Opinion: Trump Trade Policy

May 20, 2018
By Martin Rapaport

International trade is the foundation of the diamond business. Billions of dollars of rough diamonds travel from Africa, Russia and Canada to Belgium, India and Israel to be sorted, polished and merchandised. The resultant polished diamonds then move to the US, Hong Kong and China, the primary consumer markets for polished diamonds and jewelry. Changes in trade regulations and tariffs have the potential to severely disrupt the global diamond and jewelry industry. United States President Donald Trump is taking proactive measures that are fundamentally changing the international trade landscape. Understanding the policy considerations behind these changes is vital for those who seek to identify the risks, challenges and opportunities that will impact our trade over the next few years. A few words of caution and consideration. President Trump is a highly innovative disrupter who optimizes negotiation strategy through uncertainty. This is the opposite of how US trade policy worked in the past, when President Barack Obama sought to optimize multilateral negotiations by providing a high degree of certainty as to US trade policy. Furthermore, President Trump favors bilateral (one-on-one) negotiations over multinational negotiations, with a tendency to reject large-scale deals such as the Trans-Pacific Partnership (TPP), the North American Free Trade Agreement (NAFTA), and even possibly the World Trade Organization (WTO) rules, which form the foundation of current international trade policy. It is important to recognize that President Trump believes that current US trade policy is bad, unacceptable and non-sustainable. He is determined to change the current system, even if he has to break it before repairing it — sort of like fixing a broken leg. Finally, we recognize that many decision-makers personally dislike the President, or at the very least strongly disagree with his personality, tweets and perhaps everything about him. Unfortunately, such emotional reactions are counterproductive to understanding what the President is doing. Whether or not you like President Trump, he is rewriting international trade in ways that will have an impact on our industry. It is time to set our emotions aside and rationally understand the situation. Initial analysis In 2017, the United States imported $2.947 trillion and exported $2.327 trillion of goods and services, leaving a trade deficit of $620 billion. Since 2000, the accumulated US trade deficit has reached $10.327 trillion — that’s $10,327,000,000,000. Of this US trade deficit, China enjoyed a trade surplus of $4.411 trillion — 43% of the US deficit. In 2017, China’s surplus came to $357 billion, or 58%. Some people think the trade deficit is just a fiscal debt issue, but that’s wrong. When the US buys more than it sells, it exports economic power, prosperity, opportunity and jobs, not just money. In effect, we are making our trade partners rich and more powerful by giving them access to our purchasing power. For many years and through numerous administrations, Washington followed liberal free-trade policies that kept US markets wide open to most countries. Before presenting our view of President Trump’s policies, let’s look at the many benefits liberal free-trade policies brought us.

Cheaper imports. We got to use cheaper Chinese labor, which significantly brought down the cost of products. US consumers get a good deal buying more products at lower prices because of our trade deficit. Everything from Apple iPhones to Zara clothing has Chinese components that significantly lower the cost to US consumers.
National security. We bought the peace by buying stuff from China. When China became a nuclear power, President Richard Nixon made a deal that provided China with jobs and prosperity for peace. China would not go to war against the US if we were supporting them economically. Ever since the post-World War II Marshall Plan, the US has successfully used economic power to pacify potential enemies.
Capitalism beats communism. The US deal with China created a capitalist foundation that undermined Chinese communist economic policy. While the Chinese government retains and expands authoritarian political control over its people, economic power has clearly shifted from the government to the people. Jobs bring prosperity, which drives capitalism. Like a Trojan horse, the integration of US purchasing power into China created a capitalist society. However, we must recognize that capitalism is not democracy. In fact, authoritarian government-regulated capitalism thrives under a leadership that can ensure the optimal utilization of resources without messy democratic controls. It just might be that democracy is not optimal for everyone, everywhere. All societies impose controls over laissez-faire economic freedom through regulation. Some do it democratically; others use communist/authoritarian force. One should never underestimate the impact of economic empowerment on communism, and one should never overestimate the impact of economic empowerment on a political system. Just because capitalism beat communism in China does not mean China will become democratic. Capitalism is not necessarily the highway to democracy.
Customer creation. Opening US markets to China not only lets us buy things cheaply from China, it also creates Chinese wealth and consumer demand for US products. International trade is mutually beneficial to both parties if and only if both parties freely and fairly open up their markets to each other. If the US buys products from China at good prices because Chinese labor is less expensive, this creates Chinese wealth that can then be used to buy US products. Without the US “priming the pump,” the Chinese would never have been able to grow and afford US products.

The problem So if free trade with China and other countries is such a great win-win deal, what’s the problem? The problem is that free trade only works if it is fair. By fair, I mean there is a level playing field whereby both countries open up their markets in a reciprocal manner. And that is not the current situation. A big idea supporting free trade (i.e., open international markets) is that while lower-skill US jobs move to lower-labor-cost countries like China, new higher-skill US jobs are created, and developing countries like China then give the US an opportunity to sell the more advanced products to their consumers. Essentially, everybody gets to do what they do best, resulting in balanced trade as both countries grow. Unfortunately, China and other so-called “developing countries” game the free-trade system and take the US for a ride. They maintain high tariffs (import fees) and force companies that seek to enter their market to transfer their advanced technology. China then uses its trade surplus to buy US and EU high-tech companies and bring their technology back to China. All of this while stealing intellectual property. Essentially, China is not a customer of the US, it is a competitor that the US has built up with a trade surplus of $4.411 trillion since 2000. While there is nothing wrong with competition, there is something wrong with US government policies that feed competitors that are destroying US industries. We are not just talking about low-tech industries; we are talking about the future. Some rich Americans on the east and west coasts might chuckle at the problems middle Americans are having as their factories and jobs move to China, Mexico or wherever. But in fact, they and their high-level jobs are next on China’s list. China is targeting America’s future with the Made in China 2025 plan, which calls for China to dominate the world in 10 key futuristic industries. These include artificial intelligence (AI), robotics, aerospace, electronic vehicles, railways, shipping, agriculture, new materials, biomedicine and high-performance medical equipment. The Council on Foreign Relations believes the Made in China 2025 plan is a “real existential threat to US technological leadership.” An unsustainable system So why are we giving China an extra $396 billion a year? Is it because the US has become addicted to cheap Chinese imports? Do we pacify our laid-off workers with welfare checks that enable them to buy cheap Chinese products from Walmart and Amazon? Are cheap imports destroying our will to work? Are they taking away the dignity of Americans who can’t find jobs? Has the US become too fat, complacent and lazy to compete? Consider the recent New York Times May Day editorial by flat-world, free-trade journalist Thomas L. Friedman. Entitled “The US and China Are Finally Having It Out,” the article quotes Ruan Zongze, executive vice president of the Chinese Foreign Ministry research institute: “This is a defining moment for US-China trade relations. This is about a lot more than trade and tariffs. This is about the future.” Writes Friedman: “In one corner stand President Trump and his team of China trade hardliners, whose instinct is basically right: This is a fight worth having now, before it is too late, before China gets too big.” Friedman reports that Chinese say, “Our one-party system and unified society can take the pain of a trade war far longer than you Americans can. And there is a trade imbalance today because we’ve been investing in our future and you Americans have been eating yours.” By now it should be clear: It does not matter if you are a Democrat or a Republican, the US must change its trade policies if we are to remain a prosperous country. Our old policy of uncontrolled WTO free trade is not sustainable. The WTO is a threat to our future. So where does that leave us? What should we do? And what does any of this have to do with the diamond and jewelry industry? A sea change in trade policy is taking place. The US is moving to new trade policies based on the natural-law principles of “Reciprocity and America First.” While China is at the forefront of these new policies, India and other countries will not be far behind. Once the US gets its trade policies in order, change will happen everywhere. The WTO problem Consider US, China and India import fees. Why does India charge an exclusionary 32% for jewelry imports, when the US charges only 5.5%? Why did India double its import fees for polished diamonds to 5%, when the US charges nothing? Is there a risk that the Trump administration will apply reciprocal import taxes? Is it possible that our industry will get caught up in a trade war and the US will start charging India 32% on jewelry imports and 5% on polished-diamond imports? What will this do to India’s diamond industry and the millions of people it supports? And what about US retailers who may be faced with high import fees? The root of the problem is the highly flawed World Trade Organization (WTO), which applies outdated, unfair and unsustainable rules for international trade tariffs (import fees). India and China were designated as “developing countries,” enabling them to charge protectionist tariffs that protect their industries while giving them unlimited access to US markets at very low tax rates. That is why China got to charge a 25% import fee on US cars, while the US charges only 2.5%. (We note that just last week, China reduced its car tariff to 15% under Trumpian pressure — now it is only six times the US rate.) The current WTO rules ensure that there is no level field for international trade. The WTO is unsustainable in the current environment. It’s not yet clear what President Trump will do. Will he avoid, evade or simply reject WTO rules? Given the WTO’s diverse membership of self-serving countries and agendas, it is extremely unlikely that the WTO will modify its rules to enable reasonable level playing fields. It is also unlikely that the US will continue to apply WTO rules that support the destruction of America’s economic future. The way forward The era of the WTO is ending. Liberal economists and international socialists will howl and carry on, but there is no alternative for the US. Frankly, it’s time to move on and create a new world trade order based on reciprocity and the honest understanding that competitive countries need to protect their own interests before the world’s. China and the US will likely work out their differences in bilateral trade negotiations that ignore WTO rules and reconcile each other’s “America First” and “China First” priorities. While some multilateral deals may continue, the decline of the WTO will bring on more free and fair bilateral trade agreements. Our diamond and jewelry industry must protect and promote the trade relationship between India and the US. India cuts 90% of the world’s diamonds, and the number-one export from India to the US is diamonds and jewelry. Both countries share vital strategic national security interests and support democracy. The Rapaport Group is firmly committed to promoting a bilateral free-trade agreement between India and the US. Such an agreement should eliminate all import fees for diamonds, gems and jewelry. We call upon influential companies and organizations in both countries to work with us and their respective governments to promote a fair free-trade bilateral agreement. The world around us is rapidly changing. While all of us have come to realize the great impact of the internet, we have not yet come to recognize the impact that trade policy will have on our industry. As old systems such as the WTO fail or are bypassed, there will be chaos and uncertainty. The jewelry trade is but a small ping-pong ball in a stormy ocean of change. It is vital that we proactively work together with our governments to establish level playing fields that will ensure the success and growth of our industry. Influential firms, individuals and organizations interested in promoting a free-trade agreement between the US and India are encouraged to contact me personally at martin@diamonds.net.

Trump trade principles: “Reciprocity and America First” President Donald Trump’s trade policy is based on his principles of “Reciprocity and America First.” The big idea is that US purchasing power is valuable, and we should get something for it. Those who do not reciprocate should not be given free access to our markets. Previous administrations sought to expand international trade by freely opening US markets to groups of multinational trade partners. By exporting jobs and prosperity, America hoped to buy world peace and increase foreign demand for sophisticated American products. While this may have worked for many years, it does not now. The current reality is that America is getting a bad deal. Countries like China are not reciprocating. They are not cooperating. America exports jobs and prosperity to China. In return, it gets strategic military threats in the form of aircraft carriers, fake islands and claims to the South China Sea. China uses its US trade surpluses to compete against the US as it steals intellectual property. Should the US be supporting those who stand against us? We should be using our market power to demand reciprocal relationships that support strategic “America First” interests. Trade policy gets more important as it interacts with domestic policy. Free trade is neither free nor fair when it costs America jobs and challenges America’s economic future. While cheap imports may look good, they destroy the dignity of our misplaced workers and our ability to recycle US demand through jobs that multiply prosperity. “America First” means American jobs must sometimes come before imports, even if that means higher prices. So trade policy is not just about trade. It’s about jobs, prosperity, national security, and a host of other social, economic and political factors. Optimizing trade policy requires presidential management with firm decisions about priority and balance. It also requires disruption of the current unsustainable international-trade status quo. A successful outcome requires the establishment, communication and enforcement of high-level principles. We must keep policy-makers on track and headed in the same direction by insisting that policy follow principles. The principles of “Reciprocity and America First” should be adopted, implemented and prioritized throughout the Trump administration. All policy decisions should be measured against these high-level principles.