cry). 

Again and again, Trump has assailed Canada’s 270 percent tariff on U.S. milk. But the reason he’s worried about milk exports to Canada is a non-tariff measure. Deterred from exporting whole milk to Canada by the tariff, the U.S. dairy industry began selling so-called ultrafiltered milk, a protein-rich product used in the making of cheese that wasn’t subject to the tariff. U.S. exporters did great until last year, when a regulation pushed through by Canadian dairy farmers priced local milk product ingredients at below international market prices, hurting the viability of U.S. imports. 

Canada still buys more dairy products from the U.S. than the other way round. If it were to cancel its 270 percent tariff, it can still protect its farmers through moves similar to the National Ingredient Strategy, which created a new milk product class. 

At the press conference after the fractious G-7 meeting, Trump suggested going further than getting rid of tariffs:

You want a tariff-free, you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair. So you go tariff-free, you go barrier-free, you go subsidy-free. That’s the way you learned at the Wharton School of Finance. I mean, that would be the ultimate thing. 

Trump’s economic adviser, Larry Kudlow, confirmed the president’s idea included non-tariff barriers. But “going to zero,” as Kudlow put it at the same news conference, is probably a non-starter for the same reasons that TIPP was unpopular in Europe: Few countries, and certainly not the EU, would agree to abolish customer protections such as food quality standards.

Abolishing tariffs would be a good start, if only because it would help take trade out of the populist realm of simple solutions and back into negotiating rooms filled with detail-oriented professionals. There's a reason Trump keeps talking and tweeting about Canada’s milk tariff but not about Pricing Class 7, the actual problem for Wisconsin dairy producers: It’s much harder to explain in a tweet. Zero tariffs would give Trump a victory he could trumpet without hurting America’s allies any further.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

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