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Is trade protectionism desirable?

Background

Douglas Brown & Chad Irwin, September-October, 2018, Trump’s assault on the global trading system.

Donald Trump has been true to his word. After excoriating free trade while campaigning for the U.S. presidency, he has made economic nationalism a centerpiece of his agenda in office. His administration has pulled out of some trade deals, including the Trans-Pacific Partnership (TPP), and renegotiated others, including the North American Free Trade Agreement (NAFTA) and the U.S.-Korea Free Trade Agreement. Many of Trump’s actions, such as the tariffs he has imposed on steel and aluminum, amount to overt protectionism and have hurt the U.S. economy. Others have had less obvious, but no less damaging, effects. By flouting international trade rules, the administration has diminished the country’s standing in the world and led other governments to consider using the same tools to limit trade arbitrarily. It has taken deliberate steps to weaken the World Trade Organization (WTO)—some of which will permanently damage the multilateral trading system. And in its boldest move, it is trying to use trade policy to decouple the U.S. and Chinese economies.

A future U.S. administration that wants to chart a more traditional course on trade will be able to undo some of the damage and start repairing the United States’ tattered reputation as a reliable trading partner. In some respects, however, there will be no going back. The Trump administration’s attacks on the WTO and the expansive legal rationalizations it has given for many of its protectionist actions threaten to pull apart the unified global trading system. And on China, it has become clear that the administration is bent on severing, not fixing, the relationship. The separation of the world’s two largest economies would trigger a global realignment. Other countries would be forced to choose between rival trade blocs. Even if Trump loses reelection in 2020, global trade will never be the same.

Prior administrations refrained from invoking the national security rationale for fear that it could become an unchecked protectionist loophole and that other countries would abuse it. In a sign that those fears may come true, the Trump administration recently stood alongside Russia to argue that merely invoking national security is enough to defeat any WTO challenge to a trade barrier. This runs counter to 75 years of practice, as well as to what U.S. negotiators argued when they created the global trading system in the 1940s.

Acts of protectionism are acts of self-harm. But the Trump administration is also doing broader, and more permanent damage to the rules-based trading system. That system emerged from the ashes of the trade wars of the 1930s, when protectionism and economic depression fueled the rise of fascism and foreign governments made deals that cut U.S. commercial interests out of the world’s leading markets. In 1947, the United States responded by leading the negotiations to create the WTO’s predecessor, the General Agreement on Tariffs and Trade, which limited arbitrary government interference in trade and provided rules to manage trade conflicts. Under this system, trade barriers have gradually fallen, and growing trade has contributed to global economic prosperity.

The United States once led by example. No longer. Trump has threatened to leave the WTO, something his previous actions suggest is more than idle talk. He says the agreement is rigged against the United States. The administration denounces the WTO when the organization finds U.S. practices in violation of trade rules but largely ignores the equally many cases that it wins. Although the WTO’s dispute-settlement system needs reform, it has worked well to defuse trade conflict since it was established over two decades ago…

It has become clear, however, that the administration does not want a permanent deal, or at least any deal with an explicit path forward that the Chinese government might accept. Even if Trump and Chinese President Xi Jinping come to some superficial agreement, it is unlikely to be more than a temporary truce in what is now a permanent trade war. The administration’s goal seems to be nothing less than the immediate and complete transformation of the Chinese economy or bust—with bust the most likely outcome. To satisfy the United States, China would have to end forced technology transfers, stop stealing intellectual property, curtail subsidies to state-owned enterprises, abandon industrial policies designed to gain technological dominance, stop harassing foreign firms operating in China, and begin to open markets that the government deliberately closed to give control to domestic firms. In other words, the United States wants China to turn its state-dominated economic system into a market-based one overnight.

Such a change would perhaps be in China’s best interest, but economic regime change is quite an ask for one country to make of another. The Communist Party leadership keeps its lock on power by maintaining control over all facets of the Chinese economy. Losing that control would jeopardize its grip on political power. No one seriously expects China’s leaders to cede control of the economy simply because of U.S. threats.

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The Trump administration may not even expect them to; it may have been asking all along for something that it knew China could not deliver. If so, the objective was never a comprehensive deal; it was the tariffs themselves. For one thing, if the administration had been serious about getting a deal from China, it would have maximized its leverage by bringing along Japan and the EU, both of which have similar economic concerns. Indeed, Japan and the EU have made considerable efforts to work with the administration when it comes to China. They have mostly been rebuffed.

There were hints from the beginning that the administration was never searching for a deal that would truly end the trade war. In 2017, Navarro outlined the administration’s view that trade with China threatened U.S. national security. He also let slip that he wanted to rip up the supply chains that bound the United States and China together. At the time, some dismissed him as a rogue eccentric. Now, the United States is on the cusp of slapping tariffs on all imports from China—the first step toward Navarro’s goal. Geopolitics has trumped economics.

This is not protectionism in the sense of trying to help a domestic industry in its struggle against imports. The goal is much broader and more significant: the economic decoupling of the United States and China. That would mark a historic fragmentation of the world economy. It would represent, in the words of former Treasury Secretary Henry Paulson, the falling of an “economic iron curtain” between the world’s two largest economies. Such a separation would have foreign policy and national security implications well beyond the economic consequences.