Capital Account -- Dear Canada: It's Not Personal, It's Just Trade

By Greg Ip Features Dow Jones Newswires

The day after the Trump administration announced a 20% tariff on lumber imports from Canada, Commerce Secretary Wilbur Ross was asked if he was comfortable taking action against "an extremely close ally and neighbor."

Continue Reading Below

"They're an important ally. They're generally a good neighbor," Mr. Ross responded. Dumping lumber, he said, "I don't regard as being a good neighbor."

Mr. Ross' response was a useful reminder that allies can have arguments and remain allies. Indeed, Mr. Trump's more hardheaded approach to trade could catalyze a useful re-examination of the assumption that trade must always be tied to broader geopolitical goals. That served the U.S. and Western Europe well for most of the postwar period, but in recent decades it has also contributed to a backlash against globalization whose repercussions are still being felt.

The trade wars of the 1930s led Congress to give most authority over trade to the president on the theory he would balance parochial commercial considerations with the broader national interest. After World War II, the U.S. saw commercial and military ties as essential for strengthening its allies against the Soviet Union. It opened its market to West Germany and Japan despite their own barriers to U.S. exports, such as artificially low exchange rates.

To differing degrees, this has remained the preferred U.S. approach ever since. A major rationale for the North American Free Trade Agreement was to turn Mexico into a reliable, democratic partner.

Yet the logic that trade can always and everywhere advance a geopolitical agenda has sometimes been pushed too far. In 2000, Bill Clinton reasoned that admitting China to the World Trade Organization would hasten political liberalization internally. He was wrong. In subsequent years, the combination of China's WTO membership and artificially low currency led to ever larger trade surpluses, displacing millions of U.S. workers, yet China's domestic politics have hardly liberalized.

Continue Reading Below

Other U.S. interests have been elevated over confronting China on trade. When George W. Bush was president, officials debated whether to designate China a currency manipulator. But the currency was a lower priority than getting China's help curbing North Korea's nuclear program and the administration withheld the designation. In the end the U.S. got a backlash against trade and a nuclear-armed North Korea.

A similar logic has long driven European integration. A handful of Western European nations formed the core of the European Union in the 1950s in part to put an end to war, and expanded to Spain, Greece and Portugal to keep them from reverting to military dictatorship.

When the Berlin Wall fell, the EU offered membership to Russia's former Eastern European satellites as a way of permanently drawing them out of its orbit. This expansion, though, strained the bloc's cohesion. An influx of lower-paid Eastern European migrants eventually fueled a backlash by aggrieved native-born workers, a major element in Britain's vote to leave the EU and bolstered support for France's anti-EU National Front. Yet Hungary has drifted into autocracy despite membership, as has Turkey, which has long pursued membership.

There's no simple formula for when trade and national security policy should be linked, but it helps when both make sense on their own merits. Ronald Reagan took sweeping protectionist steps against Japan in the 1980s, but neither country let that affect their security alliance, which was simply too vital to both.

What can Mr. Trump learn from this?

On China, Mr. Trump's original instinct was to go after its systematic discrimination against U.S. companies through currency and business policies. Yet, like his predecessors, he has since concluded that China's cooperation on North Korea is more important and for now held his fire on trade. Whether it succeeds remains to be seen; so far, North Korea has only grown more bellicose.

Yet nearby, the Far East provided a potentially more important example of how to balance competing national security and economic priorities. When Vice President Mike Pence visited South Korea last week, he reiterated the U.S.'s "unwavering" commitment to its defense while calling for "reform" of their free-trade agreement, which, he says, leaves too many barriers to U.S. firms. Mr. Pence thus kept trade disagreements and strategic priorities on separate tracks, much as Mr. Reagan did with Japan in the 1980s. (The fact Japan and South Korea are allies makes it easier for the U.S. to maintain such a separation than with China, a potential rival.)

Like Mr. Ross's remarks on Canada, Mr. Pence's comments signaled that just because the U.S. doesn't like how a country trades, that doesn't mean the two can't be friends. Conversely, as the disappointing experience thus far with China and North Korea demonstrate, the Trump team should be under no illusions that holding fire on trade will sway its adversaries.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

April 26, 2017 15:37 ET (19:37 GMT)