What Do the Midterms Mean for Trade?
Trade was a highly contentious issue during President Trump’s first two years. He has doubled tariffs, other countries have enacted equivalent retaliatory tariffs, and tensions are unlikely to ease anytime soon. This unease will not change under a newly divided Congress. The midterm elections will have significant implications for trade policy in the short, medium, and long runs.
The biggest short-term question will be what happens to the renegotiated NAFTA, called the United States-Mexico-Canada (USMC) Agreement. Congress is currently in the middle of a 90-day window to vote on the revised agreement, but Republicans are lukewarm on it. Many Republicans share economists’ skepticism of President Trump’s trade protectionism. At the same time, they are reluctant to buck a Republican president—some Republicans have even gone one further and reversed their stances on trade and other issues in deference to the president. Lame duck Republicans will likely punt to the next Congress in an attempt to avoid cognitive dissonance.
That’s where the new Democratic House majority comes in. The new NAFTA/USMCA changes very little in terms of actual trade policy. But it has significant symbolic value as a political victory for President Trump. Democrats would love to deny Trump this victory. But they will also be reluctant to cause further tensions with Canada and Mexico’s governments, staunch allies which endured many slights during the negotiating process, both domestically and from President Trump. They would like to have something to show for their indignities, even if it’s just getting President Trump out of their hair for a bit. This could push foreign policy-minded Democrats in favor of passing NAFTA/USMCA. At this point, it is hard to predict which impulse is stronger.
This is also partially because Democrats are just as divided as Republicans on trade issues. Traditional Democrats often favor a more-or-less open approach to trade, not terribly different from the average pre-Trump Republican. The original NAFTA and the creation of the World Trade Organization happened under Bill Clinton, and President Obama signed about half a dozen trade agreements that liberalized trade on net. Going further back, President Kennedy signed a major trade bill in 1962 that led to a successful round of international negotiations bearing his name that sharply reduced tariffs around the world. Franklin D. Roosevelt’s Secretary of State, Cordell Hull, presciently argued that if goods do not cross borders, soldiers will.
Democrats have slowly become more protectionist in recent years, with Sen. Charles Schumer (D-NY) even arguing for a 27.5 blanket tariff against Chinese goods in the mid-2000s. This makes him roughly 2.5 percentage points different from President Trump, which sounds about right. But Trump’s vocal advocacy of government-managed trade has pushed many Democrats somewhat back towards the free trade side.
At the same time, the party’s labor and environmental wings tend to oppose free trade. Labor interests often see protectionism as a rent-seeking opportunity to kneecap competitors. Many environmental activists reflexively oppose policies that create wealth and development. The party’s ideological left flank also tends towards protectionism; Sen. Bernie Sanders (I-VT) is uncomfortably similar to President Trump on trade.
In the medium term, between now and the 2020 election, President Trump hopes to pursue trade agreements with the United Kingdom, European Union, and Japan. As with NAFTA/USMCA, House Democrats will be eager to deny President Trump a political victory. The question is whether Democrats can overcome their own protectionist elements enough to be an effective opposition party.
The biggest long-term policy that could come out of the new congressional alignment is similar to the biggest possible upside to regulatory reform: a renewed separation of powers. Under the Constitution, only Congress has the power to tax. But Congress delegated away much of its tariff-setting authority to the president during the 1960s and 1970s. That is how President Trump was able to enact so many tariffs without congressional input. Democrats should rein in a too-powerful executive branch and reclaim Congress’ intended constitutional taxing authority.
Trade will be a busy issue for at least the next two years. Unlike their Republican colleagues, the new Democratic House majority can be an effective check against President Trump’s government-managed trade policies. But they have to keep their own populist impulses in check in order to do so effectively. Perhaps Iain Murray’s and my “Traders of the Lost Ark” can serve as a guide, as well as excellent primers by Don Boudreaux and Pierre Lemieux.