National Myths are an Unreliable Guide to Trade Policy
March Madness: it would be tempting to describe recent U.S. trade policy that way. First, the Trump administration imposed tariffs of 25 percent on U.S. steel imports and 15 percent on aluminum imports under section 232 of the 1962 trade act. Then later in the month it placed $60 billion worth of duties on China in response to its intellectual property violations under the authority of section 301 of a 1974 trade law.
The first action, which the White House said was necessary for national security reasons, raised serious concerns about its legality under World Trade Organization (WTO) rules. The Geneva-based trade body does allow countries to take steps to protect their “essential security interests,” but it was hard to see how targeting U.S. NATO allies for sanction would stand up to scrutiny. China, which is mostly responsible for the steel glut that is hurting U.S. producers, will hardly be affected by the 232 tariffs since its exports are already restricted under earlier trade penalties.
The White House’s follow-up move to exempt like-minded countries such as the European Union, Canada, Mexico, Australia, Argentina, Brazil, and South Korea does bring the steel and aluminum decision more closely in line with multilateral rules. But these exemptions are temporary, so the jury is still out on the extent to which the 232 decision poses a challenge to the WTO. Not only should they be made permanent, but other U.S. allies like Japan need to be added to the list of tariff-free countries.
The 301 action on China is different. It is clear that Beijing has placed unfair burdens on foreign companies that wish to do business there, like transfers of technology, sharing trade secrets, and storing data locally. It is also true that because of the lack of transparency of China’s economy it has proved difficult to marshal the evidence necessary to win decisions against its trade practices in the World Trade Organization.
Despite the U.S. administration’s manifest frustration with the WTO, which has led it to put a hold on naming new judges to its dispute settlement body, the U.S. Trade Representative has announced that in addition to the unilateral tariffs under section 301 the U.S. will bring a case against China in Geneva. This is a constructive step, and the EU, Japan, and other key U.S. trading partners should support the U.S. initiative.
Placing tariffs on Chinese goods is unlikely to change the country’s behavior.
But it’s important to be realistic about the meager chances of success of the core White House approach to China. Placing tariffs on Chinese goods is unlikely to change the country’s behavior. If a tit-for-tat trade war were to break out between the two economic giants, where would the smart money go? China, with its authoritarian regime, may be better placed than the U.S. with its noisy democratic politics to endure the hardships of short-term economic self-harm.
The United States should not let itself fall into such a survival of the fittest contest. Yes, solitary shows of strength do play well with some voters—which is not surprising in a country that has had difficulty surrendering its self-image of frontier individualism. But national myths are an unreliable guide to policy.
The current age is one of multiple economic powers. So no, it’s not a sign of weakness to recognize that the U.S. will only be successful crafting a trading system that advances its interests if it works together with its partners. It would be a sign of realism.
Eventually the White House will have to move from the theatrics of tariffs to the hard work of trade policy: writing new rules. That’s what the NAFTA renegotiations can do, and so could a revival of the U.S.-EU trade talks begun during the Obama administration.
The Trump team has slapped a few wrists. Now it’s time for the outstretched hand.