The Rebalancing That U.S. Trade Policy Actually Needs

A container ship is unloaded at the Virginia International Gateway terminal in Norfolk, Va., May 10, 2019 (AP photo by Steve Helber).

President Donald Trump likes trade wars because he thinks they are “easy to win,” as he infamously put it, and because he thinks they will help improve the trade balance. Trump claims past American presidents have been weak, allowing other countries to take advantage of the United States in trade negotiations. As evidence, he points to the large American trade deficit. But any economist worth her salt will tell you that the deficit doesn’t reflect what Trump thinks it does. Instead, it simply reflects the propensity of Americans to spend more than they save and invest.

Trump is wrong about a lot of things when it comes to trade, including that the trade arrangements to which the United States is a party reflect poor negotiating skills. To the contrary, they overwhelmingly reflect U.S. negotiating preferences. But Trump does have a point that some of the negotiators’ priorities don’t reflect those of many Americans. Indeed, policymakers have manifestly failed to adopt the kinds of parallel policies that would compensate workers displaced by free trade agreements or provide the skills and resources needed to take advantage of globalization. That—not new tariffs—should be the focus of U.S. trade and economic policy going forward, which would entail some rebalancing to make it fairer and more inclusive.

In a new paper for the Center for Global Development, I explore three areas where American trade policy currently falls short: a tariff structure that discriminates against poor consumers at home and poor workers abroad; unilateral trade preference programs to promote development that have big gaps; and free trade agreements that have become increasingly tilted in favor of business interests.

First, while the U.S. market is quite open overall, the highest remaining tariffs—those that are well above the average of around 2 percent—discriminate against poor people. They fall mostly on food, clothing and footwear products that poor Americans disproportionately consume and that poorer countries disproportionately produce. Recent studies show that the additional tariffs imposed by Trump over the past 18 months have wiped out the benefits of the domestic tax cut for low- and middle-income households and have hit poor countries particularly hard.

The United States is the only rich country in the world that refuses to provide duty-free, quota-free market access for the world’s poorest countries.
Second, the United States, like other industrialized countries, has a Generalized System of Preferences program that is supposed to help poorer countries use trade as a tool of economic development. But the program does little to offset the discrimination against those countries’ exports because it mostly excludes the labor-intensive items facing the highest tariffs. Take the African Growth and Opportunity Act and special trade preferences the U.S. gives to Haiti. Both go further in reducing barriers to clothing imports, and they have been more effective in promoting exports from across Africa and from Haiti. But even those beneficiaries must contend with a list of unilaterally imposed eligibility conditions—such as providing high levels of protection for intellectual property owners—that reflect narrow U.S. interests, not development priorities. The United States is the only rich country in the world that refuses to provide duty-free, quota-free market access for all of the world’s poorest and most vulnerable countries, almost 15 years after members of the World Trade Organization committed to doing so.

What’s more, the so-called “gold standard” template that American trade negotiators use for free trade agreements is basically the same for all of its trade partners, regardless of their level of economic development. The scope of U.S. free trade agreements has gone well beyond traditional market access issues meant to level the playing field for American business, to include high protections for international investors, intellectual property owners and other business interests. Developing country partners may get a bit more time to phase in certain obligations in U.S. trade agreements, for example high levels of patent protection for pharmaceuticals. But they must do so at the end of the period prescribed in the deal, no matter how relatively poor they may still be.

A range of American civil society groups, as well as developing countries themselves, express concerns that numerous provisions in U.S. trade agreements are tilting the balance in favor of business interests at the expense of consumers, workers and the environment. Critics have focused in particular on the special dispute settlement mechanism that allows foreign investors to take governments to binding arbitration and seek compensation for the impact of regulations, including those aimed at protecting public health or the environment. Other areas of concern include strong protections for intellectual property owners that can raise prices for drugs and agricultural inputs, as well as efforts to harmonize regulatory approaches in areas such as food safety.

It is true that U.S. negotiators have responded to complaints that the protections for workers’ rights and the environment are weaker than those for corporations. The language in those chapters of recent free trade agreements has gotten much stronger over the years and, at least on paper, the enforcement provisions are now the same for all parts of these agreements. Trade unions and environmental groups, however, argue that these provisions are largely unenforceable in practice. This is a major bone of contention between the White House and Democrats in the House of Representatives in the debate over ratification of NAFTA 2.0, the U.S.-Mexico-Canada Agreement.

While Trump is unquestionably an outlier in his approach to trade policy, concerns about America’s policy did not originate with him. The challenges to maintaining a relatively open U.S. market will not disappear when he leaves office. The first priority to begin restoring support for trade policy in the United States has to be an expansive domestic agenda focused on reducing inequality and strengthening American competitiveness. But there also needs to be a rebalancing of trade policy priorities to make free trade fairer, both at home and abroad.

Kimberly Ann Elliott is a visiting scholar at the George Washington University Institute for International Economic Policy, and a visiting fellow with the Center for Global Development.