USTR Lighthizer's great leap backward on trade

Gary Clyde Hufbauer (PIIE) and Euijin Jung (PIIE)

September 1, 2020 9:00 AM
Image credit: 
Anna Moneymaker/REUTERS

In his latest defensive salvo over his unsuccessful trade policies, the Trump administration’s top trade envoy, US Trade Representative (USTR) Robert Lighthizer, is making the case for more trade wars, 18th century mercantilist thinking, and rewriting of history of the world economy in the last 75 years. In an op-ed in the Wall Street Journal on August 20, Lighthizer set forth his frustrations over reforming the World Trade Organization (WTO). But his prescriptions are too confrontational to work, and his reading of the value of the trade is obsolete.

The foundation for Lighthizer’s prescriptions is mercantilism, pure and simple. Imports are bad, exports are good. Anything the United States does to lower its trade barriers represents a gift to foreign countries—not, as has been the case, an incentive for those countries to open their own economies to their own advantage and to the advantage of the United States. The ambassador shows not the slightest awareness, much less appreciation, for the fact that trade ministers do the US and partner economies an enormous favor when they can overcome domestic resistance to liberalizing their own economies and welcoming foreign commerce.

No, trade is not a zero-sum game

Lighthizer’s lead objection to tariff reductions under the old General Agreement on Tariffs and Trade (GATT, established in 1947) is that not all countries reduced their barriers at the same rate. Well, of course. That is the nature of making progress in all international negotiations. In fact, over eight negotiating rounds during many decades, the United States and other advanced countries slashed their average applied and bound tariffs to low single digits, while Brazil, India, Indonesia, South Africa, and other developing countries clung to high applied tariffs and even higher bound tariffs.

In other ways, as well, developing countries escaped the full impact of GATT rules, and to this day claim “special and differential” treatment. But this treatment was a truly doubtful benefit. Lighthizer’s logic is that developing countries were the big winners from being protected in the GATT system, and advanced countries the big losers. It is true that high tariffs and other barriers imposed by US trading partners restrict US exports. But it does not follow that the United States would benefit by emulating bad policies abroad.

Compare the performance, over the past 30 years, of protection-loving India and far more open China; or protectionist Argentina and free trade Chile; or high-tariff Nicaragua and low-tariff Costa Rica. Few if any examples can be found of nations protecting their way to prosperity, but many examples can be found of countries prospering as they embraced free markets. Yet, echoing President Trump, Lighthizer seeks to “rebalance” US trade relations with its many partners: If they do not unilaterally reduce their barriers, a second Trump administration would seek to raise US tariffs across the board.

Echoing the Reciprocal Trade Act of 2019, endorsed by the Trump administration, the ambassador calls on the 164 WTO members to adopt common “baseline tariff rates” patterned after average tariffs adopted by advanced countries. This impractical proposal recalls the mercantilist foundation of Lighthizer’s world view: Countries that protect their markets win; countries that open their markets lose.

For 70 years, multilateral tariff negotiations have, with considerable success, shaved tariff rates step by step. In each round of negotiations, individual countries “gave” as many tariff concessions to their multiple partners as they “received” collectively from those partners. In other words, a country might cut its tariffs by 3 percentage points on average if its assembled partners cut their tariffs by 3 percentage points on average. By this process of bargaining at the margin, true winners slashed their tariff rates to very low levels.

In sharp contrast to established practice, Lighthizer now asks all countries to attain the same level of baseline tariff rates, whether the country must cut its average tariff by 1 percentage point or 15 percentage points to achieve the ambassador’s goal. But only in free trade agreements have countries agreed to a common baseline tariff, namely zero. Essentially, the ambassador is giving the world, and individual partners, a binary choice: Cut your tariffs to the average US level, or we will raise our tariffs to your level. It is tempting to take Lighthizer’s proposal at face value—as an attempt to achieve global free trade in a second Trump administration. But alas, that temptation is starkly at odds not only with the realities of tariff negotiations but also with the ambassador’s mercantilist world view that trade is a zero-sum game.

Yes, the WTO dispute settlement system needs reform, but it has greatly benefited the United States

Next in line, among the ambassador’s objections to the WTO, is the dispute settlement system, crowned by its Appellate Body, which is now moribund because the Trump administration has refused to approve new appointees. The system was adopted at US insistence and to US design during the Uruguay Round of multilateral trade negotiations (1986-94). In Lighthizer’s telling, Appellate Body decisions were loaded against the United States. The adverse decisions that particularly irritate the ambassador were concentrated on alleged US abuse of contingent protection, via antidumping and countervailing duties, often with penalty duties in excess of 50 percent. These duties were imposed by the United States on the ground that surges in imports were damaging the US economy, especially when imported goods received unfair subsidies or were sold below cost. In several cases, US justifications were ruled specious by the Appellate Body. But Lighthizer makes no mention of the many cases where the United States prevailed in the Appellate Body against China, the European Union, and other partners.

Lighthizer is correct in asserting that the dispute settlement system needs reform, and in this area he constructively suggests an arbitration model. A PIIE Policy Brief one of us coauthored offers additional recommendations. But reform is stalled and, in the meantime, some 20 WTO members (19 countries plus the European Union as a bloc) have established their own interim appeal arbitration arrangement for disputes among the participants. It is questionable whether these participants will be interested in Lighthizer’s idea of discarding the Appellate Body. But unless the United States is willing to compromise, it will have no recourse to a binding dispute settlement system. Without the Appellate Body, panel decisions will go into limbo when the losing party chooses not to comply with panel rulings. When other countries violate the norms, retaliation will become the main US response, and counterretaliation will become a frequent event. Score a victory for protectionist policy.

Reversal on bilateral trade agreements is odd

Curiously, Lighthizer takes a potshot at bilateral trade agreements—curious since the Trump administration is an avid practitioner. Lighthizer negotiated limited deals with South Korea, Japan, and the European Union; renamed the North American Free Trade Agreement (NAFTA) the United States-Mexico-Canada Agreement (USMCA) after updating a few provisions and abandoning others; and launched talks with Kenya, India, Brazil, and the United Kingdom. The ambassador faults the European Union for its 72 bilateral free trade agreements—to be sure, a larger number than the 20 US bilateral FTAs, but it is hard to claim that the United States has been a dedicated multilateralist during the Trump administration.

Trade wars will not help fix issues with China

The ambassador’s biggest grievance, though only fourth on his list, is the absence of WTO rules that might curb Beijing’s state-owned enterprises, subsidies, and forced technology transfer. By all accounts, these practices harm the United States and other trading partners, and the WTO must be updated to address Chinese issues. But Trump has failed to leverage the WTO to achieve this objective. Instead, his two full years of trade, technology, and investment wars have failed to change Chinese policy but inflicted significant damage on both economies. In addition, they have done a great deal to isolate the United States from its allies and trading partners. Again, protectionist policy can claim a major victory.

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Euijin Jung Senior Research Staff

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