Aren’t We All Free Traders?
September 10, 2018
The president’s periodic assertion that he is the only real free trader around, buoyed by his proposal at the G7 Summit for a trade deal with no tariffs, no non-tariff barriers, and no subsidies, reminded me of my experience some years ago on Capitol Hill. Working for a senator (John Heinz, R-PA) who occasionally said the same thing—without claiming to be the only one saying it—I frequently found myself giving talks where I would assert that there were no protectionists in the Senate. Everyone was a free trader, I would say, but there was disagreement over how you get to free trade.
Some favored unilateral concessions to gain the consumer benefits in the short term. Some favored traditional negotiations, preferably under the then-General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), umbrella. Others were of the “bludgeon them into submission” school, favoring strong defensive measures to bring the other guys to the table and force concessions from reluctant governments (at the time, Japan was the main target of everyone’s ire). That was a genuine policy argument, but it was largely among senators who at least claimed to have the same ultimate goal.
My nice little speech, however, was upended one day when then Senator Ernest “Fritz” Hollings (D-SC) took to the Senate floor to announce with some pride that he was a protectionist. As a result, I had to amend my standard remarks to say that there were ninety-nine free traders in the Senate and one protectionist. That, of course, was a considerable reduction from the 1920s when you could easily find a majority that would declare themselves protectionists. So, the world has moved on a bit, at least rhetorically, but our current president’s statements have reopened the debate about protectionism and raised a number of questions worth discussing.
The first is whether he is really a free trader at heart. On that, the jury is still out, at least in part. He says so, and his aides have argued that his protectionist tactics are simply efforts to bring other countries to the negotiating table and leverage trade agreements that will be good for us. Since he has not yet finished any outstanding negotiations except with South Korea, which is still on shaky ground because of uncertainties related to auto tariffs, the issue of whether his tariffs are merely tactics remains unresolved. Note that the agreement with Mexico reached last week did not result in the removal of steel or aluminum tariffs, which is a sign that perhaps these things are not tactics but permanent features of the president’s trade policy.
The second question is probably more important—are the agreements he is pursuing actually promoting freer trade? Here, there is mounting evidence suggesting they are not. He has said agreements should be based on “reciprocity,” which to him seems to mean equivalent tariffs (i.e., our car tariff is 2.5 percent, the EU’s is 10 percent), and they should be the same. That is an unorthodox approach that runs counter to the theory of comparative advantage. Normally, in a trade negotiation, countries try to pursue their comparative advantage by lowering tariffs on stuff where they lack an advantage and thus need while persuading their counterpart to lower tariffs on things where we have an advantage. So, in a simple example, I will lower my tariff on onions if you lower yours on cherries. That would lead to a more trade enhancing and profitable outcome than if we both lower them on onions. His approach fails that test.
Beyond rhetoric, it also appears that the real objective of some of these negotiations is not to liberalize trade but to bring manufacturing back on shore. The best example, of course, is the auto rules of origin changes in the agreement with Mexico, which seem clearly designed to push manufacturers to alter their supply chains and bring production back into the United States—whether or not that will work is a complicated question that will require reviewing the fine print of the agreement and therefore will be the subject of a subsequent column. Pretty clearly, however, this is not freer trade, if only because it is forcing companies to adhere to rules that are based on politics rather than economics. If the agreement is implemented, a new equilibrium will eventually be established, but it will almost certainly have higher costs and greater inefficiencies than the old one.
The case of China is less clear because we do not really know what the president wants. If it is to lower our trade deficit, that is not free trade; it is market manipulation. If it is to get China to alter its non-market practices, then that would be a free trade goal, albeit an unrealistic one. Regardless, to call Donald Trump a free trader, like so many other things he has said, would be a stretch.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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