The Rise of China and the Fall of the ‘Free Trade’ Myth

China’s economic success lays bare an uncomfortable historical truth: No one who preaches ‘free trade’ really practices it.


‘America first does not mean America alone,” President Trump declared last month at the World Economic Forum in Davos, Switzerland. This sudden burst of pragmatism from an avowed nationalist showed what a difference a year can make. Denouncing the “false song of globalism” during his presidential campaign, Trump, on his third full day in office, canceled the Trans-Pacific Partnership, a regional trade deal with Japan and 10 other countries. He then denounced Canada, Germany and South Korea for exporting more to the United States than they import. He promised to renegotiate trade pacts with Europe, Canada and Mexico and get a better deal for American workers. In Davos, however, he reached out with conciliatory words to the very free-trading and globalizing elites he has consistently maligned.

Clearly, Trump’s views on trade and globalization have evolved since his insurgent campaign. This may well be because of the rapid gains in the past year of a country he did not mention by name. In fact, Trump chose in Davos to affirm that “America is open for business” because it was in these same Alpine heights, three days before Trump was inaugurated as president, that China seized the opportunity to claim leadership of the global economy. With the United States seemingly in a protectionist crouch, China had become, despite all its problems, indispensable. “In a world marked by great uncertainty and volatility, the international community is looking to China,” Klaus Schwab, the founder of the World Economic Forum, said last year while introducing his guest, the Chinese president and general secretary of China’s Communist Party, Xi Jinping.

As the usual gaggle of hedge-funders, Silicon Valley executives and government officials looked on, Xi rose to defend free trade and globalization against the relentless attacks of Trump. “Some people blame economic globalization for the chaos in our world,” Xi said. “One should not retreat to the harbor when encountering a storm, for this will never get us to the other shore of the ocean.” Xi then confidently quoted Dickens. “ ‘It was the best of times, it was the worst of times.’ These are the words used by the English writer Charles Dickens to describe the world after the Industrial Revolution. Today, we also live in a world of contradictions.”

Never mind that Dickens was actually describing the world before the French Revolution. Xi’s claim of openness was, to say the least, riddled with contradictions of its own. It is increasingly difficult for foreign companies to do business in China; Beijing’s “Made in China 2025” industrial policy aims to increase “indigenous innovation” and self-reliance. When Trump, a year later in Davos, denounced such “unfair economic practices” as “industrial subsidies and pervasive state-led economic planning,” there was little doubt which nation he had in mind.

Yet Xi is entitled to some of his rhetorical point-scoring. The financial crisis of 2008 greatly weakened the American economy, but it left China relatively unscathed. More important, China, whose share of world trade in the mid-1970s was less than 0.5 percent, is today the world’s leading exporter — the hub of new and increasingly dense transcontinental trading networks that bypass the United States. “When the United States grows, so does the world,” Trump claimed in Davos. But America’s status as the linchpin of the global economic order is now endangered. The trading system China dominates has reduced the long dependency of Latin American and sub-Saharan African countries on American and European markets. China is now bringing to a close the first phase of globalization, begun by Europe and the United States in the 19th century. In the process, it is making East Asia the new center of the world economy.

It has fallen upon Trump, as president of the United States, to respond to this momentous historic shift, and he has done so with his characteristic mix of threats, boasts and volte-faces. But to grasp China’s economic achievement, and its ramifications, it is imperative to ask: Why has a market economy directed by a Communist state become the world’s second-largest? Or, to rephrase the question: Why shouldn’t it have? Why shouldn’t China’s rise have happened the way it did, with state-led economic planning, industrial subsidies and little or no regard for the rules of “free trade”?

The economic success of East Asian countries like Japan in the 20th century had already invalidated the article of faith invoked by Trump in Davos: that nations can advance only by eliminating barriers to the free movement of goods and capital and by minimizing the role of government in the economy. But these historical lessons have long been obscured by economic orthodoxy, one that Trump’s — and China’s — unexpected ascents have now exposed to critical scrutiny.

In his most recent book, “Straight Talk on Trade,” the Harvard professor Dani Rodrik castigates fellow economists for holding fast to a simple-minded view of free trade and globalization, one that he believes has caused economic chaos and political backlash across the West. “Are economists,” he asks, “responsible for Donald Trump’s shocking victory in the U.S. presidential election?” This might be overstating the case. But it is true that the argument that free markets equal progress was most eloquently and influentially advocated by the American economist Milton Friedman.

The paradoxes of China’s rise today are best illuminated by Friedman’s querulous visit to the country in 1980, when China was desperately poor. The Nobel laureate from Chicago was then cementing his reputation as an apostle of free markets. He had just published “Free to Choose,” a book that was written with his wife, Rose, and later turned into a television series featuring, among others, Ronald Reagan, Arnold Schwarzenegger and Donald Rumsfeld. Friedman’s argument, that “the world runs on individuals pursuing their separate interests,” would shape American economic policy for decades to come. He helped disparage the idea, exemplified most vividly by Franklin Roosevelt’s New Deal, that government had a legitimate, and often indispensable, role to play in advancing economic development and protecting the vulnerable. As his keen disciple Reagan famously put it, “Government is not the solution to our problem; government is the problem.”

Friedman’s fervent advocacy of free trade and the efficiency of unregulated markets gave intellectual ballast to the so-called Washington Consensus. Free markets, the thinking went, not only generated wealth for all nations but also maximized consumer choice, reduced prices and optimized the use of scarce resources. Friedman’s faith in the efficiency of markets came to constitute what John Stuart Mill referred to as “the deep slumber of a decided opinion.”

Friedman was the most influential proponent of free trade since Adam Smith declared it, in 1776, the basis of the wealth of nations. But in 1980, few people in China, including the academics who invited Friedman to a lecture tour, knew that their American guest was an impatient, even volatile, ideologue.

A series of (often comical) misunderstandings ensued. Friedman complained about the Chinese man with a “terrible body odor” who received him at the Beijing airport; the man turned out to be one of his academic hosts. Friedman’s lectures in praise of free markets were met with bewilderment. His assertion that capitalism was superior to socialism disturbed the Chinese greatly. Some of the more agitated Chinese economists went in a delegation to Friedman’s hotel to lecture him about the achievements of their regime.

Friedman, who (erroneously) saw Japan and South Korea as brilliant examples of open, competitive markets, was understandably impatient in China; the country embodied everything that was wrong with government planning. Indeed, China in 1980 was just lurching out of Mao Zedong’s calamitous experiments. Deng Xiaoping’s government was trying to improvise new solutions to the country’s economic backwardness, which officials thought had exposed China to humiliation in the 19th and early 20th centuries. “Development,” Deng said, “is the only truth. If we don’t develop, we will be bullied.” And national development, in Deng’s view, could be achieved by a variety of means. His flexible attitude was summed up by a much-popularized Chinese maxim: “Cross the river by feeling for the stones.”

The Chinese couldn’t help bristling at Friedman’s blunt dismissals of their government. Despite horrific disasters, the Chinese state had drastically raised literacy and life-expectancy levels. Also, the Chinese were then seeking a third way: They looked to Japan and Singapore rather than the United States for economic models that would accelerate growth without endangering the authority of the Communist Party. The Chinese saw little of value in an American proponent of laissez faire. Friedman left China, angrily claiming that his hosts were “unbelievably ignorant about how a market or capitalist system works.

Friedman died in 2006, shortly before the financial crisis of 2007 and 2008. The extensive political aftershocks of that crisis arguably include the election of a protectionist to the highest office in the United States, who has threatened to cancel decades of commitments to free trade at the risk of alienating his country’s closest allies.

As bewildered (and appalled) as Friedman would most likely have been by Trump’s demonization of free trade, he would have found it still harder to explain why China, run by a Communist Party, has emerged as central to the global capitalist economy. For the Chinese regime achieved this not by liberating its 1.4 billion citizens to maximize their private interests in unfettered markets but by controlling its currency, owning large businesses and intervening heavily in investment decisions by private companies.

Indeed, economic history reveals that great economic powers have always become great because of activist states. Regardless of the mystical properties claimed for it, the invisible hand of self-interest depends on the visible and often heavy hand of government. To take only one instance, British gunboats helped impose free trade on 19th-century China — a lesson not lost on the Chinese. Britain was protectionist before it was a free-trading nation. The United States itself was, while industrializing, the “mother country,” as the economic historian Paul Bairoch wrote, “and bastion of modern protectionism.” Its average tariffs in the late 19th century were nearly as high — 45 percent — as the steepest ones Trump has slapped on imports of washing machines. The philosophical father of economic protectionism is, in fact, Alexander Hamilton, the founder of the American financial system, whose pupils included the Germans, the Japanese and, indirectly, the Chinese.

No story is as instructive as that of the Japanese, arguably the most diligent of Hamilton’s disciples. Post-1945 Japan preceded China as the hub of regional and intercontinental trade networks. Soon after its disastrous part in World War II, Japan helped revitalize Asia and by the mid ’90s was the biggest investor and exporter in most East Asian countries; it gave more foreign aid and sent more tourists to them and was the biggest buyer of their raw commodities. What’s more, it offered a model for development that combined a market economy with state intervention — one that China was even then beginning to learn from.

How did Japan, a country devastated by a world war that had few natural resources of its own, achieve economic primacy in Asia? Friedman’s explanation in “Free to Choose” was that “free trade set off a process that revolutionized Japan and the lives of its people.” Francis Fukuyama, who proclaimed the end of history in 1989, credited Japan’s success to “economic liberalism” of the kind espoused by Adam Smith. But the Japanese followed a very different model, one adopted from Hamilton.

Japan learned early the political risks of economic stagnation. At the height of 19th-century imperialism, it signed a humiliating treaty that subjected its trade policy to the control of five Western powers, deprived it of the right to impose tariffs, set radically low import duties and gave foreign residents in trading ports extraterritorial status. Smarting from such insults, the conservative Meiji rulers of Japan became obsessed with regaining their sovereignty and protecting themselves from foreign tormentors.

In this endeavor, they looked to Germany. Unified in 1871, Germany was scrambling to catch up with industrialized Britain. To do so, it borrowed from recipes of national development proposed by Hamilton soon after the Americans broke free of their British overlords. In his “Report on the Subject of Manufactures,” submitted to Congress in 1791, Hamilton used the potent term “infant” industries to argue for economic protectionism. Hamilton’s father was Scottish. Born in the West Indies, then a British colony, Hamilton was keenly aware of how the British practiced protectionism: preventing colonies from competing while selling their own goods around the world. In his view, infant nations needed room to maneuver before they could compete with established industrial powers. The United States embraced many of Hamilton’s recommendations; the beneficiaries were, first, the textile and iron industries and then steel.

It was Hamilton’s formula, rather than free trade, that made the United States the world’s fastest-growing economy in the 19th century and into the 1920s. And that formula was embraced by other nations coming late to international economic competition. Hamilton’s most influential student was a German economist named Friedrich List, who lived in the United States from 1825 until the 1830s and wrote a book titled “Outlines of American Political Economy.” On his return to Germany, List attacked the free-market gospel preached by Britain as sheer opportunism. In his view, the British could afford to kick away the ladder of protectionism they had climbed to the summit of global industry and manufacture. He was all for free trade, but only after young industries had been nurtured in a protective environment. Applying List’s lessons, Germany moved with spectacular speed from an agrarian to an industrial economy.

The stakes were higher for Japan. There was hardly a country in Asia that had not been forced by Britain, Holland and France into unequal trade agreements. Economic liberalism was not a feasible option. The visible hand — the state rather than the market — was needed to guide development. Closely following Germany’s example, Japan heavily subsidized its first factories, copied British design and imported foreign machinery and engineers. It not only protected many of its businesses from excessive competition but also guaranteed them a minimum profit.

When World War I disrupted Europe’s monopolies in its Asian colonies, Japanese companies moved in with their textiles, bicycles and canned foods. Following Europe’s free-trading imperialists, Japan had invaded and occupied Taiwan and then Korea, turning them into protected markets for its small industries. In a further refinement, the Japanese state bribed and coerced manufacturing companies. It gave them subsidies to export more, which in turn helped the companies fund innovations and become internationally competitive.

World War II proved only a brief interruption in Japan’s policy of protection. Utterly devastated, Japan still managed to rid Asia of its European competitors. It was during the American occupation, as the historian John Dower notes, that Japan instituted what an economist described as the most “restrictive foreign-trade and foreign-exchange control system ever devised by a major free nation.”

Given unlimited powers by their American occupiers to get the country going again, the bureaucrats of Japan’s Ministry of International Trade and Industry laid the foundations of a world-class manufacturing economy. Nationalism was a great stimulus. As Dower put it, “National pride — acute, wounded, wedded to a profound sense of vulnerability — lay behind the single-minded pursuit of economic growth that created a momentary superpower a mere quarter-century after humiliating defeat.” But Japan would have struggled had war not erupted on the Korean Peninsula in 1950 and made Japan the main source of American procurements. The path of Japan’s protectionist state was now set — the country’s prime minister, Shigeru Yoshida, would call the destructive Korean War a “gift of the gods.”

In the 1950s, Korea and Taiwan, both former Japanese colonies, inherited Japan’s institutions and protectionist practices. This was most striking in Korea, which was intensely poor in the early 1950s; its few industries were built by Japan during the 1930s. South Korea, too, found solutions for its problems in Friedrich List rather than Adam Smith. The country’s leader, Park Chung-hee, the military general who came to power in 1961, had worked for the Japanese colonialist regime. A fervent autodidact, Park was also deeply familiar with German theories of protectionism. (The economist Robert Wade reported coming across whole shelves of books by List in Seoul bookstores in the 1970s.) During his long years in power, Park nurtured South Korea’s chaebol business groups — Hyundai, Daewoo and Samsung — and boldly ventured into steel-making.

Because the United States saw Korea, Taiwan and Japan as a buffer against Communism, it helped promote such neomercantilist strategies — a mix of import substitution and export-oriented industrialization. American cold warriors also gave their strategic allies unhindered access to U.S. markets while tolerating the closure of their own to American investment. By the time the United States realized that its biggest Asian ward had grown too big, it was too late. Japan had taken many products invented in the United States (automobiles, consumer electronics) and manufactured them more cheaply and with superior quality. By the 1980s, Japan had supplanted the United States in aid and investments in East Asia. When the United States sought to limit Japanese exports, the Japanese responded by deepening their investment in Asia, moving factories and improving industrial skills and technology wherever they went.

In 1994, when I first left India to travel to Southeast Asia, I found Japan everywhere, as both promise and rebuke. The renovation of Thailand, South Korea and Taiwan under Japanese auspices was then an established fact — and a standing reproach for us in India, which had failed to match East Asia’s success in manufacturing and trade. Like most countries in the world after 1945, France as much as Japan, India embraced a model of state-led development. Its aim, as in many nations liberated from colonial rule, was not so much the growth of private wealth as the strengthening of national power. Friedman described Indians in “Free to Choose” as deluded followers of Mahatma Gandhi, idly spinning cotton in cottage industries subsidized by the state. India, he said, was blind to industrialization and, furthermore, believed in central planning. This was a caricature: India had an ambitious industrialization program, and its economy mixed private markets with state-owned enterprises, even if its historical experience of British rule predisposed it to suspect that free trade benefited only developed industrial economies. Nevertheless, Friedman was broadly right in his view of India as a social and economic laggard.

India, following a model of import-substitution growth, barely participated in world trade. Its factories produced shoddy goods that you bought only because there were no alternatives. And so I was dazzled by what was on offer in Southeast Asia. The emblems of pop American culture — Kentucky Fried Chicken, McDonald’s, Madonna — were everywhere. But the most seductive consumer goods were almost invariably Japanese: Sony, Sanyo, National, Mitsubishi, Hitachi, Fuji.

Feeling inadequate before East Asia’s progress, many middle-class Indians longed for what Chalmers Johnson, in a book about Japan’s unique growth, called the “capitalist developmental state.” In such states, skilled bureaucracies led by authoritarian leaders promoted a project of national development (while either paying lip service to, or ignoring, democratic norms). Private entrepreneurs made socially beneficial investments; government policies helped build their comparative advantage while also facilitating social stability with land reforms, education and other efforts to address income equality.

The “developmental state” assumed that market failures were to be expected and that the state played a necessary role in designing industrial and financial policy. These included not only trade protection and government subsidies but also, as the political economists Robert and Jean M. Gilpin wrote in “Global Political Economy” in 2003, “selective credit allocation and deliberate distortion of interest rates in order to channel cheap credit to favored economic sectors.” Governments were, in fact, very much part of the solution, as even the World Bank, beholden to the Washington Consensus, grudgingly acknowledged in its well-known 1993 report, “East Asian Miracle.” The high-performing Asian economies, it noted, “have achieved unusually low and declining levels of inequality, contrary to historical experience and contemporary evidence in other regions.”

The hero of many middle-class Indians was the authoritarian leader of Singapore, Lee Kuan Yew, whose success in turning Singapore from an economic backwater into one of the world’s major commercial cities was much admired by Deng Xiaoping. We might have also revered, had we known more about him, South Korea’s technocratic despot Park Chung-hee, who accomplished economic goals with the help of highly trained managers, and who also appeared to reduce inequality and build what we in India sorely lacked: social cohesion.

But little did I know that Hamilton (and List) would achieve their greatest influence in post-Mao China. “The rise of China resembles that of the United States a century ago,” the Chinese scholar Hu Angang writes. He is not exaggerating. Friedman may have been right that the Chinese Communists were hopelessly ignorant of how free markets work, but ending state intervention in the economy was never on the agenda. After Mao, Chinese leaders looked to Japanese and other East Asian developers, just as the East Asians had once looked to Germany.

The first investments in China in the 1980s came from Japan as well as from transnational Chinese business networks based in East Asia. China benefited from the market networks, management and technical know-how that accompanied these investments. Encouraged by the Clinton administration, it entered the World Trade Organization in 2001 and quickly seized the opportunity — limitless export markets — opened by American insistence on free trade.

Once Japan became the leading investor in Asia, regional production chains began to link those countries with one another. As Korea, Hong Kong, Singapore and Taiwan moved up the technology and value chains, they invested in developing countries, like Vietnam and Indonesia. This process of regionalizing investment and production, which largely dispenses with Europe and America, has now been accelerated by China’s rise as a manufacturing power. The biggest investor in Vietnam today, for instance, is South Korea, whose biggest trading partner is China.

The success of China’s state-led economy presents, in many ways, the same economic (and ideological) quandary that Japan unexpectedly threw up before the United States when, in the 1980s, it became the world’s leading creditor. A regional trading system dominated by China will make Asian countries less likely to enlist in American geopolitical objectives. Locked into boundary disputes with its neighbors, China has accelerated the militarization of the South China Sea, acquiring more than 3,200 acres of land on reefs and outcrops and installing runways, ports and hangars. But it has also abandoned its abrasive attitude, making determined efforts to pivot Asia away from Trump’s America. And it seems to be succeeding.

With China offering generous infrastructure deals to the former American territory of the Philippines, President Rodrigo Duterte announced that “it is time to say goodbye” to the United States — previously he threatened to ride a jet ski to a Chinese man-made island in the South China Sea and plant his country’s flag there. Other rival claimants to parts of the South China Sea — Malaysia, Vietnam and Brunei — have also moved closer to Beijing since Trump’s election. Smaller countries like Cambodia and Laos now resemble Chinese client-states. China is also trying to repair long-strained relations with Japan by inviting investments by Japanese multinationals.

These attempts to win over major American allies in Asia complement Xi’s ambitious One Belt, One Road initiative, which aims to put China at the center of global affairs through a network of trade links and infrastructure projects stretching from Asia to the Middle East to Africa and Europe. Investing more than $1 trillion in more than 60 countries — ports in Pakistan and Sri Lanka, high-speed railways in East Africa, gas pipelines in Central Asia — the initiative can claim to be the largest overseas investment drive ever undertaken by a single country. The 11 European Union members and five non-E.U. Central and Eastern European countries that have joined the China-led political and commercial group called 16+1 have all signed major infrastructure deals with China, enhancing Beijing’s influence in the E.U. The remaining 11 members of the Trans-Pacific Partnership have gone ahead without the United States; they are expected to sign a final agreement in March.

By pulling out of the TPP and threatening trade sanctions, Trump encouraged Japan to seek a deal with Europe that shuts out the United States. Britain, another stalwart American ally, is considering joining the TPP. China, meanwhile, is hectically negotiating more than a dozen trade agreements in Asia while proposing its own alternative to the TPP, a trade agreement called the Regional Comprehensive Economic Partnership. China has also intensified efforts to build alternatives to such Western international institutions as the World Bank and the International Monetary Fund. In 2014, China inaugurated, against staunch American opposition, the Asian Infrastructure Investment Bank, whose members now include all Asian states except Japan.

There is little doubt that Beijing is presenting itself as a benign alternative to the United States. In a speech just before his second term as the party’s general secretary, Xi claimed that there were more takers internationally for Chinese “values.” China, he said, offers “a new option for other countries and nations who want to speed up their development while preserving their independence.”

It was always wildly optimistic to suppose that China would eventually be integrated into an American-dominated order and persuaded, if not forced, to adopt its norms. A postcolonial Indian like myself, who traveled to China and read in its modern history and literature over the last decade and half, could only be skeptical of such claims. It was never less than clear to me, whether in the suburbs of Lhasa, Tibet (demographically altered by Han immigration), or in the bookstores of Shanghai (stacked with best sellers with titles like “China Can Say No”), that the quest for national sovereignty and regained strength defines China’s party state and its economic policies.

Belying predictions of doom, China has again demonstrated the power of what Dower, speaking of Japan, called “national pride — acute, wounded, wedded to a profound sense of vulnerability.” The United States never knew this single-minded ambition of the historical loser to avenge his losses; American leaders now reckon with it at home, in the wake of a nationalistic backlash against free trade and globalization. Some confused policies and mixed signals have accordingly defined the American position on China. During the American presidential campaign in 2016, all the main candidates, Bernie Sanders and Hillary Clinton as well as Trump, opposed the TPP, which was intended to contain China in its own region. Then, in Trump’s chaotic first year, the United States seemed to be forced back by Hamilton’s shrewd East Asian disciples into its historical role as the mother country of protectionism. Trump now says that America first does not mean America alone, and he is open to rejoining the TPP. There may be more such reversals ahead. For Trump is only just beginning to acknowledge, after a year of bluster, the formidable challenge of China and the arduous effort needed for the United States to match its most determined and resourceful rival yet.


Decoding what the Trump administration wants on trade

Donald Trump’s “America First” agenda will shrink the US trade deficit and overturn “decades of unfair trade deals that sacrificed our prosperity and shipped away our companies,” the president promised at last week’s State of the Union address.


But translating that rhetoric into concrete trade policy is a thorny task for Trump’s top advisors, who were welcomed at the recent World Economic Forum in Davos for clues to Trump’s administration really wants, and how it plans to manage the world’s biggest economy. Quartz found their public statements left more questions than answers.

The administration maintains its perplexing focus on trade deficits

The administration’s focus on the US trade deficit, which Trump has called “disastrous,” continues to perplex outsiders.

Richard Baldwin, a professor at the Graduate Institute in Geneva and president of the Centre for Economic Policy Research, described his conversation with US trade representative Robert Lighthizer to Quartz: Lighthizer described the US trade deficit as a sign that the world’s most open economy is being taken advantage of. “That is like trying to gauge whether your broken leg is getting better by asking yourself if you still have a headache—they are not related,” Baldwin adds.

“A trade deficit means you are consuming and investing more than you’re producing,” he said. “There is nothing you can do to rebalance that unless you bring your production and your consumption more into line.” The gap between what the US imports and what it exports jumped 12% in 2017, the Commerce Department reported on Feb. 6, as the annual trade deficit hit $566 billion, the highest figure since 2008.

One way to try to rebalance the trade deficit could be raising exports of liquified natural gas, or LNG, which Ross championed during Davos panels, touting the administration’s rollback of the “regulatory burden to the energy sector” that made this possible. Exporting the equivalent of one million barrels a day of petro-carbon products could shift the trade deficit by $50 million a day, he told reporters.

The US is holding WTO hostage—but for what?

“We do think that somebody needs to be the rule-maker or arbiter of global trade,” US commerce secretary Wilbur Ross said during a panel at Davos. Traditionally, that rule maker is the World Trade Organization (WTO). But at NAFTA talks in Montreal on Jan. 29, Lighthizer threw doubt on the future of the organization, asking, “What sovereign nation would trust to arbitrators or the flip of a coin their entire defense against unfair trade?”

The White House worries that the 164-country organization is “making law where it wasn’t intended to,” said Tim Brightbill, an international trade law specialist and partner with Wiley Rein, who has represented the US solar manufacturing industry in several recent high-profile trade cases.

In an apparent strategy to gain leverage to change the WTO, the Trump administration is currently blocking the appointment of new judges.This knee-caps the agency’s ability to settle trade disputes.

The approach seems to be “if we create uncertainly than everyone will panic and give us what we want,” says Simon Lester, a trade policy specialist with the Cato Institute. But while the White House figures out what it wants from the WTO, the repercussions can be felt worldwide. “The dispute settlement system is the one part of the WTO that still functions,” Lester said.

Negotiations have proved impossible because the WTO’s members can’t come to a consensus, adds Brightbill, so “the dispute settlement process is increasingly resolving what should have been resolved through negotiations.” Blocking judges in the appeals court means the system just breaks down. In the worst case scenario, without a functioning WTO individual countries could start taking decisions into their own hands, and applying, say, 100% tariffs to trading partners they were battling with.

The US needs new bilateral partners

Trump’s trade policy is based on righting a perceived imbalance between other nations and the US. As an example of how the US is disadvantaged, the Ross cited auto import tariffs between nations, with the US charging a measly 2.5%, and countries like China as much as 25%. Fixing the problem would require new bilateral trade agreements with individual countries or regions, a solution that fits well with Trump’s stated goal crafting new “America First” trade deals.

But crafting such agreements takes a long time—probably two years, minimum, according to Lester, when everything from tariffs to intellectual property to state subsidies are factored in. The US said in August that NAFTA renegotiations would be finished by the end of the year, he points out.

“You can’t negotiate sector by sector,” said Lester. “You can go to the EU or China and negotiate a comprehensive trade agreement,” and within that agreement set ranges for import duties on sectors like cars. Right now the US doesn’t have a Free Trade Area or Customs Union agreement with Europe, or Japan, or China, or New Zealand, he noted.

The Transpacific Partnership would have created US trading partners from over a dozen countries at one point. Expect the Trump White House to start new bilateral trade deals with a handful of countries—but don’t expect those to have a quick impact on deficit.

China is the new Japan

In his speech to the World Economic Forum, Trump took aim at China without mentioning the country by name. “The United States will no longer turn a blind eye to unfair economic practices, including massive intellectual property theft, industrial subsidies, and pervasive state-led economic planning,” he said.

Trump’s pugilistic attitude towards China is comparable to the George H.W. Bush White House in the 1990s, says Baldwin, who served that White House as an economic advisor. Then, the US and Japan were butting heads over trade, he recalls. The present day situation is “the same level of nationalism and antipathy against a particular nation, [but] this time it’s China.”

The US’s trade deficit with China jumped 8.1% in 2017, to hit a record $375.2 billion, and Trump’s trade advisors have already taken what action they can for now: The Department of Commerce recommended in mid-January that Trump raise tariffs against steel and aluminum imports, in what’s known as a Section 232 investigation. And last August the US trade representative’s office (USTR) opened a so-called Section 301 investigation against China’s intellectual property theft.

One hurdle to the US forming a sophisticated, coherent China trade policy is the fact that the USTR office is still understaffed at the top levels, missing deputies and a chief negotiator on agriculture and intellectual property.

And whether the White House actually acts against China, though, is now at the discretion of the president, who values his relationship with Chinese president Xi Jinping, even as he criticizes Beijing‘s actions on Twitter.

Here too, global trade experts are looking for more clarity. “Do you want them to privatize their companies, or propose some constraints on their behavior?,” said Lester. “Whatever it is, spell it out,” he said.

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Trade deficit hits highest level since 2008

The U.S. trade deficit surged to its highest level since 2008 during President Trump’s first year in office despite his vow to lower the gap and crack down on unfair competition.


The nation’s trade gap in goods and services jumped 12.1 percent to $566 billion in 2017, up $61.2 billion from 2016, the highest level since the deficit hit $708.7 billion in 2008, the Commerce Department said Tuesday.

For the year, imports surged to $2.9 trillion, easily eclipsing the $2.3 trillion in U.S. exports.

Notably, the U.S. deficit in goods soared last year to a record-high $375.2 billion with China, a nation that Trump has both demonized and praised on trade during his tenure.

Trade gaps also increased with Mexico and Canada while the two nations continue working with the United States to update the North American Free Trade Agreement.

For December, the trade deficit increased to $53.1 billion, up from $50.4 billion in November, which was the highest level since October 2008.

Throughout his campaign and time in office, Trump has said he would wipe out deficits created by what he calls America’s bad trade deals. He has vowed to remake the nation’s trade policy to shift the biggest benefits to the United States.

“Right now, the same trade policy that Trump attacked ferociously and promised to speedily replace is still in place,” said Lori Wallach, head of Public Citizen’s Global Trade Watch.

“So far, the administration has not implemented the comprehensive new approach to our China trade policy that is needed,” she said.

Recently, Trump levied steep tariffs on imported solar panel technology and washing machines, which immediately boosted prices for U.S. consumers.

Alliance for American Manufacturing President Scott Paul said he shares Trump’s “disdain for trade deficits,” adding, “I can’t imagine the record goods deficit with China in 2017 is anything he’ll be crowing about.”

“But he can and certainly should do something about it,” Paul said.

The president has to decide in the next couple months whether he will act on steel and aluminum case reports on his desk that argue for higher tariffs based on national security concerns, a move the U.S. has rarely used because of risks that U.S. exports could be hit with tariffs from other nations in retaliation.

Despite his fiery rhetoric against trade, the Trump administration made few inroads on trade policy outside of slapping higher tariffs on what they consider offending products coming in from nations such as China and Canada.

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Montreal Round of NAFTA Negotiations Threatens Health, Family Farms and the Environment

WASHINGTON – The latest round of secret negotiations on a new North American Free Trade Agreement (NAFTA) concludes today in Montreal. Central topics of discussion among negotiators from Canada, Mexico and the United States this past week have been provisions rolling back food safety, chemical and pesticide regulations governing agricultural products, according to Politico.


Bill Waren, senior trade analyst at Friends of the Earth, has released a new analysis focused on trade implications for agriculture and food policy.

Bill also issued the following statement:

The decision to continue talking on NAFTA is bad news for our environment. While trade ministers make secret deals, we can be assured what they see as progress will no doubt put our environment and public health at risk.

Family farmers in the U.S., Canada and Mexico are threatened by NAFTA renegotiation. A renegotiated NAFTA promises more commodity speculation, more corporate price gouging of family farmers and consumers and more environmental destruction in rural North America. It is also clear that NAFTA renegotiation threatens environmental protections across the board, particularly in connection with food safety and regulations related to dangerous chemicals and pesticides.

No NAFTA would be better than Trump’s NAFTA.

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Trump’s trade chief clashes with Canada, Mexico in NAFTA talks

MONTREAL — The high-stakes NAFTA talks appear to be finally headed on a slow-but-steady forward course, but negotiators remain under pressure to deliver quick results to alleviate the threat of President Donald Trump withdrawing from the pact.

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“We believe that some progress was made,” U.S. Trade Representative Robert Lighthizer said Monday during a closing press conference. “We finally began to discuss some of the core issues, so this round was a step forward — but we are progressing very slowly. We owe it to our citizens, who are operating in a state of uncertainty, to move much faster.”

Lighthizer, however, publicly chastised Canada, America’s largest trading partner, over filing trade complaints against the U.S. in the international arena. He also called on Canada and Mexico to dig even deeper to produce “major breakthroughs” before negotiators reconvene in Mexico City in late February for the seventh round of talks on revamping the 24-year-old pact.

There is still a very real possibility that Trump could withdraw from the pact unless Canada and Mexico agree to changes to make it better for the United States, despite efforts by the farm and the business community and members of Congress to change his mind about that, he said. In several recent speeches, including last week at Davos, Switzerland, Trump said that he supported free trade but that it must be “fair.”

“I don’t think the president’s view has changed at all. His view is if we can get a good agreement, we should have one,” Lighthizer said, adding that the existing pact is “really not a good agreement for the United States.”

Lighthizer, a blunt-speaking lawyer who denied reports he engages in “vulgar” behavior to keep opponents off-guard, said Canada deserved some credit for offering new ideas to break the logjam in one of the most difficult areas of the negotiations.

But he also complained a proposal for measuring the amount of U.S., Mexican and Canadian content in automobiles — the so-called rules of origin language — was enormously vague and asserted that it could pave the way for more Chinese or other foreign parts used in North America-made cars, rather than less.

Canada’s informal counterproposal attempted to cater to Washington’s demand that the level required in order for an automobile to qualify for reduced duties under the agreement be raised to 85 percent, from its current 62.5 percent.

Lighthizer blasted it as “the opposite of what we are trying to do,” but Canadian officials took comfort in the fact he said the United States would continue to discuss it.

Canada and Mexico came into the latest round under pressure to engage more seriously, in Washington’s view, on a number of U.S. controversial demands, such as significantly tightening the auto rules of origin in a bid to boost U.S. manufacturing.

Lighthizer’s tough talk also targeted a case Canada recently launched at the World Trade Organization, which he called “a massive attack on all of our trade laws.”

“Of course, we view this case as frivolous, but it does make one wonder if all parties are truly committed to mutually beneficial trade,” he said.

Canadian Foreign Minister Chrystia Freeland, a former journalist under pressure to stand firm against U.S. proposals for radically changing the pact, said she was “pleased” with progress made this week.

“There is still a significant gap on a number of issues, and we are going to be working extremely hard, extremely energetically with our two partners to try to close those gaps,” she said at an individual press briefing.

Freeland rebutted Lighthizer’s complaints about Canada’s informal auto proposal by noting it had been welcomed by auto companies on both sides of the U.S.-Canadian border.

“This includes ideas to update NAFTA’s rules of origin for autos in ways that would draw new investment to the North American industry — fostering value-added R.&D. jobs, next-generation autonomous and electric cars and North American steel and aluminum production,” she said.

Freeland said the task of renegotiating NAFTA should not cause “the dismantling of cross-border supply chains that have made our auto industry the envy of the world.”

She continued to blast the initial U.S. proposals on rules of origin and other issues as unconventional.

“We should be clear about this: These proposals are unprecedented and in some ways represent an approach quite different from any Canada has encountered before, as a trading nation,” she said.

Mexican Economy Secretary Ildefonso Guajardo, who spoke first at the joint press conference at the end of the round, said the negotiations are at a “better moment” after this round of talks.

“Progress was achieved in several areas of the negotiation, especially in the chapters that aim to modernize NAFTA,” Guajardo said in his statement.

The Mexican trade official highlighted that a new anti-corruption chapter was closed in Montreal. Negotiators also completed work on language for an annex oninformation and communication technology. They were close to finishing negotiations on annexes for chemicals and pharmaceuticals.

Guajardo said chapters on telecommunications, digital trade and food safety measures are about 90 percent complete and there would be an effort to close them at the next round in Mexico City.

He added that Mexico recognized “the effort put forth by Canada in presenting creative ideas on some of the most important issues of the negotiation.”

“Mexico is committed to intensifying our engagement and will continue working constructively to solve the pending issues,” he said.

 The three countries have an informal deadline of finishing by March 31, but many in the trade and business sectors believe that the talks could stretch on for months — even extending into 2019. In particular, the pace could slow as the calendar gets closer to Mexico’s presidential elections on July 1 and the U.S. midterm elections in November.

It’s hard to predict how much longer the negotiations will take, but at least Canada and Mexico are “starting to realize that we have to begin to talk,” Lighthizer said. “I think that’s a reason for guarded optimism, but you know I’m never really very optimistic.”

Rep. Dave Reichert, a Republican lawmaker in town to monitor the talks, told reporters on Sunday that Lighthizer describes himself as “a curmudgeon. So when he shows optimism it may not be readily visible to the rest of us.”

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Republicans seek to tame Trump on trade

GOP senators are urging the president to preserve NAFTA — and hope to get some assurances at the State of the Union.


Forget the stalemate over immigration and spending. Right now, Republicans are most worried about President Donald Trump’s trade policy.

Fresh off new tariffs aimed at imported washing machines and solar panels, GOP lawmakers fear a round of tariffs targeting steel and aluminum — or worst of all: a sustained attack on NAFTA and dissolution of the trade agreement entirely. Trump’s populist trade policies dominated the Senate GOP’s strategy sessions last week, privately eliciting handwringing from the party’s large bloc of free traders, according to GOP sources familiar with the matter.

As the White House teases a conciliatory approach for Trump’s first State of the Union, Republicans hope he also will offer them an olive branch on one of the most yawning divides between the president and his party.

“That would be welcome,” said Senate Majority Whip John Cornyn of Texas, whose state is a key beneficiary of the North American Free Trade Agreement. “I don’t want us to shoot ourselves in the foot by terminating NAFTA or creating anxiety where it’s not necessary.”

While most Republicans have fallen in line behind a president they largely did not support in the 2016 presidential primary, many in the GOP are still comfortable taking on Trump when their states’ interests are jeopardized. Senate Republicans are now circulating a letter addressed to the president asking him to preserve NAFTA, according to GOP officials on Capitol Hill.

It’s a pointed example of the party’s lingering divisions under Trump — on an issue where there may be significant action amid an otherwise unproductive legislative year. And it’s a reminder that on trade, Trump can largely do what he wants through the executive branch with little recourse from Congress.

“I’ve encouraged him to think of it in terms of modernizing NAFTA, not ending NAFTA,” Cornyn said. “A lot of members in our conference and on both sides of the aisle are trying to encourage the president to think in those terms.”

The GOP has long been a party of free traders. During the past two years of President Barack Obama’s presidency, Senate Republicans labored to pass a bill giving him the ability to quickly negotiate new trade deals. Now they have a president of their own party who prefers to scrap trade deals and slap tariffs on other nations.

Senate Finance Chairman Orrin Hatch (R-Utah), who led the fight to give Obama so-called Trade Promotion Authority, said he wants to hear Trump “extrapolate” concrete policies, because “right now they’re just suggestions.”

“I’m not uncomfortable. But I’m not comfortable either,” Hatch said of Trump’s trade stance. “I’m a free-trade guy. And I believe that this ought to be a free-trade country, especially when it comes to NAFTA and our hemisphere.”

Republican sources said GOP senators’ disagreements with Trump on trade surface far more often in party lunches than what the president said on Twitter or the chaotic story of the day from within the White House. Senators will often wait to complain about Trump’s policies until Tuesdays, when Vice President Mike Pence often visits the GOP lunch, hoping that bending Pence’s ear will help moderate Trump.

And in some cases, Trump has listened. His decision to impose tariffs on solar panels wasn’t as severe as some senators had feared. And Trump opened the door last week to re-engaging on the Trans-Pacific Partnership, a massive deal negotiated by Obama with Pacific Rim countries that Trump rejected shortly after taking office. The Trump administration has also sought to soothe some senators over NAFTA in recent weeks, according to GOP senators.

But some are still wary that Trump’s policies in general, like new potential tariffs on steel and aluminum, could lead to major pain in rural America and states that rely on agriculture.

“Trade is necessary for agriculture. And I do worry that putting on tariffs on these goods, that agriculture will be hit in retribution by other countries,” said Sen. Joni Ernst (R-Iowa). “And it is easy to hit ag.”

In Ohio, however, Trump’s trade actions cut a different way: The state’s manufacturers have been struggling to compete with cheap washing machines produced in Asian countries.

“He’s on the right track in some regards, like trying to ensure we’re having a level playing field. That’s why I supported the washing machine case,” said Sen. Rob Portman (R-Ohio), a former U.S. trade representative. “The concern I have is not so much those level-the-playing-field actions, as the trade agreements.”

The biggest fear is Trump will follow through on his long-held threat to scuttle NAFTA, which could dramatically reshape the global economy and disrupt a number of conservative states that sell goods across North America borders. Many lawmakers believe they would have little ability to stop Trump if he decided to dissolve the trade pact, so they are pressing for Trump to work on improving NAFTA rather than kill it.

“Any agreement that’s as old as NAFTA could be modernized or updated. But it’s fundamentally sound policy, and a majority of our members believe we need to make it clear we’re committed to it,” said Sen. Thom Tillis (R-N.C.).

Some Republicans said privately they are confident Trump won’t actually pull out of the agreement and is using his threats as a negotiating tactic. Others said they trust his instincts when it comes to forging economic deals.

“He’s a negotiator and he approaches things a little bit different than most people,” Hatch said. “Often he’s right.”

For Trump, the first step would be to formally notify Canada and Mexico of his intent to withdraw. Such an action would start a six-month clock, at the end of which he could terminate the agreement if he wanted to — though he wouldn’t have to.

Some lawmakers said they believe Congress could stop him from withdrawing after the six-month clock expired, but worry that Mexico and Canada would use that time to begin forging new trade agreements with other countries. Plus it would provoke an ugly intraparty feud that would distract from all other issues.

Most Republicans would rather just hear Trump say during the State of the Union that he’s keeping NAFTA but working to improve it, rather than entertain doomsday scenarios.

Sen. Roy Blunt (R-Mo.) said he is hoping Trump reprises on Tuesday a recent speech he made in Tennessee, where he said he was looking for “fair and reciprocal” trade deals and wants to improve NAFTA. Blunt said those comments were “pretty good.”

But, he added: “A lot of the other comments I’m not so happy with.”

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Trump’s State of the Union had basically nothing to match his promises on trade

He was surprisingly silent on issues like NAFTA and China’s trade cheating.


On his path to the White House, Donald Trump made transforming the way the US does trade with the world one of his biggest policy priorities.

But in his first State of the Union address, he had remarkably little to say about his record on the issue during his first year in office — or his future vision for trade policy.

Trump offered plenty of lofty rhetoric about how under his watch the US would no longer put up with unfair trade deals. “The era of economic surrender is totally over,” he declared. “From now on, we expect trading relationships to be fair and, very importantly, reciprocal.”

But when it came to actually explaining how his new era had begun or what it might look like in the coming years, he declined to offer any specifics.

“We will work to fix bad trade deals and negotiate new ones. And they will be good ones. But they will be fair,” he said in one of just a few characteristically vague sentences on the issue in his speech.

Trump didn’t mention ongoing negotiations over NAFTA; his decision to reopen talks over the US-South Korean trade agreement known as KORUS; the impact of leaving the Trans-Pacific Partnership; or his stance on the World Trade Organization. Nor did he name specific countries that he thinks are trade cheaters that deserve to be punished for taking advantage of the US.

Chad Bown, a trade expert at the Peterson Institute for International Economics, told me he found it surprising that Trump used such vague language to discuss trade, especially when it comes to China policy.

“The Trump administration’s strategy to deal with the serious challenges posed by China remains entirely unclear,” Bown said.

Trump has promised a lot more than he’s delivered on China so far

On the campaign trail, Trump promised to avenge China’s “rape” of the US economy and its “theft” of coveted manufacturing jobs from the American heartland. He pledged to punish China for devaluing its currency to give itself a special advantage in global trade. And he threatened to impose enormous 45 percent tariffs on goods from China to protect American industry from competition.

But after he took office, none of that happened. Trump reversed his position on blacklisting China as a currency manipulator and failed to issue any big tariffs.

Earlier in January, he did make his first more aggressive move toward Beijing by issuing 30 percent tariffs on imported solar panels, which China produces more of than any other country in the world.

But there are still more questions than answers regarding how Trump intends to fulfill threats he’s made against Chinese steel and aluminum imports. Perhaps most importantly, it remains to be seen how he decides to deal with China’s practice of forcing US companies to hand over their most prized technology in exchange for access to China’s market.

Experts widely expect any major steps Trump takes against Beijing to be reciprocated, and believe that a trade war could unfold as the countries get locked in a tit-for-tat against each other’s economies.

A number of trade watchers expected the president to roll out some major announcements on how he was going to get tough with China during this speech. But Trump instead opted to go with vague rhetoric and leave questions of how he might handle some of his most controversial economic policy to the public’s imagination.

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Asia fears solar panel, washing machine tariffs just the start for tough-on-trade Trump

SEOUL (Reuters) – South Korea and China protested on Tuesday against U.S. President Donald Trump slapping steep import tariffs on washing machines and solar panels in a move that stirred fears in Asia of more protectionist measures coming out of Washington.

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For all his rhetoric to win votes, Trump’s actions on trade during his first year had been less alarming than many outside the country had feared – until now.

“It shows that the U.S. administration, after taking its time, it’s now indeed starting to roll out measures restricting trade with the idea of living up to the promises made during the electoral campaign,” said Louis Kuijs, head of Asia economics at global consultancy Oxford Economics, in Hong Kong.

“This could very well be just one step of many,” said Kuijs, predicting steel and aluminum imports could be on Washington’s target list.

The United States’ stance has put a cloud over global trade at a time when its revival has fueled hopes for a stronger world economy. But, at least, economists believe the United States will avoid taking measures that could impact U.S. companies global supply chains, particularly for cars and electronics.

The tariffs on washing machines, meantime, have dealt a heavy blow to South Korea’s Samsung Electronics and LG Electronics.

Together they ship between 2.5 million to 3 million washing machines annually to the United States, with sales of around $1 billion, and they hold a quarter of a U.S. market that has been dominated by Whirlpool and General Electric Co .

South Korea’s trade minister Kim Hyun-chong said the new U.S. tariffs violated World Trade Organisation rules.

“The United States has opted for measures that put political considerations ahead of international standards,” Kim told a meeting of industry officials.

“The government will actively respond to the spread of protectionist measures to defend national interests.”

China, the world’s biggest solar panel producer branded the move an “overreaction” that would harm the global trade environment for affected products.

“The U.S.’s decision … is an abuse of trade remedy measures, and China expresses strong dissatisfaction regarding this,” Wang Hejun, the head of the commerce ministry’s Trade Remedy and Investigation Bureau, said in a statement on its microblog.

“China will work with other WTO members to resolutely defend its legitimate interests in response to the erroneous U.S. decision.”

Mexico said it would use legal means to ensure Washington met international obligations, pointing to compensation envisaged under the North American Free Trade Agreement.

India has recently re-opened a U.S. dispute, alleging Washington has failed to comply with a ruling on solar power.

Vietnam has also challenged U.S. anti-dumping measures against exports of fish fillets, according to a WTO filing.

The decisions in the two “Section 201” safeguard cases for washing machines and solar cells came after the U.S. International Trade Commission (ITC) found that imported products were “a substantial cause of serious injury to domestic manufacturers.”

The tariffs on washing machines exceeded the harshest recommendations from ITC members, while the solar tariffs were lower than domestic producers had hoped for.

Trump ignored a recommendation from the ITC to exclude South Korean-produced washing machines from LG from the tariffs.

Washington will impose a 20 percent tariff on the first 1.2 million imported large residential washers in the first year, and a 50 percent tariff on additional imports. The tariffs decline to 16 percent and 40 percent respectively in the third year.

A 30 percent tariff will be imposed on imported solar cells and modules in the first year, with the tariffs declining to 15 percent by the fourth year. The tariff allows 2.5 gigawatts of unassembled solar cells to be imported tariff-free in each year.

“After a year’s preparation, Trump is ready to take action to address the huge trade deficit with China and get even,” said Zhang Yi, chief economist at Capital Securities in Beijing.

“Last year, we thought nothing would happen, but now China should not have any illusion about it. If the U.S is using Section 201 to hit you, they will hit hard,” Zhang added.

Some analysts in Seoul believed Trump was intensifying pressure on its Asian ally to rely more on him when dealing with North Korea, while gaining leverage renegotiating a bilateral free trade pact that Trump has previously labeled as “horrible.”

“Security and trade are linked to each other under Trump,” said Choi Won-mog, an international trade law expert at Ewha University.

A filing published by the WTO on Jan. 12 showed Seoul had already asked for authorization to impose annual trade sanctions worth at least $711 million on the United States, in response to the dispute over washing machines.

South Korea also asked for permission to impose an open-ended amount of trade sanctions if Washington broke the same rules again with regard to other products.

Seoul has already demanded compensation because the United States had failed to meet a Dec. 26 deadline to comply with a ruling against duties of up to 82 percent it had earlier imposed on appliances made by Samsung Electronics, LG Electronics and Daewoo Electronics.

Both Samsung Electronics and LG Electronics expressed concern over U.S. tariffs, saying they would hurt American consumers and jobs.

LG Electronics shares ended up 0.5 percent after an earlier plunge, while Samsung Electronics was up 1.9 percent in line with the South Korean market’s 1.4 percent gain.

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GOP lawmakers condemn Trump’s tariff decision ahead of NAFTA talks

Republican senators on Wednesday condemned President Trump’s decision to impose tariffs on washing machines and solar panels, exposing simmering GOP divisions over international trade that threaten the uneasy alliance between the president and lawmakers of his own party.


“I don’t agree with it, I think it’s a bad path to head down,” Sen. Roy Blunt (R-Mo.) said of the tariff decisions. “The retaliatory tariff fight is never a good fight and I generally think we need to be more positive about our trade opportunities.”

The lawmakers said the tariffs could start a trade war that would damage the U.S. economy and threaten jobs, hurting the American workers Trump says he wants to help. The lawmakers also cautioned the administration to move carefully as it renegotiates the North American Free Trade Agreement — including during talks between U.S., Canadian and Mexican trade officials this week in Montreal. The White House is also considering whether to impose trade restrictions on imports of steel and aluminum, decisions that could have a widespread impact on the U.S. economy.

Sen. Mike Rounds (R-S.D.) said he was planning to sign onto a letter being circulated among Senate Republicans Wednesday expressing concern to the White House about the tariff decisions.

“I understand what the administration’s trying to do — they’re trying to send a message. And at the same time we want them to be very careful in terms of causing problems for organizations that are trying to do business in the United States who might still get hit with tariffs on their products,” Rounds said.

The tariffs and uncertain nature of NAFTA discussions have stoked fears among GOP lawmakers that Trump will follow through on threats to withdraw from the trade pact. NAFTA enjoys widespread support among Republicans lawmakers, and before Trump, the party was largely united in favor of free trade.

GOP lawmakers have spent months trying to convince Trump to temper his “America First” trade approach, and they vowed on Wednesday to continue trying to persuade him to hold off on major changes.

But their campaign of persuasion faces the obstacle that Trump ran on a strictly protectionist platform, pledging to pull out of NAFTA and punish China and other U.S. competitors for unfair trade practices.

Trump believes that NAFTA and other past trade agreements have made it easier for other countries to sell their products in the United States in a way that destroys U.S. manufacturers through the use of cheap labor and low prices. This is a view shared by many Democrats, who have also said NAFTA should be renegotiated after more than 20 years.

Since taking office, he has not made good on most of his trade threats but many decisions still loom. The move on tariffs represented the most significant trade decision to date for the administration, and an apparent win for the protectionists in the White House.

In April, Trump came very close to beginning a process to terminate NAFTA, but he backed off following an intense lobbying campaign by lawmakers, business leaders, and some of his closest advisers.

He also came very close to starting a process that would have terminated a trade deal with South Korea, but tensions with North Korea intensified and he postponed that decisions as well.

Republicans are also treading carefully as they want to avoid getting crosswise with a president who’s shown no compunction in going on the attack against lawmakers from either party when they go against his wishes.

“Well so what kind of a story are you writing? What a bad guy Trump is because he’s doing tariff decisions? That’s where everybody wants to go is to drag me into an article to be fighting with the president,” said Sen. James E. Risch (R-Idaho) when questioned on the topic Wednesday. “Look, trade is really important. The president understands that. He wants a better deal for America, I support that. Details are always difficult to do. I don’t want to work against the president, I want to work with the president to make trade work better.”

Some Democrats are closer to the president on trade than members of his own party. Sen. Sherrod Brown (D-Ohio) applauded this week’s tariffs and said he’d been dismayed when Trump delayed decisions about whether to impose restrictions on steel and aluminum imports.

Different groups of advisers within the White House have taken different approaches to trade policy.

U.S. Trade Representative Robert E. Lighthizer and Commerce Secretary Wilbur Ross have argued that the U.S. has been ripped off by other countries when it comes to trade policy, while White House National Economic Council Director Gary Cohn has urged more caution, warning that impulsive changes could harm the U.S. economy.

“The problem in part is you got the free traders whispering in one ear of the president, you got the people like Lighthizer and Ross whispering in the other ear, and the president seems too paralyzed on this,” Brown said.

American manufacturers had complained for years that rising imports were hurting their sales. Trump imposed a tariff of 30 percent on solar panels in the first year, though it will recede to half that figure in four years. On washing machines, the first 1.2 million will face a 20 percent tariff, with additional imports facing a 50 percent levy. Imported parts for washing machines will also face a 50 percent tariff.

As he signed documents to kick off the tariffs, Trump again leveled a threat to withdraw from the North American Free Trade Agreement. His advisers have spent months trying to renegotiate terms of the deal with Canada and Mexico, though progress has been slow.

“NAFTA is moving along pretty well,” Trump said Monday. “I happen to be of the opinion that if it doesn’t work out, we’ll terminate it … So we’ll see how it all works out.”

Opinions on NAFTA are well-defined among most GOP senators: They support it strongly, though some allow that there’s room for improvement.

“I think withdrawing from NAFTA would be a disaster,” said Sen. John Thune (R-S.D.). “We’ve made that clear.”

The pushback comes as negotiators are meeting in Montreal in a sixth round of talks aimed at modernizing the 1994 treaty. Since getting underway in August, the three countries have made little headway toward overhauling an agreement that the president has repeatedly assailed as unfair to the American factory workers who helped him reach the White House.

Trump periodically has threatened to give notice of U.S. intent to quit NAFTA, which would trigger a six-month exit process. He has spoken of withdrawal as a possible negotiating strategy, though Mexico and Canada have vowed to abandon the talks rather than negotiate under duress.

As recently as January 18, Trump tweeted that NAFTA was a “bad joke” and suggested that Mexico would pay for a wall along the southern U.S. border through concessions in the talks.

At the same time, Trump has been hearing from farmers and industry groups that fear the loss of valuable export markets if he withdraws from the treaty. Up to 1.8 million U.S. workers would immediately lose their jobs if NAFTA were terminated, according to a new study funded by the Business Roundtable, a group of CEOs from companies such as JPMorgan Chase, General Motors and Walmart.

Negotiators are expected to make progress this week on parts of the treaty dealing with e-commerce and some — but not all of last year’s gloom — has lifted. “I think we’re in better shape,” said one foreign official familiar with the talks.

With the tax legislation now behind him, the president has been eager to move forward on an aggressive bid to rewrite U.S. trade policy. With this week’s steep tariffs on imports of solar panels and washing machines, Trump was exercising a presidential prerogative that had lain dormant since 2002, when President George W. Bush raised barriers to shipments of foreign steel.

That is widely expected to be just the beginning of the president’s trade actions this year. Lighthizer, the U.S. trade representative, is preparing recommendations for U.S. action against China over its aggressive campaign to vacuum up U.S. trade secrets.

Citing national security, the administration also is mulling potential action against imports of steel and aluminum. Such measures might invite similar action by other countries that could certainly find or invent strategic rationales for protecting their businesses, analysts say.

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In praise of Trump’s solar panel tariffs

Making good on his “America first” rhetoric, President Trump slapped new tariffs on solar panel imports this week. Reaction from both environmentalists and the business world was swift and largely negative.


The new policy won’t generate many U.S. jobs, critics said. It will set back the growth of solar energy in America, and it could spark a trade war with China.

I’m not so sure. In fact, Trump’s tariff may well be a good thing.

The administration will impose a four-year tariff schedule on all solar panels bought from abroad — 30 percent the first year, and then dropping by 5 percentage points each subsequent year, until it gets to 15 percent in the final year.

These tariffs are clearly aimed at China. A mere ten years ago, China was not a major player in the global solar manufacturing industry. But today, it accounts for around two-thirds of all solar panel production. American solar manufacturers argue that China achieved this dominance by unfairly subsidizing its own solar production, and then flooding the global market with ultra-cheap panels.

But that doesn’t tell the whole story. Back in 2011, nearly three-fifths of all U.S. solar panel imports came from China. Today, it’s 11 percent, with Malaysia and South Korea taking the top two spots at 31 percent and 21 percent, respectively. (It’s worth pointing out that a lot of those imports could still be Chinese-owned companies stationed in Malaysia or South Korea, or Chinese-driven supply chains that stop off in those countries before ending as imports to America.)

American solar manufacturers have been hurt by such imports from abroad. More than a dozen have closed factories in the last six years. Ultimately, that’s because solar panels from abroad are cheaper. America imports around 80 percent of its solar panels.

But critically, domestic manufacturing of solar panels is a minor part of the overall domestic solar industry. Of the 260,000 to 374,000 Americans who work in solar, only around 38,000 actually produce solar panels. The rest mainly work in installation and related services.

If your business is installing solar panels, you want those panels to be as cheap as possible. More expensive panels mean fewer customers. So while Trump’s tariffs could create more jobs for solar manufacturing, it could potentially kill jobs in the far larger arena of solar installation.

Seems open and shut, right?

Well, maybe not. Because the effect of Trump’s tariffs on the total price tag for domestic solar installations is likely to be minor. Estimates suggest the cost will rise at most by 10 percent, and probably far less for smaller-scale residential installations. That increase will push the cost of solar installations back up to where they were a mere year and a half ago. “I don’t believe this decision will reverse the solar expansion in the U.S.,” Fatih Birol, the executive director of the International Energy Agency, said at the World Economic Forum in Davos. “The global solar industry will adjust. The penetration of solar in the U.S. will continue.”

Furthermore, solar panels from abroad are cheap because the countries that produce them often have low living standards. Their workers aren’t paid much. That means those manufacturers don’t really have to come up with new innovations and technological breakthroughs. They can compete mostly on price. American manufacturers, by contrast, have to pay their workers a lot more — and thus have a lot more incentive to innovate. American-made solar panels won’t be the cheapest. But they might be the best.

However, American solar manufacturers will never really have the opportunity to innovate and be the best if they get run out of business by a flood of cheap competition from overseas. Giving U.S. solar manufacturers a few years of breathing space, as Trump’s tariffs do, could really aid American solar innovation.

None of this is to say the tariffs are an ideal solution. Both sides in this debate are suffering from some pretty serious failures of imagination. Environmentalists are right to want as much solar as fast as possible, but are relying on breezy free trade “comparative advantage” arguments to push for it. Meanwhile, the Trump administration is right to worry about over-reliance on imports, but is falling back on brute mercantilism. You could envision an alternative where the U.S. government borrowed $1 trillion to invest in solar installations across the country, and promised to buy American while doing so. That would solve both sides’ problems at once.

But within the unfortunate limits imposed by both sides’ failures of imagination, Trump has arguably stumbled on a measured response to a complex and difficult problem. These tariffs are a good thing.

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