The Pandemic Depression
The Global Economy Will Never Be the Same
I am pleased that my essay on trade and the dignity of work (“How to Make Trade Work for Workers,” July/August 2020) has generated so much interest and discussion. And I welcome the opportunity to respond to critiques that have appeared in Foreign Affairs and elsewhere.
This debate is not about small things but about the kind of economy and society we want our children to inherit. We do future generations a disservice if we resort to the usual partisan carping on an issue when consensus is achievable—and indeed, has been achieved under the administration of U.S. President Donald Trump—even in an otherwise divisive climate. The passage in Congress of the U.S.-Mexico-Canada Agreement (USMCA) by overwhelming numbers and the bipartisan support for a tougher China policy are proof that a new consensus is quickly solidifying
Many critics of the administration’s trade policy start by lamenting the death of the Trans-Pacific Partnership. In my view, the TPP was a bad agreement for the United States. Its chapter on the rules of origin (which stipulates that a certain percentage of content in traded goods must be from the free-trade area in order to qualify for duty-free treatment) would have allowed China to set up new auto assembly platforms in Malaysia and Vietnam, divert high-value parts to those plants (up to 55 percent of total content), and flood the U.S. market. The agreement had weak or unenforceable obligations in such important areas as labor, intellectual property, and currency manipulation. The chapters on state-owned enterprises and digital trade were riddled with loopholes. For these reasons, there was substantial, bipartisan opposition to the TPP in Congress. Indeed, both major party candidates in the 2016 presidential election opposed it.
Although the downsides of the TPP were obvious, the economic upside was limited at best—and there were other ways to obtain it. The United States already has free-trade agreements with six of the 11 other countries in the TPP. Of the remaining five, Japan holds 86 percent of the combined gross domestic product. The biggest potential export opportunities for the United States in Japan are in the agricultural sector, and this administration’s Phase 1 deal with Japan succeeded in opening that market. The deal secured most of the market-access benefits of the TPP for U.S. farmers and ranchers—plus a high-standard digital trade agreement—at a much lower price than the TPP would have done.
The best leverage the United States has over China is Chinese dependence on access to the American market.
The case in favor of the TPP, therefore, was always primarily about geopolitics, not economics. There are two contradictory theories about the supposed strategic benefits of the TPP. The first rested on the assumption that China would want to join, the United States would let it in, and then—so the argument went—China would reform at long last. Precisely the same argument led the United States to welcome China into the World Trade Organization (WTO). Given how that worked out, it is surprising that anyone would advocate replaying this failed strategy.
A second theory is based on the opposite premise—that the TPP would have been a NATO-like counterweight to China in the Indo-Pacific region. But the incremental advantage of this strategy is questionable at best, given that the United States already has not only free-trade agreements but also mutual-defense treaties with many of the TPP countries. Such speculative political benefits simply were not worth the cost of losing untold numbers of blue-collar jobs, in my opinion. Moreover, had the TPP been in effect during the COVID-19 pandemic, it would have hindered U.S. efforts to lessen dependence on overseas supply chains for medical equipment and other critical products, thereby undermining national security in a critical way.
Setting these obvious costs aside, proponents of the encirclement strategy are too sanguine in assuming that the United States would have held the line on excluding China from the TPP over time. Especially given that many TPP supporters—not to mention China itself—had precisely the opposite objective, the pressure to let China in would have been persistent and intense.
In the end, the best leverage the United States has over China is Chinese dependence on access to the American market. If one believes—as I do—that absent reform, China’s economic model poses an existential threat to the economic security of the United States, this administration had no choice but to use the best and most potent tool at its disposal to address that threat.
Armchair internationalists often assert that Washington hasn’t done enough to work with its allies on China over the past three and a half years. In fact, we’ve worked quite closely with them. Together with Japan and the EU, we formed a trilateral group that has met several times and issued detailed statements of shared principles on trade matters relevant to China. In this and other areas, including 5G and investment screening, the current U.S. administration has far more to show for its efforts to engage allies on China-related matters than any previous one has.
Getting U.S. allies to take bold, concerted action is easier said than done, however. Even at the height of the Cold War, the relations between the United States and its allies were less harmonious than some remember in hindsight. Charles de Gaulle withdrew France from the NATO military command structure, Willy Brandt launched Ostpolitik, and students marched by the thousands in European capitals to protest policies of the Reagan administration. These events all took place when the U.S. military was the only thing standing between Paris and Soviet tanks.
Where China is concerned, the interests of the United States and its allies are not necessarily aligned, nor has there been a shared appreciation of a common threat, at least not until recently. Several EU member states are part of China’s Belt and Road Initiative. Germany had a $22 billion goods surplus with China in 2019, not a $345 billion deficit like the United States has. And many allies may simply be tempted to sit on the sidelines in order to avoid controversy and perhaps, pick up some extra market share in China along the way.
There are reasons for optimism, however. With the steady encouragement of the Trump administration, Australia, India, Japan, the United Kingdom, and even the EU recently have taken steps to bring their China policies in closer alignment with that of the United States. I suspect the future will bring about even greater convergence.
In his July 9 response (“There Is Little Dignity in Trump’s Trade Policy”) to my Foreign Affairs essay, Chad Bown mostly serves up familiar free-trade fare that I addressed at length in my original essay. But some claims are false or misleading and thus merit a response. For instance, Bown suggests that the Trump administration’s Section 301 investigation of Chinese forced technology transfer and intellectual property theft was just a pretext for raising tariffs. This is absolutely and demonstrably wrong. The Office of the U.S. Trade Representative spent eight months and thousands of man-hours investigating and meticulously documenting China’s practices in a 200-page report. To imply that this effort was all a sham is not only foolish but also an insult to the dedicated career public servants who authored the report and the numerous businesses and trade associations that submitted testimony in support of its findings.
The current administration has far more to show for its efforts to engage allies on China than any previous one has.
Bown’s depiction of the response of U.S. labor unions to the Trump trade policy is misleading. He implies that the United Steelworkers did not support the president’s 232 tariffs on steel and aluminum imports. But the union’s press release endorsing the policy is here. He cites the AFL-CIO’s endorsement of Joe Biden—something that is as surprising as summer following spring, given that the organization has never endorsed a Republican for president in its history. But Bown neglects to mention that the AFL-CIO, the Steelworkers, and the Teamsters all endorsed USMCA, marking the first time these unions have supported a trade agreement in decades. These unions also supported the administration’s use of tariffs to combat China’s trade practices.
Bown further charges that I “err[ed]” in accusing the George W. Bush and Obama administrations (the latter of which Bown worked for—something he does not mention) of doing “nothing” to counter China. But I acknowledged that both administrations brought cases against China at the WTO. My point was that these efforts didn’t work. If Bown believes that the U.S. approach to China was anything resembling a success before this administration, it is fair to say that he’s in the minority.
To assert, as Bown does, that the WTO has not cost a single American job is to ignore the devastating effects of the organization’s jurisprudence. U.S. antidumping and countervailing duty (AD/CVD) laws prevent foreign countries from flooding the U.S. market with undervalued goods or subsidized goods and thereby harming domestic industries. China has brought dispute after dispute to the WTO’s Appellate Body challenging U.S. AD/CVDs, and the Appellate Body has consistently sided with China (reversing earlier WTO dispute settlement panel rulings in favor of the United States). China is now accumulating billions of dollars in retaliation rights based on outrageous Appellate Body interpretations of the WTO rules. When the United States joined the WTO, it thought it had preserved its ability to protect industries that faced serious injury due to surges of imports through so-called safeguard actions. Yet the Appellate Body has not found a single U.S. safeguard action to be WTO consistent, with the result that after 2001, U.S. administrations refused to even initiate safeguard investigations to protect U.S. workers and businesses against import surges—until this administration took action on solar cells and washers. Appellate Body findings led Congress to repeal the Byrd Amendment, which allowed the U.S. government to use AD/CVD duties to compensate victims of unfair trade practices. Another Appellate Body report, resulting in a threat of significant countermeasures, effectively pushed Congress to eliminate provisions of the tax code that allowed U.S. exporters to compete more easily in countries that have value-added taxes. To suggest these decisions did not prevent the loss of even a single American job is preposterous.
As to Bown’s overall theme—that the current policy “pit[s]” Americans against one another—I would say it is not even a half-clever phrase. Nearly all state interventions in the marketplace can be caricatured in this way, including those that Bown himself advocates in health care, education, and the minimum wage. Unless one calls for laissez faire across the board—as Bown clearly does not—the question is ultimately one of balance and degree. Prior to the pandemic, the U.S. economy was the envy of the world, and compared to past periods of robust growth, the benefits were more evenly felt. From January 2017 to January 2020, 500,000 new manufacturing jobs were created and real wages for manufacturing workers rose by 2.5 percent, compared to a decline of 0.6 percent from January 2009 to January 2017.
After many decades of a trade policy dominated by geopolitics and the blind pursuit of efficiency, the United States now has a new worker-focused trade policy that I believe will endure well beyond this administration. Some bitter-enders will continue to argue that we should just let the jobs go and then attempt to glue the pieces of society back together again. Fortunately, the country as a whole has moved on and will be stronger for it.
Charting a Path Between Protectionism and Globalism