The recent tariffs on steel and aluminum have been characterized as trade war. This is weird because countries often enforce trade rules with targeted tariffs and sanctions, and markets adjust. What’s the real issue?
In the orthodoxy of free trade, tariffs are heresy. Any tariff suggests that the neoliberal free trade approach has failed and government intervention is required. Also, if we protect steel, then the “protectionist barbarians” all rush in and want import restrictions, too.
This begs the question, “Why have rules for globalization at all, if we won’t enforce them?”
The context for the recent steel and aluminum tariffs should start with a central message from the 2016 presidential campaign. Millions of workers and communities around the country feel left behind by our approach to globalization. We can do something about that…or not.
President Donald Trump speaks in terms of win-lose or “everyone is out to get us.” But he is doing something. The advice from free-trade establishment experts seems to be:
- We can’t do anything;
- Don’t worry about large chronic trade deficits, de-industrialization, stagnant wages and growing inequality; and
- At some point in the future, China will realize that our approach is right and theirs is wrong.
This is a tough message in communities that have lost jobs in aluminum, logging and other industries that had sustained those communities for many years.
A better leadership message for tariffs would give more context for these tariffs.
First, China has built historic overcapacity in steel and aluminum. Chinese leaders recognize they should close some plants, particularly those that are most polluting. Multi-national talks have tried to address this for years. China has slow-walked that process. Their dumping has continued, holding the price of steel below the fair market level. This damages our steel and aluminum industries, which have closed facilities and laid off tens of thousands of workers.
It should not be our public policy to let China distort markets and take production from the United States to China. Our economy already has lost electronics, home appliances, textiles, solar panels and many other manufacturing industries. If China displaces our steel and aluminum, they could repeat that process with cars and airplanes.
Tariffs are rough tools, but legitimate and appropriate in cases where dumping has been identified. Economist Rob Scott proposed a refinement to Trump’s tariffs. Any country that also has a tariff on steel from China would be exempted from our tariff. This would reverse Trump’s fascination with trade war, by calling for a multilateral defense of appropriate rules for globalization.
Second, China, Japan, South Korea and other countries have well-designed industrial policies that serve their national interests and have raised their living standards. For decades, we have followed a particularly weak industrial strategy, which diverts gains to those at the top, while de-industrializing our economy, worsening inequality, and eroding confidence in social and political institutions.
Our approach works very well for investors and global companies but leaves most people behind. Our neoliberal free-trade approach to globalization is exhausted socially, politically and economically. Bernie Sanders, Hillary Clinton and Donald Trump all said we need a new approach to globalization. Well-targeted tariffs would be part of that. We also should stop China’s misalignment of currency, which encourages companies to move production from the U.S. to China. Renegotiating NAFTA gives us an opportunity to strengthen labor rights, help the environment and change other rules that have encouraged production to move offshore.
In general, we need more effective national strategies that recognize our national interests and make our economy fairer and stronger. We have done that in our past. Other countries do that for themselves now.
Side note #1: We should recognize social dumping as a legitimate trigger for “border adjustments,” which would have the same general effect as tariffs. From that perspective, the recently shelved Trans-Pacific Partnership trade deal (TPP) should never have included five countries that fail to meet global standards in fighting human trafficking. Even worse was inclusion of Malaysia, a sixth TPP country that was ranked by our State Department as being among the worst in the world for human trafficking.
Side note #2: Nothing in economics or trade theory says we need maximum possible trade. There is an optimum level of trade, which may be less than what we have now.
Neoliberal free trade is the philosophical opposite of industrial strategy. Our free trade approach blurs national boundaries and national identities. It puts interests of global investors above public interests. It thwarts national policies.
Many of our major trading partners have effective industrial strategies. This is not about trade war. It’s game theory. Countries with effective strategies will prosper while those with ineffective strategies will fall behind.
This post originally appeared at The Stand.