Trump team spurns Adam Smith with its trade stance

When promoting a book on the subject of American trade politics in Europe, it is not difficult to draw an audience — especially after two years of the Trump presidency.

Europeans usually carry a sophisticated interest in Washington affairs, but they currently greet American trade policies with perplexity, especially in the trade power centers of Geneva, Brussels and London.

{mosads}In Geneva, in two separate group meetings, I met with more than two-dozen senior trade diplomats posted at the World Trade Organization (WTO), including ambassadors from most of the trading powers: the United States, the European Union and several Asian and influential developing countries. 

A common concern running through the discussions at these meetings derived from the threat that Trump policies and rhetoric pose to the WTO system and the international economic order created and sustained under American leadership over the past seven decades.  

Common questions discussed at each meeting involved whether the WTO can continue to function if the United States clogs the dispute settlement system, refuses to comply with its rules or simply withdraws from participation. 

What may have been academic questions in the past are now nearing reality as a WTO panel passed judgment for the first time on a country’s use of national security reasons for imposing protectionist trade restrictions.

Although the panel approved the restrictions in this case, a similar panel may not approve the highly controversial national security rationale behind the Trump steel and aluminum tariffs that are now also being challenged in the WTO. 

President Trump and his very able — and very protectionist — United States trade representative (USTR), Robert Lighthizer, are already placing enormous stress on the WTO dispute settlement system by blocking the addition of new appellate body judges to replace those who must retire at the end of their terms. 

Most experts agree that the dispute system needs reform, but it is unclear how far Ambassador Lighthizer wants to go with the reforms because his default position in holding these new appointments hostage seems to demand a new system of unilateral self-enforcement. He favors an arbitration system that was rejected decades ago in favor of a rules-based, judicial-style system.

Despite the numerous efforts and proposals tabled to help resolve the issue, the United States has largely remained aloof from the process.

WTO Deputy Director-General Alan Wolff, who is a seasoned American trade expert (approved by Trump to serve in that position) having served in senior positions in both political parties and in private practice for at least four decades, warns that the “natural consequence of dispute settlement becoming inoperative is to return trade relations … to combat without rules.” 

Ambassador Dennis Shea, the U.S. representative to the WTO, appeared surprised by Wolff’s public comment, but Wolff’s perspective is widely shared among the trade community in Geneva.

Another WTO problem is likely to explode when (and if) the United States and China settle their present trade war, if it is settled along the lines currently being discussed. 

The favored negotiating approach of Ambassador Lighthizer represents a move away from the tradition begun by Cordell Hull of competitive free-market trade, to a government-managed trade approach. 

Hull, as President Franklin Roosevelt’s secretary of State, chose this principle of non-discriminatory trade, known as unconditional most-favored nations, as the cornerstone of the international economic order to end the trade wars of the 1930s. 

Lighthizer’s “managed trade” protectionist approach, which he used against Japan when he served as deputy USTR under President Reagan in the 1980s, may suit President Trump’s goal of reducing the U.S. trade deficit with China by requiring China to purchase more American soybeans and microchips, for example, but only in a given year or in the short run.

Despite China’s argument that it is moving to a market-based economy, this compliance with the Trump/Lighthizer management goals to reduce its bilateral surplus is not new or difficult for China in a largely state-owned, planned economy. 

Many ironies are uncovered in this 21st-century return to mercantilist policies long ago abandoned by most economists and veteran statesmen. 

The Trump/Lighthizer approach is not only ironic but a complete reversal of American policy since the 1930s of promoting the free-market policies of Adam Smith over the socialist planned economic approach, and the protectionist, “beggar-thy-neighbor” trade preference agreements that led to the trade wars of the 1930s. 

{mossecondads}If the U.S.-China trade war settlement creates significant trade preferences to the detriment of other WTO member states, new litigation in Geneva is certain because President Trump was careful to exclude the EU members and others from these negotiations. 

From my meetings in Brussels and London, I gather that there is little interest in completing bilateral deals between the EU or the U.K. and the United States until there is some assurance that the steel and aluminum tariffs are eliminated, not to mention auto tariffs that Trump keeps threatening.

The outcome of any WTO litigation following a U.S.-China preferential trade agreement may well destroy the economic order created by Cordell Hull and lead to the path of the 1930s once again.  

Former Rep. C. Donald Johnson (D-Ga.) served as ambassador at the Office of the United States Trade Representative under President Bill Clinton and is the author of “The Wealth of a Nation: A History of Trade Politics in America” (Oxford, 2018).