Trade Policy Still Matters to Renewing U.S. Leadership

National Security Advisor Jake Sullivan’s landmark speech on April 27 on renewing the United States’ economic leadership presented a framework to link the administration’s domestic and international economic policies. In contrast to other sections, the passages on international trade were less thoughtful, included inaccuracies, and were based on misperceptions. Instead of renewing U.S. leadership, they are likely to lead to bad policy.

The Progressive Policy Institute’s Ed Gresser has masterfully refuted Sullivan’s erroneous notion that international economic policy in the 1990s was all about tariff reductions. Even if that were the case, Sullivan’s aversion to tariff reductions is surprising. U.S. tariffs broadly operate as a regressive tax, affecting lower-income households more than those with higher incomes. Proportional tariff reductions would help lower-income households and, one would think, be part of a “foreign policy aimed at the middle class.”

Sullivan asserts that the shifting global economy, the pandemic, climate change, and war in Ukraine have revealed “cracks in the foundation” of the post-World War II international economic order. No doubt these developments strained the international economic system, but any cracks are self-imposed—and could and should be fixed.

The two pillars of international trade rules—initially enshrined in the General Agreement on Tariffs and Trade and now the World Trade Organization (WTO)—are “most favored nation” (to treat all trading partners the same) and “national treatment” (to treat foreign traders no differently than domestic ones). Former president Trump’s imposition of tariffs on steel and aluminum and the managed trade deal with China rocked those foundations. The Biden administration’s failure to roll back those measures, expand “buy American” price preferences, and offer subsidies exclusively to domestic firms were additional blows.

Sullivan’s distain for trade and trade rules appears to be because he believes trade is responsible, in part, for: (1) hollowing out the United States’ industrial base, because trade liberalization was “an end of itself”; (2) geopolitical and security competition, because the premise that “economic integration would make nations more responsible and open . . . peaceful . . . didn’t turn out that way. In some cases, it did, and in a lot of cases it did not”; and (3) inequality, because the “prevailing assumption was that trade-enabled growth would be inclusive growth . . . But the fact is that those gains failed to reach a lot of working people” and the “China shock” hit pockets of manufacturing “especially hard—with large and long-lasting impacts.” (On a semantic note, the phrase “a lot” is not the kind of ambiguous term senior government officials should use, especially in a speech on economics.)

Let’s tackle these one by one.

Is U.S. industry hollowed out? From 1947 to 2015, around the time Chinese imports reached their peak as a share of U.S. imports, manufacturing as a share of real GDP consistently hovered between 11.3 and 13.6 percent. Globally, the United States ranks first or second in 13 of 16 manufacturing industries. While manufacturing employment has plummeted from 22 to 9 percent of nonfarm employment over the last 40 years, the massive increase in productivity—output per unit of work—has kept U.S. manufacturing strong. And those job losses in manufacturing have been made up 10 times by jobs created in other sectors. 

Trade liberalization was not “pursued as an end in itself” but to reduce costs, provide more options for consumers and industry, open foreign markets for U.S. goods, and stimulate competition. The Peterson Institute for International Economics’ Gary Hufbauer and Lucy Lu estimate the payoff to the United States from trade expansion from 1950 to 2016 was roughly $2.1 trillion (measured in 2016 dollars), or about $18,131 per household.

Sullivan highlights the U.S. national security risk of relying on foreign semiconductors and critical materials for electric vehicles. No doubt other sectors, like shipbuilding, could be added. But these few exceptional sectors cannot justify a wholesale generalization that U.S. manufacturing is on the ropes.

On regional integration, rather than running through the list of 355 regional trade agreements where peace and cooperation still rule the day, like those underpinning the European Union and Association for Southeast Asian Nations, Sullivan’s main targets are Russia and China. These exceptions prove the rule, i.e., that economic integration has been useful politically and economically. Policy needs to account for the exceptions but not discount the rule.

With respect to inequality, context is important. High-income households do reap about three-quarters of the gains from trade, according to Hufbauer’s estimates. But the reason is not trade itself; rather it is that the structure of the U.S. economy has “shifted from serving ordinary people and toward serving businesses and their managers and owners,” in the words of Nobel Prize-winning economist Angus Deaton and Anne Case.

Major factors driving this change are the extraordinary costs of healthcare, as well as racism, weak social protections, inadequate access to education, concentration of corporate power, and the decline of unions. Not surprisingly, participants in the International Trade Commission’s recent roundtables on the distributional effects of trade and workers’ ability to adjust citied many of these same factors.

Sullivan should remember that competition among economic models is not new. Following World War II, a debate raged about the appropriate economic model to power recovery: market-oriented, which produced the Great Depression, or command-driven, which held unproven charm. Under U.S. leadership, the former was adopted, with trade playing a vital role.

Europe adopted a mixed economy of market-oriented policies with an overlap of social protections to avoid skewed income distribution. The world prospered. Today, facing the same international strains as the United States, Germany and France are not experiencing the same labor adjustment issues. Deaton and Case surmise “it’s American institutions . . . that caused the problems, not the challenges themselves.” To accentuate that point, economist David Autor, who identified the “China shock,” found that even 10 years on, as trade impacts have faded, the affected areas are still struggling, suggesting the country is likewise ill prepared for a domestically generated “green shock” to coal-producing regions in the transition to clean energy.

A foreign economic policy for the middle class would entail taking measures to reduce inequality, which, fortunately, are pretty much the same measures that would make better use of the country’s human capital. A more effective workforce and links to global value chains (a.k.a. “trade”) are keys to future productivity that will maintain the United States’ competitive edge.

The challenges enumerated by Sullivan are real. But renewing U.S. leadership cannot be achieved by designing policy based upon exceptions. Doing so reduces the clarity, consistency, and effectiveness of a U.S. trade policy that should expand the economy’s capacity. And the United States should not blame other countries for our lack of domestic policy imagination.

Rather, renewing U.S. leadership demands taking measures to strengthen the domestic workforce and the United States’ competitive edge in high-tech industries and embracing, not demonizing, international trade. It means working with other countries to cope with new strains on the trading system. National measures necessary to ensure national security and address climate change should be openly discussed in the WTO and, if necessary, be subject to understandings among like-minded countries. Much is on the line. Basing policy on misperceptions and exceptions is not the way to go.

James Wallar is a senior associate (non-resident) with the Economics Program at the Center for Strategic and International Studies in Washington, D.C.

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James Wallar
Senior Associate (Non-resident), Economics Program