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Trade distortion and protectionism

Needed: A rational debate on the new US trade philosophy

Published 24 June 2018 | 4 minute read

The current US Administration has been accused of incoherence in its trade policy. In reality, a very clear philosophy is discernible in at least some aspects of its approach to trade. Since this philosophy flies directly in the face of the basic principles which have governed trade since the end of WWII, an informed and reasoned debate on this new view of trade is sorely needed.

The architects of the post-War trade system – having lived through the Great Depression and two World Wars in three decades – came to the conclusion that stability, predictability, and a robust set of multilateral trade rules and norms would best serve the national interests of the US and its partners. These simple principles have provided the foundational pillars for the global trade system for more than seven decades and have become so deeply ingrained that they have been accepted without question. At least until now.

The current US Administration, and in particular US Trade Representative Robert Lighthizer, are adhering to a much different philosophy. Having reflected on the past seven decades of history, Ambassador Lighthizer (and those in the Administration who share his views) have come to the conclusion that stability, predictability, and robust rules often serve the interests of other countries (which are seen as competitors rather than partners), at the expense of US interests. According to this alternative philosophy, US interests are frequently best served – and its comparative advantages are best maximized – in a world of unpredictability and lax rules which provide ample scope for unilateral actions.

Although strands of this philosophy are evident in most of the recent US trade actions, it comes through most clearly in the US negotiating positions in NAFTA. Perhaps the biggest stumbling block in NAFTA is the US insistence on a “sunset clause” which essentially means that NAFTA would be terminated in five years unless all three parties agreed to continue it. Some observers have gone so far as to question whether this is a serious proposal, or if it is a “poison pill” designed to sink the negotiations. Such a clause would make it difficult, if not impossible, for companies to do long-term or even medium-term planning, critics point out. But that is precisely the point. According to the Lighthizer mindset, the predictability and stability created by NAFTA has facilitated, and perhaps even encouraged, US companies to move operations and jobs across the border, with disastrous results for US workers. A “sunset clause” would undermine that predictability and rebound to the advantage of the US. The presumption being that companies would prefer the “safe harbor” of the United States if they no longer can count on the terms of the NAFTA remaining in place in perpetuity. In this way, by fostering uncertainty, the US is maximizing some of its most important comparative advantages: the world’s single largest consumer market and strong domestic rule of law.

The same philosophy is apparent in the US negotiating position on NAFTA’s Investor-State Dispute Settlement (ISDS) provisions. These provisions essentially allow private companies to bring cases in a private tribunal against government policies which they believe diminish the market access they reasonably expected to receive. They are designed to improve stability and predictability in countries that might not have as robust a legal system as the US, and as such have been regarded as quite helpful for US companies with operations abroad.

Ambassador Lighthizer is attempting to remove or water down ISDS provisions, openly questioning how and why it is in the best interests of the US government to minimize the risks associated with US companies moving operations out of the US and into foreign jurisdictions. In this sense, uncertainty about whether fair and unbiased legal judgments can be obtained in a foreign country is considered a good thing: It discourages US companies from setting up operations in such countries. ISDS provisions are seen as perverse: They remove one of the most important comparative advantages the US posseses vis a vis competing jurisdictions: strong rule of law.

One may agree or disagree with Lighthizer’s negotiating stance, but it’s difficult to assail his logic: ISDS provisions do undeniably minimize the risk US companies face in moving operations abroad. Once again, from this point of view, an existing system that provides predictability and stability are seen as working against US national interests.

Canada and Mexico are approaching the NAFTA renegotiations with an intention to update the 23-year-old pact in the many places where it is needed and to make other common-sense modifications, as defined by their individual national interests. The US approach is fundamentally different, seeking to overturn the core principle on which the agreement is based: the establishment of a largely open and integrated North American production base and market. Many of the US proposals are in fact intended to undermine continental integration and to establish a set of incentives and disincentives that will result in more production being shifted to the US.

The extraordinarily stringent automotive rules of origin proposed by the US is perhaps the most direct way this objective is being pursued. Interestingly, this negotiating position is being leveraged by a unilateral trade action – the Section 232 investigation into automotive imports – which could result in substantial tariffs being applied. The current US automotive tariff is only 2.5 percent, so if the US overplays its hand on the automotive rule of origin, companies will be tempted to ignore it, source from wherever they want, and then simply pay the minimal 2.5 percent tariff.

Obviously, that calculation would be dramatically altered if unilateral trade action under Section 232 results in a substantially higher automotive tariff. Companies would have little choice but to shift production to the US in order to meet the rule of origin and avoid the higher tariff. Lax trade rules and/or enforcement which permit (or at least fail to prevent) the US from taking such unilateral actions are therefore seen as an integral part of the United States’ ability to protect and promote its national interests. Undermining the efficacy of the WTO, the global trade referee, either by asserting the US’ right to ignore decisions, or by undermining dispute settlement by blocking Appellate judges, is part of the broader strategy.

Contrary to the conventional wisdom, there is a fair degree of coherence (and an underlying philosophy) behind current US trade policies – at least those being driven by the US Trade Representative. Ambassador Lighthizer, a deeply experienced trade professional with credentials beyond question, is convinced that the traditional approach to trade is flawed, and that his very different approach is in the best interests of the United States. Is he right or wrong? This is the debate we need to be having – now.

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Stephen Olson

From 2014 to January 2024, Mr. Olson was a Senior Research Fellow of the Hinrich Foundation. Mr. Olson began his career in Washington DC as an international trade negotiator and served on the US negotiating team for the NAFTA negotiations.

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