In a recent CNBC interview, Donald Trump’s pick for Commerce Secretary, Wilbur Ross, explained why he thought the Trans-Pacific Partnership was a “horrible deal.” His main complaint was that the agreement has “terrible rules of origin.” Specifically, he warned, “In automotive, a majority of a car could come from outside TPP, namely could come from China, and still get all the benefits of TPP.” Presumably this is what Trump was talking about when he said China would “come in … through the back door.”

All trade agreements have rules of origin that specify how much of a product’s manufacturing has to occur within a member country for it to qualify for tariff preferences. These rules differ from product to product and are the result of negotiation and industry pressure. Under the TPP’s rules of origin for automobiles and most auto parts, at least 45% of an import’s value must have been created within one or more TPP members for the good to qualify.

So, technically, Ross is correct. A hypothetical car could contain 55% Chinese content and still be eligible for TPP preferences as long as all the rest came from Japan, Mexico, the United States, or some combination of TPP members. What Ross is missing, however, is why this is a good thing. 

For one thing, liberal rules of origin help alleviate the problem of trade diversion. Reducing protectionist trade barriers removes artificial impediments to economic growth by enabling greater specialization that relies on a country’s comparative advantages. But trade agreements only remove barriers between some countries, leaving others in place. When all countries’ exports are burdened equally, investment still flows to where products can be made most efficiently. Tariff preferences, while better than no liberalization at all, have the downside of incentivizing investment based on where there are preferences, creating their own sort of inefficiency.

Ross himself alludes to this problem in his CNBC interview when he notes that “Mexico has 44 treaties with other countries that make it very advantageous to do international shipping from Mexico rather than from the United States.” But if the rules of origin in Mexico’s treaties allow for high levels of non-Mexican content, some of those goods shipping out of Mexico might be largely made in America. Mexico’s treaties could benefit American companies that use Mexican parts just as the TPP could benefit Chinese companies that use American parts.

Strict rules of origin, on the other hand, threaten to interfere with cross-border supply chains. With or without trade agreements, the fact is that many industries have expanded beyond national borders. Any automobile purchased in the United States, regardless of brand, is going to have lots of foreign-made parts. The manufacturing process from raw material to pickup truck involves the labor of people in countries all around the world. The phenomenon of global supply chains unlocks new levels of comparative advantage—instead of car-making, the relevant activities are things like engine-making, glass blowing, software design, and assembly. Each part of the process is more valuable if the other parts are done as efficiently as possible. U.S. autoworkers are more productive (and therefore better compensated) when these supply chains are not hindered by tariffs.

Some industries, of course, would rather have protection than efficiency. The reason that Ross is focusing on automobiles in his criticism of the TPP is that Detroit automakers are highly invested in North American supply chains. They benefit from tariff-free trade under NAFTA, but NAFTA has very strict rules of origin for autos—requiring over 60% of content to be from the region. 

Replacing that arrangement with the TPP’s 45% rule would open up a lot of competition not only from Japan but from China and Thailand as well. The TPP would eliminate some of the benefits Canadian and Mexican suppliers currently enjoy under NAFTA’s preferential access. More competition among suppliers, however, will lower costs for U.S. operations and make the industry as a whole more competitive.

Like other Trump advisors, Ross has expressed a preference for bilateral trade agreements rather than regional ones. Combined with strict rules of origin, this strategy (if pursued) would worsen the problem of trade diversion; promote inefficient, policy-driven supply chains; enrich rent-seeking cronies at the expense of economic growth; and generate the least possible benefit from trade liberalization. That’s why previous administrations (Obama with the TPP; George W. Bush with the Free Trade Area of the Americas) have preferred a regional approach. 

Ultimately, Ross’s analysis of the impact of the TPP is fatally flawed due to his erroneous understanding of trade as a zero-sum game. Trade is a cooperative endeavor in which people in different countries seek mutual advantage through exchange. Allowing people in China to benefit from trade with Americans is not a failing of the TPP. On the contrary, it’s one of the ways the TPP would help create value for U.S. companies and better jobs for American workers. 

Donald Trump has called the North American Free Trade Agreement the “worst trade deal ever negotiated.” If he were speaking on behalf of Canadian exporters or American consumers of softwood lumber, his point would have some validity. For more than 20 years, NAFTA has failed to deliver free trade in lumber. Instead, a system of managed trade has persisted at the behest of rent-seeking U.S. producers, egged on by Washington lawyers and lobbyists who know a gravy train when they see one.

Those who consider the United States a beacon of free trade in a swirling sea of protectionist scofflaws will be surprised by the sordid details of the decades-long lumber dispute between the United States and Canada. Among those details is the story of how the U.S. Commerce Department (DOC) ran roughshod over the rule of law to manufacture the leverage needed to extort from Canadian lumber mills a sum of $1 billion, which was used to line the pockets of American mills and the U.S. Forestry Service, while restricting lumber imports for nearly a decade through October 2015, at great expense to retailers, builders, and home buyers.

With that ugly history mostly expunged from the public’s memory, the U.S. lumber industry is back at the trough again, demanding its government intervene to restrict Canadian supply, following a whole 13 month period during which it was forced out of the nest to operate in an environment rife with real market conditions! In the quiet shadows of the Friday after Thanksgiving, U.S. softwood lumber producers filed new antidumping and countervailing duty petitions with the DOC and U.S. International Trade Commission (ITC), alleging that dumped and subsidized Canadian imports were causing material injury to the domestic industry.

Whether the DOC finds legitimate evidence of dumping or countervailable subsidization is actually beside the point here. The agency has proven itself quite capable of producing evidence it is willing to defend as legitimate, which is all that matters when the game plan is to use the specter of a long, drawn out procedural battle—a period during which importers have no certainty about whether they will have to pay duties or how large that bill will be—to arm-twist the Canadians back to the table to agree, once again, to limited U.S. access in exchange for suspension of the unfair trade petitions.

If the investigations go forward and injurious dumping and/​or injurious subsidization are found—a likely outcome given the discretion DOC has to administer these laws—preliminary duties likely would be imposed in April 2017 and final duties imposed by the end of the year. Depending on those duty rates (and how willing importers are to stomach the risk that their duty liability increases) imports of lumber from Canada could continue. But, the more likely outcome is that the two sides will reach a new agreement to limit Canadian access to the U.S. market, through quantitative restrictions, export taxes, or some combination of the two, before preliminary countervailing and antidumping duties are imposed. 

Unfortunately, this wouldn’t be the first time that the U.S. trade remedy laws have been used to extort settlements under which foreign producers agree to restrict their exports to the United States in exchange for the U.S. government dropping often spurious claims against them. But the lumber case provides an especially egregious example of how the United States—self-proclaimed champion of free trade—uses the threat of protectionism to strong arm even its closest trade partner.

(If you’re interested in diving deeper into this post, the full story is published here, on Forbes.)

In yesterday’s Investor’s Business Daily, Club for Growth President David McIntosh and I had a short piece on the perilous implications of President-elect Trump’s threats to unilaterally withdraw the United States from our trade agreements or impose punitive and wide-ranging tariffs on imports. The economic effects of Trump’s promises have been explored at length (see, e.g., this new one on NAFTA and Texas), but most trade law experts are just now digesting the legal issues. What we’re finding is, to use the technical term, a big mess that could have unforeseen economic and constitutional implications in the Age of Trump. As we note:

For almost a century, American trade policy has been formed and implemented by a successful “gentlemen’s agreement” between Congress and the president. Congress delegated to the president some of its Article I, Section 8 powers to “regulate Commerce with foreign nations” so that the president may efficiently execute our domestic trade laws. The president negotiates and signs FTAs with foreign countries, while Congress retains the ultimate constitutional authority over international trade, for example by approving or rejecting agreements or by amending US trade laws.

As a result of this compromise, the United States has entered into 14 Free Trade Agreements with 20 different countries and imposed targeted unilateral trade relief measures — all without significant conflict between Congress and the President.

The question now is whether Mr. Trump, as president, could and should single-handedly implement his trade agenda on Jan. 20, 2017 without any congressional action.

The IBD op-ed scratches the surface of these legal issues, but below are more details on just a few of the many ambiguities lurking in U.S. trade law—ambiguities that, if not properly clarified, could be exploited by a protectionist U.S. president against the original intent of the Congress that delegated their constitutional authority over trade policy under the (incorrect!) assumption that the president would always be the U.S. government’s biggest proponent of free trade.

NAFTA

Under U.S. Law, FTAs are negotiated and signed by the president, but have limited legal force in the United States until they are converted into implementing legislation (which would amend current law), passed by Congress, and then signed into law by the president. In the case of NAFTA, this meant that President Clinton signed the deal, but it was Congress who ultimately approved and implemented it through the North American Free Trade Agreement Implementation Act, which President Clinton subsequently signed into law.

Such a process indicates that a similar one would be needed to terminate NAFTA, but the law is far from clear in this regard. The President’s constitutional authority over foreign affairs (under Article II) and “termination and withdrawal authority” under the Trade Act of 1974 could give him the authority to withdraw, without congressional approval, from NAFTA under Article 2205 of the Agreement. At that time, Canada and Mexico would immediately be free to withdraw any and all trade concessions (e.g., preferential tariff treatment) made under NAFTA with respect to the United States.

Withdrawal, however, might not automatically terminate the Implementation Act, thus leaving U.S. duties and other NAFTA commitments in place while Canada and Mexico do as they please. The only certain way to terminate the Act would be through Congressional passage of another piece of legislation, but the President could claim that the Act self-terminates after withdrawal under Section 109(b) of the Act (“During any period in which a country ceases to be a NAFTA country, sections 101 through 106 shall cease to have effect with respect to such country”). The Act and its supporting documents do not clarify this provision, and there is no post-WWII precedent relating to U.S. termination of an FTA. Thus, the President could theoretically instruct Customs and other agencies to raise US trade barriers to non-NAFTA levels on his view that the Implementing Act has terminated, while Congress claims he has no such authority.

Similar ambiguity exists in the NAFTA Implementation Act with respect to raising “additional duties” on NAFTA imports via presidential proclamation when the President determines that they are “necessary or appropriate to maintain the general level of reciprocal and mutually advantageous concessions with respect to Canada or Mexico.” None of this is defined or explained in the Act or elsewhere and, again, there is no historical precedent.

Making things even more complicated, the Trade Act of 1974 and the 1988 Trade Promotion Authority (“fast track”) law governing NAFTA negotiations and implementation each contain their own, unclear provisions on the President’s unilateral authority to raise duties on trade agreement partners via presidential proclamation.

The relationship between all of these overlapping, ambiguous laws is a complex matter of statutory interpretation—certainly not something a President should simply pursue without congressional input, especially given what’s at stake here.

Other U.S. Trade Agreements

Similar provisions in other U.S. FTAs and implementing Acts—particularly those in the US–Korea FTA (Article 24.5 of the Agreement and Section 107(c) of the implementing law) and other bilateral FTAs—raise similar, perhaps even more pressing problems. Even the WTO Agreements and the Uruguay Round Agreements Act (URAA) implementing them in the United States, while expressly foreclosing unilateral termination of the URAA by the President (thank heavens), raise other concerns about new executive branch protectionism without congressional consent.

Tariffs and Other Unilateral Protectionism

Finally, various U.S. laws permit the President to unilaterally impose duties for reasons not thoroughly explained in law, regulation or practice. These ambiguities exist for much the same reasons as those in our trade agreement laws: the President has constitutional power over foreign affairs and the execution of U.S. law, and is traditionally the most trusted person in the U.S. government not to use these protectionist tools to reward discrete domestic constituents. For example, President-elect Trump has threatened to impose tariffs under Section 232 of the Trade Expansion Act of 1962, which only permits them when a certain product is “being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security.” However, neither Section 232 nor the relevant regulations define the term “national security.” Past agency practice would argue against using Section 232 in ways envisioned by Candidate Trump, but this is hardly reassuring when President Trump appoints the head of the agency. Trump might therefore try to block imports under Section 232 in ways never envisioned by Congress or past Presidents.

* * *

So could a President Trump carry out his many campaign threats without congressional input? As shown in the examples above, the law is unclear in many cases—primarily because Congress in the modern era never anticipated a president more protectionist than its House and Senate majorities. Indeed, Congress’ broad delegation of authority to the President is based on the implicit understanding that the executive branch was more insulated from discrete constituent interests and thus in the best position to advocate free trade, which provides broad and significant national benefits but smaller, concentrated costs. Now, however, things may have changed, and our laws aren’t prepared for a president who views open trade as a threat and protectionism as a weapon.

Indeed, the reality of the President-elect’s trade intentions has shined a bright light on the many ambiguities in U.S. trade law—ambiguities that confuse both the practical operation of our laws and the proper separation of powers intended by Congress therein, but were ignored (including by me!) because of the longstanding bipartisan consensus in favor of trade liberalization, congressional–executive cooperation on trade, and the implicit understanding of the president’s special role in promoting U.S. trade liberalization. With the “free trade consensus” now clearly frayed—if not completely torn apart—we should seriously reconsider Congress’ historical delegation of trade powers.

During the Bush and Obama years, Congresses controlled by the opposition party have railed against executive overreach and pushed for limits on powers delegated or assumed by the President through liberal interpretations of poorly-drafted laws. By acting now to clarify various ambiguities in current U.S. trade law, our political leaders can finally match their words with their deeds and, in the process, avoid not only economic calamities but also a potential constitutional crisis. Only time will tell if congressional Republicans are up to the task.

The views expressed herein are those of Scott Lincicome alone and do not necessarily reflect the views of his employers.

This makes perfect sense — in a country ruled by the Communist Party:

China plans to clamp tighter controls on Chinese companies seeking to invest overseas, intensifying efforts to slow a surge in capital fleeing offshore amid tepid growth and an uncertain economic outlook.

Of course, it would be crazy in a capitalist country ruled by a party committed to free enterprise.

The United States has recorded a trade deficit in each year since 1975. This is not surprising. After all, we spend more than we save, and this deficit is financed via a virtually unlimited U.S. line of credit with the rest of the world. In short, foreigners in countries that save more than they spend (read: record trade surpluses) ship the U.S. funds to finance America’s insatiable spending appetites.

Japan and more recently China have been the primary creditors for the savings-deficient U.S. And since their exports are largely manufactured goods, the real counterpart of their buildup of dollar claims on Americans is for them to run export surpluses in manufactured goods with the U.S. The accompanying chart shows the contribution of Japan and China to the U.S. trade deficit since the late 70s.

So, the U.S. savings deficiency has contributed to the hollowing out of American manufacturing. But, you wouldn’t know it by listening to President-elect Trump. He never mentions America’s savings deficiency. Instead, he claims that American manufacturing has been eaten alive by foreigners who use unfair trade practices and manipulate their currencies to artificially weak levels. This is nonsense.

To get a handle on why the President-elect Trump – and many others in Washington, including the newly-elected Senate Minority Leader Charles Schumer – are so misguided and dangerous, let’s take a look at Japan. From the early 1970s until 1995, Japan was America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed U.S. manufacturing. Washington also asserted that, if the yen appreciated against the dollar, America’s problems would be solved.

Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese caved into U.S. pressure, and the yen appreciated, moving from 360 to the greenback in 1971 to 80 in 1995. This massive yen appreciation didn’t put a dent in Japan’s exports to the U.S., with Japan contributing more than any other country to the U.S. trade deficit until 2000 (see the accompanying chart).

In April 1995, Secretary of the Treasury Robert Rubin belatedly realized that the yen’s great appreciation was causing the Japanese economy to sink into a deflationary quagmire. In consequence, the U.S. stopped bashing the Japanese government about the value of the yen, and Secretary Rubin began to evoke his now-famous strong-dollar mantra. But while this policy switch was welcomed, it was too late. Even today, Japan continues to suffer from the mess created by the yen’s appreciation.

Now, China is America’s economic enemy, and China bashing is in vogue. Indeed, hardly a day goes by without President-elect Trump railing against China, accusing it of unfair trade practices and currency manipulation. He is also threatening to impose huge tariffs on the Middle Kingdom.

At the same time, President-elect Trump is promising a set of spending and taxing policies that will cause the gap between our spending and savings to widen. This will balloon our trade deficit. And with that, Mr. Trump will, no doubt, point an accusatory finger and start a trade war with China, a country that currently contributes 48% to the U.S. trade deficit. So, the President-elect’s promised lax fiscal policies might just get us into a trade war with one of the most important countries in the world.

“Well we’re living here in Allentown
And they’re closing all the factories down
Out in Bethlehem they’re killing time
Filling out forms
Standing in line
Well our fathers fought the Second World War
Spent their weekends on the Jersey Shore
Met our mothers in the USO
Asked them to dance
Danced with them slow
And we’re living here in Allentown.”

– Billy Joel, “Allentown,” 1982

Nearly 35 years after the release of Billy Joel’s wistful lament about the decline of iconic Bethlehem Steel and the selfless virtues of America’s “Greatest Generation” along with it – the U.S. steel industry may be getting the last laugh. Yesterday, former Nucor Steel CEO Dan DiMicco and longtime Washington trade attorney Robert Lighthizer, who has devoted much of his professional career to building walls between foreign steel and the U.S. companies that want to buy it, were appointed heads of President-elect Trump’s “Landing Team” at the Office of the United States Trade Representative.

To those who have been holding out hope that Trump’s anti-trade campaign bluster would moderate before it could be converted to policy, the selection of DiMicco and Lighthizer is pretty devastating news. Neither has met a tariff he didn’t like or a trade agreement he did. To the non-political staff at USTR, the DiMicco/​Lighthizer duo must feel like a real poke in the eye. After all, the mission of the agency is “to work toward opening markets throughout the world to create new opportunities and higher living standards.” The staff is generally committed to trade liberalism and good will among nations and their sensibilities are informed by foreign service backgrounds. DiMicco and Lighthizer bring an enforcement and prosecution ethos to the USTR, which will send a lot of the existing staff to the exits, while ensuring that the agency’s budget is devoted primarily to bringing complaints against our trade partners, rather than negotiating new and better deals.

Of course, Trump mistakenly cites the U.S. trade deficit as evidence that the United States is losing at trade. We are losing, he bellows, because our trade agreements are disastrous. And, they are disastrous, he reasons, because U.S. negotiators always get outsmarted by their crafty foreign counterparts. What better way not to get outsmarted than to appoint people who would take a wrecking ball to existing agreements instead of crafting new ones?

For reasons unsupported by facts, DiMicco abhors the North American Free Trade Agreement and wants it shredded. He also wants the United States to withdraw from the Trans-Pacific Partnership – which, yesterday, became one of Trump’s Day One priorities. Trump has been outspoken about his intentions to declare China a currency manipulator and to respond with punitive unilateral measures. To the extent that Trump’s actions are constrained by U.S. treaty commitments under the World Trade Organization, Lighthizer has a long history of challenging the veracity of the WTO dispute settlement system, which he claims embodies an anti-American bias. He has long advocated for closer scrutiny and, if warranted, U.S. withdrawal from the WTO.

Ten years ago, I debated Lighthizer in this week-long back-and-forth hosted by the Council on Foreign Relations. His affinity for wanting to bend the WTO to be more responsive to U.S. demands (i.e., “All animals are equal but some are more equal than others”) was very much on display then.

The U.S. steel industry has been one of America’s most protectionist and litigious industries for more than a century. Its model was never to compete on economics or commercial considerations. It was always to invest in K Street and use the levers of politics to cordon off the U.S. market for domestic steel. As a trade attorney, Lighthizer brought hundreds of antidumping and countervailing duty cases against foreign producers with the aim of raising the cost of foreign steel to downstream, steel-consuming U.S. industries, such as appliance, automobile, and pipe and tube manufacturers. Often testifying in hearings before the U.S. International Trade Commission, where Lighthizer argued for the imposition of tariffs, was Dan DiMicco, in his capacity as Nucor CEO.

It’s not that the steel industry isn’t entitled to its day in court. The problem is that the industry’s interests are so overrepresented in Washington. After all, “primary metal” manufacturing (which is a sector that includes more than just steel-making) accounted for $56 billion of value-added output last year. That’s a lot — until you recall that total value-added in the U.S. economy last year (GDP) was over $18 trillion. In other words, the direction of the administration’s trade policy is being shaped by two men who speak on behalf of interests that account for less than 0.3 percent of the U.S. economy. What about agricultural interests? What about the tech industry? Pharmaceuticals? Equipment manufacturers? Professional services? Will the interests of the other 99.7 percent of the U.S. economy have a voice in the formulation of trade policy? 

Most of us don’t live in Allentown.