Perspective on Multilateral Trade Deals and Trade Wars

President Trump’s intention to impose tariffs on imported steel and aluminum caused ripples on Wall Street, outcries from companies that depend on global supply chains and warnings from economists who cited the cost of trade wars.

President Trump’s intention to impose tariffs on imported steel and aluminum caused ripples on Wall Street, outcries from companies that depend on global supply chains and warnings from economists who cited the cost of trade wars.

President Trump’s threat to impose a 25 percent tariff on steel imports and 10 percent on aluminum imports stunned Wall Street, infuriated US international trading partners and confounded economists.

Trump defended his proposed tariffs as campaign promises he intends to keep. More fundamentally, they reflect his view that bilateral trade deals that his administration would negotiate would be better for Americans than multilateral trade pacts, which he has deplored as unfair to US workers. So far, few nations have shown much interest in bilateral trade deals. The United States and a post-Brexit United Kingdom will need to work out bilateral trade arrangements, but that can’t occur until the UK is officially out of the European Union.

Stunned Wall Street investors worry about the ripple effects of a trade war on the broader US economy. International trading partners are contemplating retaliation. Economists point to the unpleasant history of trade wars. Trump says trade wars can be good and winnable.

Like immigrant bans and border walls, unilateral tariffs have gone out of favor in the globalized economy. Since tariffs levied as a cure to the Great Depression, which in actuality deepened and lengthened the depression, industrialized nations have moved toward multilateral military, diplomatic and trade arrangements. NATO, the United Nations, the European Union and the North American Free Trade Agreement are prime examples.

The motivation for multilateral arrangements is to provide for greater security and enhanced economic opportunity at the expense of some domestic industries and workers. The underlying macroeconomic theory is that allowing countries to realize their competitive advantages on a greater scale will create more prosperity than protecting domestic markets. The winners tend to be consumers and global companies that have clear rules to follow for their international supply chains. The losers are industries and economic sectors that can’t compete globally.

The losses are not insignificant and can be enormously destructive in regional or state economies such as the Rust Belt. Politicians and organized labor have responded to abandoned factories, displaced workers and failing farms by blaming “free trade” and taking aim at NAFTA and the proposed Trans-Pacific Partnership, which was intended to connect US economic interests into an Asian Pacific trading community.

Even though Trump withdrew from the TPP, the other 11 nations involved have continued to pursue a trade pact among themselves, for among other reasons self-protection against China’s growing economic power and its interest in pursuing separate trade deals with Japan, Indian and South Korea. European nations created an economic union, including a common currency, to leverage their collective market in the face of a dominating US economy, which now boasts a $17 trillion annual gross domestic product.

Along the way, the globalization of finance overwhelmed global trade in goods. Capital sloshes across national borders thanks to creative finance and the advent of shell companies, almost without regard to national banking regulations or tax policy.

One of the largest ironies in the current trade dispute is that China’s excess capacity in steel and aluminum production has driven down prices globally, as China has until recently encouraged its corporations and wealthy individuals to invest billions in overseas businesses and real estate. Lower prices and a stream of investment capital have fueled economic growth from Africa to America.

The United Kingdom’s vote in 2016 to exit the European Union a year from now has revealed how difficult it is to depart from a multinational economic arrangement. Currency exchange restrictions, foreign worker status, border crossings and trade are complex issues and, depending on final Brexit agreements, could crimp international investment in the UK, discourage immigrant labor and require a hard border with Ireland.

Trump officials say US steel and aluminum producers need protection because they are vital to American security interests, which is akin to developing countries defending tariffs to protect their infant industries. One challenge with selective tariffs is they have a habit of spreading. For example, Trump threatened to impose tariffs on European autos if the EU retaliated to his steel and aluminum exports.

Former US trade officials say the Trump tariffs violate international trade agreements and lead to litigation before the World Trade Organization. Trump might consider withdrawing from the 160-member WTO, but trade officials warn that could risk unraveling the global economic order, which dates back to the 1994 General Agreement on Tariffs and Trade. One of the GATT principles is preventing countries with excess capacity in a commodity from dumping products on the international market at below cost. Some have argued the United States should pursue an anti-dumping case against China. U.S. Steel argued for that approach as far back as 2016.

Trump’s call for tariffs surprised Republican leaders on Capitol Hill. Over the weekend on Face the Nation, South Carolina GOP Senator Lindsey Graham said Trump should reconsider imposing tariffs because they raise consumer prices and “let China off the hook.” “China wins when we fight with Europe. China wins when the American consumer has higher prices because of tariffs that don't affect Chinese behavior. If you want to affect China get back in the Trans-Pacific Partnership, be present in Asia, hit them on intellectual property theft, hit them on currency manipulation, hit them about steel dumping. China is winning and we're losing with this tariff regime.”


Managing Winners and Losers in Globalizing Economy

Globalization has produced winners and losers, which has soured many Americans and US policymakers on the undisputed benefits of free trade. The problem may not be trade, but the failure of US policy to keep pace with demands in a more competitive global economy.

Globalization has produced winners and losers, which has soured many Americans and US policymakers on the undisputed benefits of free trade. The problem may not be trade, but the failure of US policy to keep pace with demands in a more competitive global economy.

Based on the 2016 election, Americans seemingly soured on international trade. But that may not be an entirely accurate perception.

The election focused on workers dislocated by globalization. Less attention went to the benefits of trade, such as low-cost apparel and year-round fruits and vegetables. Foreign-sourced clothing has enabled American families on average to reduce spending on clothing from 7 percent to 3 percent of total household budgets.

Right or wrong, trade policies produce winners and losers. The losers received the attention in 2016, not inappropriately. US policies to compensate dislocated workers have been inadequate and, at times, non-existent. But that oversight does not override the everyday benefits that freer flowing international trade has brought to a broad swath of Americans.

Innovation Hub, an NPR program airing over the weekend, carried an interview with Edward Alden, author of “Failure to Adjust: How Americans Got Left Behind in the Global Economy.” Alden argues that America at large has benefitted from trade, but at the expense of some Americans who lost their jobs. The impact was predictable, as far back as 1971, but US policymakers have by and large dodged responsibility for finding ways to compensate trade losers, unlike many foreign contemporaries.

That responsibility, Alden says, includes both showing respect for dislocated workers and preparing the next generation to compete in a global economy.

Pete Peterson, an economic adviser to President Nixon, wrote a prescient paper in 1971 citing the upside of international trade and the dangers lurking in the future. He accurately predicted that some American workers would be left behind by globalization and implored for policies to prepare Americans for intensified global competition. You can’t say we weren’t warned.

“A program to build on America’s strengths by enhancing its international competitiveness cannot be indifferent to the fate of those industries, and especially those groups of workers, which are not meeting the demands of a truly competitive world economy,” Peterson wrote. “It is unreasonable to say that a liberal trade policy is in the interest of the entire country and then allow particular industries, workers, and communities to pay the whole price.”

Trump's Trade Pullout Roils Rural America

Today, trade has become a four-letter word. Republicans and Democrats have made protectionist arguments for border taxes, punitive penalties for US corporations moving manufacturing overseas and dumping or renegotiating trade agreements such as the Trans-Pacific Partnership. Nobody cried when President Trump withdrew from the TPP, even as China quietly stepped in to fill the void left by the United States.

That is exactly the point Peterson made in 1971. Much closer to World War II, Peterson could foresee the rise of a new generation of industrial leviathans, starting with Germany and Japan, which the United States helped to resuscitate. It may have been harder back then to project the economic rise of China, let alone Vietnam, India and Brazil.

Alden’s view aligns with Peterson’s. You can’t stop the ineluctable move toward globalization, but you have to adapt. Clinging to the past is like playing poker without ever looking at your cards. It also ignores the fundamentals of why globalization has advanced – trading partners are less likely to engage in war and free trade rewards the economy of advantage, whether it is technological innovation or low wages.

Trade pacts are intended to create rules that sufficiently even out advantages and disadvantages in bilateral or multilateral arrangements, but not necessarily to erase all disadvantages. Those disadvantages can be groups of workers or communities dependent on businesses on the decline.

Automation can amplify the perceived effects of globalization on job losses. Factories may remain in the United States, but employ fewer people because assembly lines are manned by robots. Remaining jobs are for people with different skills, such as running sophisticated machine tools or designing computer programs.

Digital technology has led to greater international integration, generating a flood of information flows that is reaching all corners of the globe. Information has become less proprietary and in many cases the cost of entry into business sectors has been significantly or totally erased, creating new waves of competition, such as outsourced tax preparation in India. There is evidence to suggest that cross-border data flows are becoming the most dominant form of international commerce.

One of the ironic twists of a more competitive global economy is the investment in the United States by foreign-owned companies. Asian and European auto makers manufacture vehicles in the United States, both to sell here and export elsewhere. Taiwanese-based Foxconn announced plans to build what it called a multi-billion-dollar manufacturing facility to produce Apple iPhones. It also has plans for an R&D facility in Michigan for self-driving cars. Chattanooga Tennessee sports two dozen foreign-owned companies that have helped lower the state’s jobless rate to 3.6 percent, a record low.

Traded goods are just a part of international commerce. The movement of capital, supported by financial services, plays a significant role. That’s why large banks are closely watching the details of Great Britain’s exit from the European Union, which could create barriers to service free-flowing capital. Data indicates financial flows have more than doubled since the beginning of the 21st Century.

Alden concludes that opposition to trade deals and globalization is the result of ignoring advice Peterson gave Nixon almost half a century ago. A more competitive world demands American keep its competitive edge, promoting innovation, investing in modern infrastructure, ensuring top-notch education and getting serious about retraining workers who suffer dislocation caused by trade (or by automation).

Today’s disillusionment with trade is linked to growing economic inequality, itself a reflection of a nonchalant attitude toward global competitiveness. People frustrated with their economic lot often blame immigrants. A better focus for their anger might be US policymakers who have failed to do what’s necessary to keep America competitive.

Restricting Free Trade to Save Free Trade

Globalization has come under sharp scrutiny in the 2016 presidential election, exposing deepening political fault lines. Harvard professor and author Dani Rodrik offers ideas for how to save international trade by giving individual nations a license to restrict trade to protect domestic economic and political institutions. (Illustration by Andrew Holder/New York Times)

Globalization has come under sharp scrutiny in the 2016 presidential election, exposing deepening political fault lines. Harvard professor and author Dani Rodrik offers ideas for how to save international trade by giving individual nations a license to restrict trade to protect domestic economic and political institutions. (Illustration by Andrew Holder/New York Times)

Globalization has gotten a black eye in the 2016 presidential election and in the Brexit vote in the United Kingdom, but populist opponents have offered few tangible alternatives other than a trade war, rejecting the Trans Pacific Partnership or trying to renegotiate existing trade deals.

Dani Rodrik, a Harvard professor and author, offers suggestions in a New York Times op-ed that will annoy populists, labor unions and globalization cheerleaders. He says to preserve free-flowing trade – and the democracies the engage in it – will require giving individual nations the autonomy to protect their own interests. 

“Globalization has deepened the economic and cultural divisions between those who can take advantage of the global economy and those who don’t have the resources and skills to do so” Rodrik wrote. “Nativist politicians like Donald J. Trump have channeled the resulting discontent as hostility to outsiders: Mexican or Polish immigrants, Chinese exporters, minorities.” 

Rodrik’s solution is to cap “hyper-globalization” and replace it with a form of globalization with increased national autonomy. For example, he says nations should be able to place restrictions on cross-border transactions that involve worker or environmental rights violations.

That sounds eerily similar to the kind of trade restrictions that globalization and free-trade agreements have sought to eliminate. Rodrik claims some trade trimming will be necessary to salvage the basic idea of free trade, which he notes has “pulled 700 million people out of poverty." “Globalization,within limitations,” he says, “has been good economics. Globalization, within limits, can be good for our democracies, too.”

In his op-ed, Rodrik offers four specific suggestions:

  • Give individual nations the autonomy to choose trade-related institutions that best represent their interests and reflect their risk-tolerance.
  • Countries should be able to prevent “regulatory arbitrage” whereby corporations circumvent national labor or environmental laws by moving operations to offshore locations.
  • International economic negotiations should pivot on domestic policy autonomy combined with increased trade transparency to ensure both sides keep their commitments.
  • Global governance should focus on enhancing democracy, not globalization.

“Global governance cannot overcome major problems like inequality, social exclusion or low growth,” Rodrik says. “But it can help by devising norms that improve domestic policy transparency, public deliberations, broad representation, accountability and use of economic evidence in domestic proceedings.”

Interesting by its omission is mention of reforms to trade adjustment assistance, which has drawn criticism for being inadequate and training dislocated workers for jobs that don’t exist in their community – or at all.

The fundamental question raised by Rodrik’s call for a “little-less-free trade” is whether a little would turn into a lot. Nations already file actions alleging unfair trade practices that range from “dumping” products at low costs to self-serving tariffs that make imported products noncompetitive. The license to protect domestic economic interests could embolden industry, labor and environmental advocates to push for greater protections, which could trigger what amounts to trade wars between nations or international regions.

Rodrik also doesn’t address the issue of globalization of financial markets, which dwarf the movement of goods and services across national boundaries. Restricting the flow of money is considerably more complex and can be tied up with another international bugaboo – concessionary tax policies and tax havens.

None of this discounts the value of the conversation Rodrik’s op-ed started, which highlights the many moving pieces that must be addressed to find a balance that benefits consumers without unduly exposing workers to economic discoloration and ultimately posing a challenge to democratic governance.

Taking the Political Bite Out of Trade

Opposition to international trade deals has welled up in both presidential primaries, but few realistic proposals have surfaced to address worker security in the face of unstoppable globalization and technological change.

Opposition to international trade deals has welled up in both presidential primaries, but few realistic proposals have surfaced to address worker security in the face of unstoppable globalization and technological change.

International trade deals have been trashed by presidential candidates in both parties, but realistic alternatives that would do more good than harm have been scarce.

Economists admit globalization of manufacturing and distribution, huge cross-border capital flows and accelerating technology changes have taken their toll on jobs and job security. However, they warn scrapping trade deals and trying to erect trade barriers will create worse economic problems without protecting workers they seek to shield.

A better approach, according to economists, is to increase support, especially in terms of job training for workers who lose their jobs because of globalization or trade deals that favor some sectors at the expense of others.

The Trade Adjustment Assistance program exists to provide that support, but is woefully funded compared to dislocated worker programs in other industrialized nations. It also isn’t very practical. The program pays for job training, but unemployed workers still need to earn money to pay a mortgage and put food on their family table.

Increasing funding for Trade Adjustment Assistance hasn’t been a political priority, but the deep discontent that has welled up by working class families all across the nation, as reflected by their votes for “outsider” presidential candidates strongly opposing trade deals, may change that.

Another idea kicking around in economist circles is called wage insurance. This involves wage subsidies to workers who lose their jobs so they can afford to take lower-paying jobs while obtaining job training. President Obama mentioned wage insurance in his final State of the Union address earlier this year.

Bolstering the Trade Adjustment Assistance program or enacting some type of wage subsidy doesn’t have the same raw appeal on the political stump as GOP frontrunner Donald Trump saying he will cut better trade deals with China, Japan and others. But his promise, based largely on his negotiating skill as a hotel developer, may not be worth the risk of a costly trade war that triggers a global recession.

Democratic contender Bernie Sanders has criticized former President Bill Clinton for pushing through the North American Free Trade Agreement, which has resulted in the transfer of U.S. manufacturing jobs to Mexico. Both he and Democratic frontrunner Hillary Clinton have expressed opposition to the Trans-Pacific Partnership, a key Obama priority. But neither Sanders nor Clinton have articulated a clear alternative to the TPP, which Obama defends as a roadmap for economic development in the Pacific Rim written by the United States, not China.

Free trade policies have been problematic for labor-backed Democrats and now appear to be a challenge for big business friendly Republicans, too. Protectionism also faces headwinds because American consumers are savvy enough to know that would mean higher prices for goods. Businesses, farmers and workers in states like Oregon and Washington that have export-dependent economies realize protectionism would hurt them.

As a result politicians on both sides of the aisle may be forced to pursue policies that produce tangible improvements for middle-class workers who have been and likely will remain vulnerable to new economic realities.

It is one thing to rail about trade policy on the campaign stump (Obama certainly did in his 2008 campaign), but it is another to stare at the hard realities. The United States remains the dominant world economy, but it no longer commands a position where it can call all the shots. The global economy is more intertwined so a hiccup on the Chinese stock market or refugee flows into Europe can impact the U.S. economy.

Just about everyone has a stake in figuring out trade policy. It may be the most fundamental middle-class American issue. It matters to young people who must navigate careers that don’t have life-time job guarantees. Those at the top of the economic heap may face growing unrest and a sharper shift to the political left if more isn’t done to provide greater job security to a growing group of Americans.

Activist labor programs could be the best defense against worker frustration, the least statist policy and the most popular political talking point. There is a general election coming up this fall to try out this approach.