The Pandemic Depression
The Global Economy Will Never Be the Same
In “How to Make Trade Work for Workers” (July/August 2020), Robert Lighthizer, trade representative to the administration of U.S. President Donald Trump, sets about explaining the president’s policies, including his tariffs on imported steel, his renegotiation of the North American Free Trade Agreement, his trade war with China, and his decision to dismantle the World Trade Organization (WTO). The normally tightlipped Lighthizer is the White House’s strategist, tactician, and negotiator on trade. His essay is no off-the-shelf press release, and the explanation it offers is seductive: the administration, Lighthizer claims, “has sought to balance the benefits of trade liberalization with policies that prioritize the dignity of work.”
Who can quibble with the desire to raise up hard-working Americans, many of whom did not start from backgrounds of privilege? But Trump’s trade policies reflect no such objective and may well have the opposite effect. In his effort to retrofit Trump’s policy to this stated aim, Lighthizer has produced an essay that is factually inaccurate, intellectually incomplete, and internally inconsistent.
Lighthizer argues that Trump imposed tariffs on steel and aluminum in 2018 to dignify the work of Americans who make metals. The claim is revisionist history. At the time, the administration insisted that the tariffs were necessary to shore up U.S. military defenses. The administration invoked Section 232 of the Trade Expansion Act of 1962, the part of U.S. trade law tasked with safeguarding national security—and it did so despite the fact that the United States imported steel and aluminum mainly from allies, such as Canada, Japan, and the European Union.
American workers, for their part, mostly opposed the policy. Trump put duties on Canada—the source of more than 25 percent of U.S. steel and aluminum imports—and the United Steelworkers union complained that “the Administration’s trade policies have led to confusion, higher trade deficits and no real success in changing the practices of our trading partners.” A handful of steel companies may have benefited from the resulting rise in steel prices, but some two million other Americans who depend on steel for their jobs found themselves reliant on a product that was suddenly more expensive. The economists Lydia Cox and Kadee Russ have estimated that 80 Americans work in industries that use steel for every one American who is employed in producing it.
The dignity of the American worker was hardly served when the high cost of metals, together with foreign retaliation for Trump’s tariffs, pushed some blue-collar U.S. jobs overseas. On account of Trump’s trade policy, Harley Davidson ceased making the motorcycles it sells in Europe in the United States. U.S. expenses were too high: hogs destined for the autobahn had to be built in Thailand instead.
On account of Trump’s trade policy, Harley Davidson ceased making the motorcycles it sells in Europe in the United States.
The administration set up an opaque process by which desperate U.S. businesses had to hire Washington trade lawyers in order to beg for products to be excluded from Trump’s sweeping duties. The mechanism was rife with the potential for corruption. Businesses filed tens of thousands of requests, of which Trump officials granted fewer than half, leading the Commerce Department’s own Inspector General to warn in 2019 of “the appearance of improper influence.” Denied exclusions, American businesses manufacturing such objects as steel nails, car bumpers, and beer kegs bore the brunt of the rising costs. In January 2020, the president recognized the negative impact of his policies and extended even more protection—now shielding metal-using American companies from foreign competition, too.
Trump’s trade war also took a toll on the dignity of American farmers. China levied retaliatory tariffs on U.S. agricultural goods that cost Midwestern soybean farmers a combined $6.7 billion in lower export sales over 2018 and 2019, as compared to 2017. The farmers were forced to accept a federal bailout. Many remain skeptical that they will ever regain their foreign markets.
A growing number of economic studies conclude that Trump’s trade policy has been costly for American businesses, workers, and farmers. Overall, the U.S. economy performed worse because of the tariffs. By imposing them, Trump and Lighthizer made a choice not to support working Americans but to pit them against one another.
Lighthizer legitimately identifies “market-distorting state capitalism in China” as one of the “most significant trade challenges” facing the United States. Since 2013, Chinese President Xi Jinping has pushed to enlarge the role of the state in the Chinese economy, including with the “Made in China 2025” industrial policy he rolled out in 2015. These policies can create conditions under which American companies and workers are unable to compete fairly. But Lighthizer errs in accusing the administrations of Barack Obama and George W. Bush of doing nothing to counter them.
Prior U.S. administrations had adopted a three-pronged approach to confront Chinese policies. They deployed special tariffs that already covered more than seven percent of U.S. imports from China even before Trump assumed office in 2017. At the same time, through the WTO, they filed nearly two dozen disputes against China, including six in quick succession once Chinese policy turned in 2015. Washington often brought Canada, Japan, and the European Union into those disputes in order to put China on notice that it risked access to nearly 60 percent of the global economy outside its borders. Finally, the Obama administration negotiated a new trade agreement with 11 countries called the Trans-Pacific Partnership, which prioritized the role of markets. And because the TPP had benefits that would accrue only to its members, Beijing would someday want to get in—but doing so would require China to cut back on state capitalism.
In contrast to his predecessors, Trump chose a one-pronged, unilateral approach. He withdrew the United States from the TPP. He ignored China at the WTO. His administration turned almost exclusively to tariffs. And it went after China alone.
Now, high tariffs have become the new normal.
In explaining this strategy to the American public, the Trump administration accused Beijing of intellectual property theft. That charge formed the legal basis for the trade war and provided Trump the unfettered authority to impose tariffs on China whenever he wanted, on whatever products he wanted, for as long as he wanted, and at rates as high as he wanted. And Trump had wanted tariffs from day one. As Axios reported in August 2017, Trump said of his trade team, “For the last six months, this same group of geniuses comes in here all the time and I tell them, ‘Tariffs. I want tariffs.’ And what do they do? They bring me IP. I can’t put a tariff on IP.” The administration was disingenuous to claim that the purpose of the trade war was to protect U.S. intellectual property. The tariffs were designed to increase business costs and make American companies uncertain about the profitability of investing in China in order to export back to the U.S. market.
Now, high tariffs have become the new normal. Before the trade war, U.S. tariffs on Chinese goods averaged only three percent, and China’s duties on U.S. goods were only eight percent. In January, Trump signed his Phase 1 agreement with Beijing, which cements into place U.S. and Chinese tariffs averaging nearly 20 percent, a remarkable increase in less than two years. Under the agreement, according to Lighthizer, China has made “purchasing commitments that will create long-term market access for U.S. exporters.” But such access seems unlikely so long as Beijing's tariffs remain in place.
Far from tackling the problem of “market-distorting state capitalism,” the Trump administration is asking Beijing to double down on the approach. For instance, under the Phase 1 deal, the administration expects to export substantially more Iowa soybeans, Maine lobsters, and other goods to China than it did in 2017—transactions that will make sense only if China’s state takes on an even greater role in its economy. That’s because during the trade war, Beijing cut tariffs on imports from the rest of the world even as it raised them on those from the United States. Lighthizer did not negotiate changes to those tariffs, and as a result, the Chinese private sector has little incentive to buy American. To satisfy Trump’s deal, Xi Jinping will need to provide more resources to China’s state-owned enterprises and then direct them to divert sales away from cheaper suppliers in Brazil, Germany, or Japan.
Trump’s Phase 1 agreement runs to 90 pages but remains almost entirely silent on the issue of subsidies and state capitalism. The administration has inflicted the costs of a trade war on the American public—and antagonized economic allies, such as Japan and the European Union, with other tariffs—with precious little progress to show for its pains. Worse, Trump has moved U.S. policy closer to the Chinese model that Lighthizer dislikes so much: Washington has embraced higher tariffs, more subsidies, more calls for industrial policy, and more government direction of economic activity. The United States and China are converging—but toward, rather than away from, the “market-distorting state capitalism” Lighthizer claims to worry about.
Trump has made the WTO a bogeyman. Lighthizer calls it a “litigation society” with “made-up jurisprudence that undermines U.S. sovereignty and threatens American jobs.” He presents no credible evidence that WTO jurisprudence has cost American jobs, because there is none. But he uses this assessment to justify the administration’s decision to kill off the WTO’s Appellate Body, which had adjudicated trade disputes for 25 years.
The notion that the WTO undermines U.S. sovereignty is a straw man.
Prior U.S. administrations deftly used the Appellate Body to manage trade relations, in part by bringing more than 100 disputes against other governments. When it won these disputes, the United States helped convince other countries that their interests lay in setting policy consistent with a rule book that Americans had largely written. Yes, the system also allowed other countries to challenge American policies. And sometimes, the United States “lost.” Earlier administrations and Congress often chose to adjust U.S. policy in response to those decisions. Lighthizer may have found such compromises upsetting, but they were freely chosen: the WTO never forced policy changes upon the U.S. government.
The notion that the WTO undermines U.S. sovereignty is a straw man. The Appellate Body, while it functioned, was apparently unable to stop the Trump administration from lashing out with trade barriers that inflicted costs on itself and its trading partners. But by destroying the WTO’s Appellate Body, Trump hurt Americans. He deprived future U.S. administrations of an instrument for tackling trade grievances without running the risk of a trade war. The Appellate Body’s transparency gave Washington a window onto dealmaking among other countries, such that it didn’t need to fear its exporters’ being squeezed out of third country markets. All of that is now gone, with nothing gained for the loss. Trump did not restore the United States’ sovereignty— it had never been missing in the first place.
Change is a constant for any country exposed to the international economy and the whims of innovation. To weather the economic and technological flux, American workers need access to health care, education, retraining, and a social safety net. Open trade advocates over the last 30 years erred in focusing exclusively on lowering trade barriers and assuming that others would legislate the complementary domestic protections that workers would need. The supporting policies never materialized, and workers were left exposed.
Lighthizer, too, overinflates the importance of trade policy. The Trump administration has failed the American worker, and neither imposing tariffs nor shutting those workers off from the world can compensate.
Lighthizer expresses concern, for example, over the United States’ increasing “deaths of despair,” while the president he serves has persistently tried to take health insurance away from more than 20 million Americans. Lighthizer has rewritten trade rules to benefit a select few autoworkers, while the administration made no effort to increase the federal minimum wage affecting 1.6 million others. (It remains stuck at $7.25 per hour, having fallen by five percent in real terms since 2016.) Lighthizer complains about Mexico’s lax labor laws, while Trump’s appointments to the National Labor Relations Board sought to obstruct American workers from unionizing.
Consequently, Lighthizer’s claims that the Trump administration had prioritized the dignity of work may fall on deaf ears. The AFL-CIO, which represents 55 labor unions and more than 12.5 million active and retired workers, has come out with an early endorsement of Joe Biden, the presumptive Democratic candidate in the 2020 presidential election, and a promise to campaign against Trump. For policy priorities that really matter to the American workers the AFL-CIO represents, trade policy was simply not the answer.
Charting a Path Between Protectionism and Globalism