How blatant self-interest continues to drive trade policy
David B. McGarry | Taxpayers Protection Alliance
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Too often, the process of policymaking dissolves from principled debate to battling for regulatory handouts. Politicians fight to secure their constituents flashy and politically popular benefits at the national interest’s expense. This dynamic asserts itself often in trade policy.
The United States, once the champion of global free trade, has pivoted hard towards protectionism under Presidents Donald Trump and Joe Biden. Trump’s efforts failed to resurrect a bygone, mid-century economic status quo. Biden has attempted to induce a premature and wholly infeasible transition to green energy and electric vehicles (EVs). Although Biden portrays himself as Trump’s foil, he has maintained many Trump-era tariffs and added a layer of protectionist subsidies. While his protectionism takes an environmentalist bent that Trump’s lacked, their views of trade and manufacturing have remarkable similarities.
Both presidents have damaged international trade relations greatly. Biden in particular – with measures such as the Inflation Reduction Act (IRA) – has escalated a global subsidies war. Countries have waged such war by providing state support to domestic manufactures. Notably, he has limited many of his prolific green-energy handouts to domestically manufactured goods and conditioned many federally-funded projects on domestic procurement practices. This disadvantages friendly nations and hostile ones – not to mention the American economy.
Trump and Biden seem to view international trade like a game of musical chairs, where someone always loses. This zero-sum – and entirely distorted – view of trade has raised tensions with America’s allies.
Two recent trade-related convulsions involving Europe illustrate the chaos America’s recent fecklessness has promoted. They also reveal just how self-interested the “rules-for-thee-but-not-for-me” approach to trade policy is (that America and other countries have adopted).
The Wall Street Journal (WSJ) reports that U.S. trade negotiators are attempting to bully the EU into imposing tariffs on Chinese steel, “which U.S. officials believe contributes to global overcapacity and undercuts U.S. producers.” The incongruity is painfully clear. Whatever China’s suspected malfeasance, the threat of reinstituting Trump-era metal tariffs – if carried out – would likely violate international trade agreements. This is the leverage U.S. “negotiators” hold over European allies.
President Trump predicated these tariffs on convenient and utterly fabricated national security concerns, another clear defiance of America’s commitments at the World Trade Organization (WTO).
In the second case, the European Commission opened an investigation into Chinese importation of EVs in September. According to a source with knowledge of the situation who spoke to Bloomberg, Europe may impose a 27.5-percent tariff on Chinese EVs. The EU currently levies an auto tariff of 10 percent.
Bloomberg’s Chris Bryant reports that the continent’s auto manufacturers have opted of late to produce fewer individual vehicles and market them at higher prices. This attracts Chinese importers, whose EVs typically cost about 20 percent less than European models. The Commission estimates that Chinese vehicles constitute 8 percent of European EV sales, a share that could grow to 15 percent by 2025.
Intra-EU politicking reveals how national and regional economic interests shape trade policy positions. Diverging manufacturing interests in France and Germany have clashed on this investigation. France – whose auto giants, Renault and Peugeot, have little manufacturing in China – has supported anti-Chinese measures. Germany’s carmakers, meanwhile, manufacture extensively in China, and it consequently has questioned the investigation’s prudence. Chinese data say French brands have but 0.4 percent of the Asian superpower’s EV market, while Germany has 17 percent.
China, which denounced the EU investigation as “a naked act of protectionism,” has itself subsidized its domestic industries heavily. In the EV and hybrid sectors, consulting firm AlixPartners says China provided $57 billion in subsidies from 2016 to 2022. Politico reports that “Officially, the national consumer subsidy program expired at the close of 2022 for those buying EVs, but motorists are still exempt from paying purchase tax and Beijing this summer unveiled 520 billion yuan (€68 billion) in new tax breaks running to 2027.”
Observers should pause here to note that Biden’s pet IRA’s subsidization of clean vehicles, much of which Congress tied to domestic manufacturing, will likely cost taxpayers $390 million, while the law’s all green-energy giveaways could total to more than $1 trillion over a decade; rules for me but not for thee.
Protectionism’s simple argument that domestic manufacturing is inherently good, and that extensive importation is cosmically bad seems as embedded in human nature as it is economically mistaken. However, especially after World War II, the United States worked extensively to promote free trade to build an institutional architecture necessary to facilitate international negotiations and disputes. This culminated in the WTO’s emergence in 1995, which provides a conflict-resolution mechanism that preserves national autonomy and incentivizes good behavior from member nations.
Today, Trump and Biden have undermined the WTO’s appellate body, without which the organization has no teeth. This has shielded both presidents’ rank, WTO-violative protectionism from international scrutiny.
Studying trade policy’s history leaves one profoundly disappointed in human beings’ incapacity to eschew self-interest for the greater good. Recent decades excepted, free-trade champions are scarce. However, America’s post-war success in expanding free trade and the concurrent gains in global wealth demonstrate that concerted and extended political effort can defeat protectionism – to the entire world’s benefit. U.S. policy makers of both parties should make a sea change and re-embrace free trade.