Is Free Trade Dead?

BY ISTVAN DOBOZI

February 8, 2023

Free trade is one of the few economic paradigms that unite economists of all ideological and political stripes: reduction of international trade barriers – import duties and non-tariff barriers – boost the development and standard of living of all countries involved. For consumers, freer trade means lower prices and greater product choice. After World War II, the United States has played a pivotal role in building the multilateral architecture of free and fair trade. Tariffs and quantitative trade restrictions were sharply pared back. As a result, world trade has expanded twice as fast as world production.

However, America’s commitment to free trade suffered a major break when – in a misguided attempt to eliminate our persistent trade deficit – President Donald Trump levied high tariffs on products from around the world, focusing on China, but not sparing even our closest friends and allies. Mr. Trump effectively sidelined the U.S.-inspired World Trade Organization (WTO), the “policeman” of the rules-based global trading system.

While President Biden has governed as a leader of the international order, on trade he has stuck with most of his predecessor’s protectionist “America First” policies. He has maintained most of Mr. Trump’s high tariffs and showed little interest in reforming the WTO, reversing its slide into irrelevance amid a global surge in new trade restrictions caused by Covid-19-related supply-chain disruptions and the ongoing war in Ukraine. This is a mistaken course. With high import tariffs we are in fact punishing ourselves, not China or other foreign suppliers. These tariffs are a hidden consumer tax and fuel inflation. According to Federal Reserve Bank estimates, the China tariffs alone increase cost to each U.S. household by $620 a year.

A credible WTO with its mechanisms to curtail protectionism, including a binding dispute resolution mechanism, is very much in the interest of the U.S., the number one trading nation in the world. Therefore, Mr. Biden should take the lead in reforming the WTO and restoring its authority amid escalating protectionism worldwide. The WTO provides the best multilateral forum to address the subsidies China illegally gives its state companies to artificially improve their competitiveness on the world market. But in its pursuit of “reshoring”, supply-chain resilience and climate agendas, the Biden administration is essentially copying China’s government-led industrial policy, thereby violating WTO rules governing open markets and free trade.

President Biden’s “Buy American” executive orders have significantly expanded the domestic content requirements in government procurement. But more ominously, under a couple of recently signed mega bills, the White House is showering subsidies totaling $650 billion (or 3 percent of GDP) on advanced chips and green technology manufactured in the United States. For example, President Biden’s “green protectionism” provides up to $7,500 tax credit per vehicle towards the purchase of electric vehicles, but only if a car is assembled in North America. The administration has willfully disregarded the international legal prohibition against state subsidies involving domestic-content requirements.

No wonder the European Union sees these measures as discriminatory and unfairly subsidizing U.S. companies and potentially forcing the EU and America’s Asian partners into a costly subsidy arms race. French President Emmanuel Macron called the U.S. green protectionism a “killer for our industry” and Brussels is contemplating a proportionate “Buy European” retaliation. After recently settling a 17-year dispute with the EU over subsidizing the manufacture of large aircraft, the last thing we want is a new subsidy war with our closest friends and allies in Europe. America once was the opponent, not an advocate, of government subsidies. But now a global subsidy race is looming, thanks in part to Washington’s actions.

After two years in office, Mr. Biden’s trade policy record is, on balance, protectionist, as he has kept many of his predecessor’s misguided America First, nationalistic policy measures and has even added to them. These policies impose significant costs on America’s economy and consumers. There is no real policy effort to liberalize world trade. The war in Ukraine has given America a chance to reassert its global leadership. To capitalize on this moment, President Biden must be ready to articulate and advance a more ambitious international economic policy for the second half of his presidency. A good way to start would be to craft a coherent trade agenda that properly aligns domestic and international economic priorities, and reestablish America as the global champion of a rules-based free and fair trade.

Istvan Dobozi is a former lead economist at the World Bank. He resides in Sarasota.


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