Lost in the 1980s on Trade
May 7, 2018
OK, campers, put on your parachute pants, tease out your mullets, and crank up the Police; we’re joining the U.S. trade representative on a trip back to the 1980s. In the minds of many, that was a golden era: recovery from a recession in the early part of the decade, a strong president, and ultimately the collapse of the Soviet Union and the end of the Cold War. Good times—when men were men and women were….marginalized. (One area where times have changed, albeit not enough.)
Our trade policy in the Reagan administration was not atypical for the times—strong free trade rhetoric coupled with specific protectionist actions. Survivors of that era will remember battles with Japan over autos, semiconductors, and machine tools; battles over steel with just about everybody; and the 1986 Plaza Accord designed to bring down the value of the dollar. (If this is beginning to sound like today, it is, except for the machine tools and the dollar. One of the uncomfortable little secrets of the trade business is that no problems are ever solved; they’re just managed and left for the next group of officials to try to do better. Those of us in this business don’t usually admit that, since it means permanent employment for trade experts, but the truth had to come out at some point, so here it is.)
Most of those issues were resolved with a tool you haven’t heard about in a while but will again—voluntary export restraints (VERs), or their near relatives, voluntary restraint agreements (VRAs) and orderly marketing agreements (OMAs). Truth be told, the word “voluntary” generally belonged in quotation marks because the agreements were only reached after serious arm twisting coupled with threats from Congress of more extreme legislative action—an example of the classic “good cop, bad cop” strategy. Collectively, these actions came to be called “managed trade,” which was based on the idea that the market by itself could not deal effectively with countries that pursued policies of what the late Chalmers Johnson called “state developmental capitalism.”
One can debate whether this approach worked. I would argue that it did in semiconductors, did in an unexpected way in autos—the Japanese long-term response was to move production to the United States—and did not, for the most part, in steel, but that is not the purpose of today’s column.
Rather, the purpose is to point out that these policies have been pulled from the ash heap of history and dusted off by Ambassador Robert Lighthizer, who remembers them well, having been responsible for implementing them 30-plus years ago. We are seeing this on steel and will see it as the China negotiations unfold. Oddly, we are also seeing it in his approach to the World Trade Organization (WTO), where he appears to long for the good old days of the 1980s when sovereignty ruled and dispute settlement was effectively optional.
Unfortunately, there are two reasons why going “back to the future” won’t work: (1) that was then; this is now; and (2) China is not Japan.
Then, we had the General Agreement on Tariffs and Trade (GATT), not the WTO, with far looser rules on handling disputes and where market-sharing arrangements were not prohibited. Now, we have the WTO and a network of rules and obligations designed to put some discipline in the system. Among them are a prohibition on VERs and a binding dispute settlement system. It’s a fair point to note that if two parties enter “voluntarily” into a market limiting arrangement, there is nobody to complain, so they may well get away with it. But in fact anybody who suffers collateral damage will complain; plus, the United States, of all countries, ought to be upholding the system rather than undermining it. Our actions will only encourage others to do the same thing, to our detriment.
Second, Japan, which was our main trade antagonist in the 1980s, had many reasons to cooperate with us. Japan was a friend and ally that had an important security relationship with us and would have gained little from rocking the trade boat. China is neither, and, coming off a century of humiliation by foreigners, invasion, and internal turmoil but now growing impressively, it is not in an accommodationist mood.
A good negotiator adjusts his tactics to take into account current realities, but in this case we seem to be merely going back in time, accompanied by the usual Trumpian bluster about the other side unfairly taking advantage of us. The case of China, in contrast to the North American Free Trade Agreement (NAFTA), is unusual in that the U.S. business community is actually pulling for Ambassador Lighthizer to succeed with respect to the technology problems he has identified, but widespread skepticism remains as to whether an approach rooted in a different era can succeed. Lighthizer, who is a famously tough negotiator, may envision himself as the “king of pain” in dealing with the Chinese, but it may well be U.S. companies and workers who end up feeling it more.
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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