Free and Fair US Trade?

In a recent article for the Financial Times, Wilbur Ross, the new U.S. Secretary of Commerce, claimed that “the United States has the lowest trade barriers and the largest trade deficit in the world.”

It is clear that, due to a combination of both cyclical factors and a growing structural gap between imports and exports, the U.S. trade deficit widened substantially from $39.2 billion in 1992 to $501 billion in 2016.

However, to argue that these increasing trade deficits arose mostly because of the lowest worldwide trade barriers in the United States, on the one hand, and through “serial trade offenders,” “currency misalignments” and “the lack of reciprocity” in the international trade rules, on the other hand, misses not only standard economic reasoning, but also the basic facts about U.S. trade policy.

The most glaring omission in Wilbur Ross’s arsenal of arguments is this: While the United States indeed has one of the lowest average tariffs on imports, at the same time it is the most active user of non-tariff trade barriers worldwide.

How free and fair is the U.S. trade really?

Looking at data, this seems to be reflected in its relatively low 3.5% average level of applied import tariffs – the lowest among its main trading partners (first column in Table 1), although not the lowest worldwide, which is in contrast with the recent claims by Wilbur Ross.

Enlarge

Enlarge

Also, in some other tariff-related aspects shown in Table 1, the U.S. attitude to trade is less free and fair than one would expect based on the policy pledges of the new U.S. administration.

The United States has the highest non-ad-valorem average duty rate of 8.7%, the third highest maximum duty rate of 350% and offers a duty-free rate only to a moderate share of its imports (45.9%, compared with 75.8% in Canada, 53% in Japan and 50.1% in Mexico).

But the most striking, although the least discussed issue so far, is that the United States has been the most intensive user of non-tariff measures.

Non-tariff trade restraints

The U.S. economy is thus highly protectionist not based on standard tariff trade barriers, but rather through the back-door of non-tariff trade restraints.

To be clear, some of these non-tariff measures actually constitute safeguard provisions under the WTO rules.

These permit governments under certain circumstances to withdraw their usual obligations in order to protect – temporarily or permanently – certain overriding interests (e.g., stemming from unfair trading practices or health protection and national safety concerns).

However, many of these provisions are actually not used in response to “unfair” trade, but to protect national
industries from foreign competitors.

This is possible because of:

1. the lack of consensus regarding the precise definitions of such measures and thus a high degree of discretion in their application
2. the difficulty to prove the opposite in case a non-tariff measure is invoked as a safeguard instrument.

Indeed, there is an established body of the literature showing that non-tariff measures are a new form of trade protectionism, often generating even greater distortions than tariffs. Figure 2 and Table 2 offer an overview of non-tariff barriers in place at the end of 2016 in the U.S. and other selected countries.

Looking at the total count of measures applied

The U.S. appears to be the most intensive user of non-tariff barriers in general and in their main categories, sanitary and phytosanitary measures, anti-dumping and countervailing duties.

This is true when looking at the total count of measures applied and at the number of product lines (as measured at the 6-digit classification level) to which such measures apply.

Enlarge

Enlarge

Both the total count of measures applied as well as the number of product lines double the numbers recorded in China and exceed by two-thirds the number of non-tariff measures applied by the EU.

They also exceed by a large margin measures applied by the other main trading partners of the United States.

And the trend is continuing. Just consider the security announcement from March 21, 2017, banning large electronic devices on flights to the United States from ten airports in the Middle East.

Effect of ban on U.S. airlines

This ban does not affect United States’ airlines and offers a way to protect the U.S. aviation industry, given that it would encourage passengers to fly with U.S. airlines excluded from the ban. Recently, it has been announced that such a ban could be extended to include other airports.

Similarly, the investigations of imports of steel and aluminum launched in mid-April are aimed at reviving the production of high-purity aluminum by the Century Aluminum smelter in Kentucky that is used in the production of the U.S. combat aircrafts, such as Boeing F/A-18 Super Hornet.

Both measures were launched in the name of “national security,” and could trigger not only retaliation from the EU, China and elsewhere. They could also spark a global flood of countries justifying anything with national security concerns.

Trump’s protectionism on the rise

President Trump perceives anyone outperforming the U.S. as a threat. Thus, the likely outcome of Wilbur Ross’ report that is forthcoming in June will be a long list of measures “to correct any (trade) anomalies” and protect the United States industries.

This is just logical under the slogan “America First.” But this results in less, not more free and fair U.S. and global trade.

What are the origins of this Trump-led U.S. protectionism? They essentially lie in the asymmetric perception of trade liberalization.

The benefits from higher trade openness are broadly spread among consumers, exporters and workers alike and thus hard to capture and quantify. In contrast, the costs of such openness are highly concentrated within an industry, or a region, or a group of workers.

Protectionism not taking the U.S. anywhere

Accordingly, whereas trade has most probably been the biggest force for good for most of the U.S. workers so far, especially given the prolonged stagnation, if not declines in real incomes, it could have squeezed the pay of particular interest groups, like low-skilled workers in Ohio, North Carolina, Michigan or Pennsylvania.

Still, is the turn to rigorous protectionism going to be the winning card for the U.S. economy? There are four strong arguments against this.

1. Some of the loss to U.S. workers allegedly from trade is better explained by fast technological progress, which led to lower labor intensity in manufacturing production.

2. Gains from trade, whatever dispersed, were always there. Although some income groups might have lost, the gains from “made abroad” disproportionally accrued to the less wealthy, as these are the people who tend to spend a higher share of their purchasing power on these kinds of things than richer people do.

3. As long as the monetary-policy-made interest rate differential between the U.S. and elsewhere persists and drives excess capital inflows to the United States, there is no reason for U.S. trade deficits to cease.

Consequently, protectionist policies to curb imports will likely be offset by the appreciation of the U.S. dollar, neutralizing the effect on the trade balance.

4. Finally, many gains from trade still remain on the United States table. Today’s trade negotiations are not mainly about cutting tariffs, but rather turn around intellectual property protection, service trade liberalization and setting higher environmental and social standards. All of this should help rather than hurt U.S. workers and the economy at large. Thus, free-trade agreements could bring about gains able to offset possible and inevitable losses.

None of these arguments play a role for now. Chances that the U.S. trade protectionism will be on the rise are high.

Still, the hope remains for a freer and fairer U.S. trade policy – just not any time soon.