Business & Economics

Free Trade on Trial: Trade and Fairness

Charges of “unfair trade” are overblown and can be addressed without higher tariffs

Image Credit: Yaorusheng/Getty Images

As the presidential campaign season heads into its final weeks, the Republican incumbent Donald Trump and the Democratic challenger Joe Biden are both questioning the fundamental fairness of the current international system of rules governing trade, especially trade with China.

At his campaign website, former Vice President Biden promises that “if we . . . stand up to the Chinese government’s abuses, insist on fair trade, and extend opportunity to all Americans, many of the products that are being made abroad could be made here today.” And in response to a recent ruling against the US government at the World Trade Organization, President Trump’s chief trade negotiator Robert Lighthizer complained, “The United States must be allowed to defend itself against unfair trade practices, and the Trump administration will not let China use the W.T.O. to take advantage of American workers, businesses, farmers and ranchers.”

Those appeals to fairness reflect concerns that the trading system is stacked against the United States and that tariffs may be one way to “level the playing field” with rivals such as China. However, most “unfair” trade practices are not truly unfair, and even those that are can be addressed by methods other than imposing tariffs on trading partners. Indeed, while it’s true that international competition can hurt certain American producers and their workers, the international trading system the United States has supported for the past 75 years has served the nation’s interest well and has lifted the living standards of the large majority of American workers for generations.

Complaints about unfair trade against China and other nations can be subjective and wide ranging. The most common complaints include such foreign practices as imposing higher tariffs than those imposed by the United States, stealing or forcing the transfer of intellectual property, “dumping” goods at below the cost of production or the home market price and subsidizing domestic producers to give them a price advantage in global export markets.

Almost all those practices are deviations from free trade and sound free-market policies generally, but almost all of them can be addressed more effectively by policy tools other than US tariffs.

Most other nations do impose higher tariffs on US exports than the US government imposes on imports from other nations. But this is not an example of “unfair trade.” Nothing in global trade rules dictates that all nations must have the same tariff rates on similar products. For reasons economists have long noted, higher tariffs primarily hurt the country that imposes them. That is why countries with relatively lower tariffs tend to enjoy higher wages and higher per capita incomes.

While the postwar trading system has not convinced all countries to embrace free trade, it has facilitated a downward trend in global tariff rates. Through eight rounds of negotiations in accordance with the General Agreement on Tariffs and Trade, the average tariff faced by US exporters in global markets has dropped from 22 percent in the late 1940s to under 5 percent. The bilateral and regional free-trade agreements that the United States has entered into with 20 other nations in the past 35 years mean that more than 40 percent of US exports face zero tariffs in their destination markets.

Foreign producers are commonly accused of “dumping” products on the US market at unfairly low prices. But dumping, according to US law, is defined as selling below the average total cost of production or below prices in the home market. There is nothing unfair about either practice. In fact, US companies practice this kind of “dumping” routinely in the domestic US market whenever they lower prices to meet competition in other regions of the country or continue to sell their products when they are operating at a loss. While competing producers may not like the lower-priced imports, such imports are a blessing to American consumers.

Foreign export subsidies are a more serious matter and can distort global trade flows at the expense of competing US producers. Those subsidies may not in fact hurt the US economy overall because Americans who buy those products, whether consumers or import-consuming industries, benefit from the lower prices that come as a result of the practice. Moreover, the US government has plenty of tools to counteract foreign subsides if it chooses to act. Those tools include joining international agreements to limit or eliminate such subsidies, filing cases through the World Trade Organization (WTO), or imposing countervailing duties to offset the price advantage foreign companies can enjoy because of domestic subsidies.

Intellectual property (IP) protection is an even more serious problem, most notably with China but also with other developing nations such as Brazil, Malaysia, Mexico and Turkey. IP theft costs US producers tens of billions of dollars a year in lost sales. However, the right response is not to impose punitive tariffs that hurt US producers and consumers, but to seek better enforcement of IP rules through trade agreements, by bringing cases in the WTO, and by directing sanctions against specific individuals and agencies, as was recommended in a 2019 Mercatus policy brief. In fact, according to a 2016 study by the US International Trade Commission, global trade agreements have enabled US firms to collect an additional $10 billion a year in IP payments.

More broadly, trade critics complain that China and other nations are flouting global trade rules that the US scrupulously follows. But the reality is more nuanced. The WTO dispute settlement system has actually worked remarkably well in the 25 years since it was established in its current form. In fact, the United States has been the top user of the system in filing cases against other nations, and it has also been the top target of complaints. In both situations, the complaining government wins about 90 percent of the time—so the US government has no grounds to complain that it is treated unfairly.

The United States itself appears guilty of breaking the same global trade rules it helped to create and expects other nations to follow. In the September 15 decision that drew the ire of US Trade Representative Lighthizer, a WTO dispute panel ruled that many of the aggressive Section 301 tariffs the Trump administration has imposed on imports from China violate core WTO principles of nondiscrimination. Meanwhile, the massive subsidies the Trump administration has shoveled to US farmers, mainly to offset the predictable Chinese retaliation against the Section 301 tariffs, also appear to exceed limits to trade-distorting farm subsidies that the US government agreed to follow. Australia, Brazil, Canada, the European Union and India are reportedly complaining to the United States about what they justifiably see as “unfair” subsidies to US farmers. The reaction of the Trump administration has been to criticize the WTO rather than to examine its own rule-busting actions.

In our less-than-ideal world, where all governments are subject to special-interest pressure for protection, American interests are served by a system that both establishes rules to discourage market-distorting activities and encourages a gradual lowering of global trade barriers over time. Instead of complaining about “unfair trade” by other nations, US political leaders would better serve the national interest by seeking to uphold that system rather than by undermining it.

This is the fourth in a series of four articles that will examine the most common arguments against free trade. The first piece in the series focuses on the impact of trade on labor markets. The second piece talks about the relationship between trade and national security. The third piece discusses how free trade boosts healthcare security.

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