The US Refuses to Play by its Own Trade Rules

Damage to the global trade regime is inevitable

For the United States, 2023 is the year it ought to demonstrate that it is capable of abiding by the rules of international trade that it played the dominant role in establishing following World War II with the 1947 creation of the General Agreement on Tariffs and Trade. That system, in large measure responsible for the prosperity of much of the world, is now in serious disarray – at the hands of Washington.

This is dangerous, at a time when the world is likely to slip into recession and the US and China are locked into an increasingly acrimonious technological, political, and economic contest for global primacy. If the US, the world’s biggest economy, which midwifed the free trade regime into existence 75 years ago, can ignore its own carefully constructed system, then any other nation can claim justification to do so as well, returning the world to the economic dark ages that prevailed before the victors in WWII stepped in. It is particularly dangerous for many of the East Asian nations, which built their mercantilist economies and prosperity on the ability to export.

“It is not surprising that the United States has adopted a hostile posture toward WTO dispute settlement in recent years,” according to a study by the Iowa-based Agricultural Policy Review, given a series of reverses at the WTO. “The United States seems to want to operate outside of the GATT rules, which it originally spearheaded, negotiated, and ratified.”

But this is no longer a unipolar world in which the US can dictate to other economies by saying, as former President Donald Trump did, that tariffs are necessary to preserve “national security.” Other nations, particularly the US’s biggest trading partner and competitor China, can do the same. That puts farm goods, digital services, aircraft, cars, and other US exports at the mercy of any nation willing to cite national security as an excuse. American trade representatives have been able to use the force of moral suasion in endless rounds of trade liberalization talks for decades. That will no longer be the case.

The US first showed it could abandon its own system under Donald Trump with his unilateral implementation, saying “trade wars are fun,” of 10 percent tariffs on US$200 billion worth of Chinese exports, then followed that with an increase to 25 percent in May 2019. No one expected President Joe Biden to continue to ignore global trade rules in 2022, but the administration declined to remove the tariffs and has continued a series of truculent decisions against free and fair trade that has dismayed its allies and antagonized its adversaries.

Perhaps most importantly, the Biden administration has neglected to rejoin the Transpacific Partnership reconstituted by Japan after Trump killed it, the omnibus 15-nation free trade pact painstakingly constructed by the George Bush and Barack Obama administrations, instead opting for a toothless “Indo-Pacific Framework” that critics say has gaping shortcomings with no incentives to lowering tariffs or providing signatories with greater access to US markets.

In August 2022, the climate and health care policy law passed by the Democrat-controlled Congress contained a discriminatory US$7,500 tax credit for US buyers of qualifying electric vehicles made in North America that has ignited protest by car manufacturers in Europe and South Korea, which sell millions of vehicles in the US, which have threatened to lodge legal complaints with the WTO. If those complaints are ignored as well,

Then, in December, the administration told the world it would ignore demands by the World Trade Organization that the US comply with a ruling that found Trump’s 2018 steel and aluminum tariffs violated America’s WTO obligations. US Trade Representative spokesman Adam Hodge issued a statement that the US “will not cede decision-making over its essential security to WTO panels.”

Biden is a lifelong steadfast labor union advocate. There is little or nothing to do with “essential security” in any of these developments. But these blows to fair and free trade are designed to help to protect manufacturing jobs in swing states where Democrats will need every vote they can get in 2024. The WTO itself says imports from low-wage countries “account for only 10–20 percent of wage changes in developed countries. Of the rest, much results from “skill-based technological change” — a shift to technologies that require labor with higher levels of skill.” But that cuts no ice with factory workers in Michigan.

US abandonment of its global moral leadership on trade and globalization is having distressing results. As the US has backed away from its free trade regime, it has been followed by a steady flood of new protectionism on the part of other countries. The WTO itself registered an annual average of 147 such measures implemented from 2012 to 2020, with the share of trade affected rising from 1.17 percent in the period from mid-October 2013 to mid-October 2014, then to 3.84 percent in the period from mid-October 2019 according to the New Delhi-based Observer Research Foundation.

“While WTO members showed restraint in employing new protectionist policies and implemented numerous trade facilitating measures amid the COVID-19 pandemic, there is little appetite for further trade liberalization,” the foundation said. “In addition, the 2017-2020 period was characterized by numerous trade conflicts, many originating in the US under former President Donald Trump.”

Especially since the onset of the Covid-19 crisis and the US-China conflict, companies in a variety of industries have begun to reconstruct their supply chains, bringing home parts of their production. It is open to question whether this will pay off.

As the Washington, DC-based Tax Foundation pointed out, “Economists generally agree that free trade increases the level of economic output and income, while conversely, trade barriers reduce economic output and income. Historical evidence shows tariffs raise prices and reduce available quantities of goods and services for U.S. businesses and consumers, which results in lower income, reduced employment, and lower economic output.”

Damaging US exports is unwise. For all the hand-wringing over supposed weakness in American trade, it is an export powerhouse second only to China, and not second by much in total exports, with China exporting US$2.64 trillion in goods in 2021, and with US goods exports totaling US$2.52 trillion, far ahead of Germany at US$1.81 trillion according to the US Trade Representative. The five biggest export products by value in 2021 were refined petroleum oils, crude oil, petroleum gases, cars, and electronic integrated circuits, accounting for an aggregated 18.8 percent of exports, suggesting a wide range of exported goods.

As the WTO notes, “protection tends to raise costs, and encourage inefficiency. The OECD calculated the likely effects on US wages of imposing a 30 percent duty on imports into the United States from developing countries. Working through the expected consequences, it found that the duty would actually reduce unskilled wages by 1 percent and skilled wages by 5 percent.”

According to the Tax Foundation, the tariffs imposed under the Trump administration and remaining in place under the Biden administration will reduce long-run GDP by 0.22 percent (US$55.7 billion) and wages by 0.14 percent and eliminate 173,000 full-time equivalent jobs. Retaliatory tariffs on US exports are estimated to reduce GDP by 0.04 percent (US$9.4 billion) and eliminate 29,000 full-time equivalent jobs.