Free to Prosper: Trade

A Pro-Growth Agenda for the 116th Congress

2019 Agenda for Congress web graphics3

View the full chapter on trade here

Protectionism, long a byword in politics for economic folly, has recently regained currency under the Trump administration. To safeguard America’s prosperity, one of the new Congress’ most urgent priorities should be to rein in the executive branch’s protectionist policies. President Trump, without input from Congress, has enacted multibillion-dollar tariffs on steel and aluminum and on more than 6,000 different goods from China, from circuit boards to peanut butter and jelly, covering more than $200 billion of exports. Other countries, including allies such as Canada, Mexico, and the European Union (EU), have responded with retaliatory tariffs on U.S. goods, including pork, cheese, motorcycles, bourbon, and blue jeans.

U.S. producers such as Harley-Davidson are offshoring some of their production to avoid the tariffs, while downstream domestic industries such as construction, automobiles, and canned goods are facing inescapable cost increases of up to 25 percent. They have little choice but to pass those costs on to consumers. Affected companies are also laying off employees, canceling multimillion-dollar deals, and adapting to reduced demand. Futures markets are more volatile than usual, due both to the tariffs themselves and to the frequent and unpredictable twists and turns in how the administration has gone about imposing them.

In the short term, the Trump tariffs have displaced hundreds of thousands of workers, who must now seek different employment, according to a June 2018 analysis by the Tax Foundation. The tariffs’ costs to consumers—some of them freshly out of a job—may well outweigh any savings from the 2017 income tax cut. In the long term, the tariffs will lead to higher producer costs, higher consumer prices, less competition, less innovation, and slower economic growth. Going forward, our allies may also credibly threaten to withhold their cooperation on other foreign policy issues.

The president’s unilateral protectionist behavior cuts against 75 years of ongoing trade liberalization that pushed the United States’ tariff rate on dutiable goods from a peak of more than 59 percent in the aftermath of the 1930 Smoot-Hawley tariff bill down to about 5 percent when the Trump administration took office—more than a 90 percent reduction. Given the harm that tariffs cause to the U.S. economy and to American foreign policy, Congress must work to ensure that the Trump administration’s protectionist stance turns out to be an aberration, not a full-on reversal of decades of bipartisan policy toward more open international trade.

Some of America’s trading partners, such as China, do not always act in good  faith. Policies and practices that China and other autocratic countries must change include weak intellectual property protections and theft of trade secrets. Congress should pursue sound policy no matter what other countries do. This means not only refraining from enacting new trade barriers but getting rid of existing barriers. Tariffs not only will fail to change such bad behavior but will hurt the U.S. economy.

A more effective approach would combine bilateral negotiations with multilateral international pressure. In the case of China, this could mean negotiating a binding bilateral agreement with the Chinese government. The Trans-Pacific Partnership (TPP), from which the Trump administration pulled out on its third day in power, would have accomplished many of Trump’s policy goals with China. It is not too late to attempt a revival, with Congress’ help. Other countries and regions, such as Japan and the European Union, have similar concerns about the Chinese government’s trading policies and can be natural allies on that issue. The Trump administration’s trade policies to date are preventing such a potentially effective alliance from forming, and other countries are pursuing their own policies without U.S. involvement. It was encouraging, however, that President Trump and EU President Jean-Claude Juncker were able to step back from mutually damaging policies and agree on a common approach to Chinese practices when they met in July 2018. The relative lack of changes in renegotiating the North American Free Trade Agreement (NAFTA) into the new United States–Mexico–Canada Agreement (USMCA) was also welcome.

A word of caution about pursuing trade agreements is in order. Congress has many international policy priorities, but it is important to restrict trade agreements to trade issues only. Separate issues should be treated separately. Trade-unrelated issues, such as labor and environmental regulations and intellectual property standards, should be negotiated in separate agreements. Lumping trade-unrelated issues into trade agreements makes negotiations slower and more contentious and gives protectionists more opportunities to torpedo liberalization efforts. The section of the USMCA that instructs Mexico to raise auto workers’ wages is a terrible precedent for infringing on other nations’ sovereignty in trade agreements, and we should not be surprised when other nations make such trade-unrelated demands of America. Such demands also increase the possibility of future renegotiations or outright repeal of the agreements over issues that have nothing to with trade.

Finally, greater engagement with the World Trade Organization (WTO) provides another effective avenue for improving other countries’ bad behavior. The WTO lacks binding authority, but the norms of international cooperation give its rulings substantial heft, which the United States can use to its advantage. Countries with legitimate grievances, of which the United States has many, have a roughly 90 percent success rate in the WTO’s dispute resolution system. The tradeoff is that other countries would bring their own legitimate grievances against the United States, but working within a rule-based system requires such cooperation. By removing protectionist policies, those rulings would actually help the United States in the long run and can hardly be called concessions. Congress should prevent the president from leaving the WTO, as he has occasionally threatened to do.

Trade is an ongoing policy issue but usually a dormant one, far down Congress’ priority list. The current administration has changed that, and Congress must act swiftly and decisively to nip in the bud policies that could cause immense economic and political harm—in the short term and the long term, both here and abroad.

In this chapter:

  • Reclaim Tariff Authority from the Executive Branch
  • Reject Retaliatory Tariffs
  • Pursue New Trade Agreements with the United Kingdom, the European Union, and China
  • Renegotiate Existing Trade Agreements to Remove Trade-Unrelated Provisions
  • Engage with the World Trade Organization to Remove Unfair Trade Barriers

Read the full chapter on trade here