Former U.S. Trade Representative Robert Lighthizer had a recent NY Times op-ed in which he argues for some big changes to the trading system. He starts off by complaining about other governments' industrial policies:
What brought down the postwar trading order was the rise in many countries of pernicious industrial policies. In this drama, those with continuous, large trade surpluses are the real villains.
China, which recently announced a nearly $1 trillion trade surplus for 2024, has demolished the system. But it is not China alone: Other chronic surplus-trade countries, such as Germany and Vietnam, have also adopted policies across their economies intended to shift resources from their consumers to their manufacturing sector to increase exports.
The innocent parties are countries like the United States and Britain that have consistently run sizable trade deficits. Policies that produce large deficits, even if they include tariffs, are not protectionist. They are the opposite.
With regard to specific industrial policies of concern, he notes the following:
Though tariffs command a lot of attention, they are not the main element of these destabilizing industrial policies. The more effective features are things like government subsidies; market-access limits; rigged health and safety standards; directed banking systems that lend below market rates to manufacturers; labor laws that keep wages down; currency manipulation; predatory tax systems; lack of essential regulation in areas like the environment ...
And then here is the crux of his proposal for a new system that he says would eliminate imbalances:
Countries with democratic governments and mostly free economies should come together and create a new trade regime. This system could enforce balance by having two tiers of tariffs.
One higher level would apply to countries outside the group. These would be nondemocratic countries as well as those that insist on using beggar-thy-neighbor, aggressive industrial policies to run large surpluses. Those tariffs over time would reduce those surpluses.
The countries within the new regime would pay lower tariffs, and they could be adjusted over time to ensure balance. When a country in the group begins to run substantial surpluses, the other countries could increase their tariffs on it. Those new higher tariffs would be reduced when the surpluses were eliminated.
I have a few disagreements with his arguments, including the following.
First, his statement that "[p]olicies that produce large deficits, even if they include tariffs, are not protectionist" is confusing, unless he is using some definition of "protectionism" that I'm not familiar with. There are various ways to define protectionism, but this is a well accepted one: "restriction of imports by means of tariffs and/or NTBs, and thereby intended to insulate domestic producers from competition with imported goods." Under this definition, tariffs imposed to protect domestic industries from foreign competition are protectionist, regardless of the country's trade balance. The fact that a country runs a trade deficit is irrelevant to determining whether it is engaging in some degree of protectionism. (All countries are protectionist to some extent.)
Second, while I, too, worry about industrial policies, it's worth pointing out that the trading system actually provides some pretty good disciplines on these policies. Unfortunately, those disciplines have not been utilized enough. Of course, there are some gray areas in which I'm not totally sure how WTO rules would deal with the issue. For example, while the GATT does have a provision -- Article XV:4 -- that could be applied to currency manipulation, it could use a lot more detail and clarity. But there's only one way to find out: File WTO complaints. Throwing up your hands and declaring defeat before trying doesn't seem like a productive approach. And if the existing rules turn out not to work, the solution is to make proposals to fill any gaps, as has happened with currency manipulation in the USMCA.
Third, in terms of his specific tariff proposal, a big problem with it is that it does not account for the fundamental reasons for imbalances. His proposal tries to use tariffs to create balance, but that approach won't achieve his goal. His own argument illustrates why. In the piece, he points out how high U.S. consumption rates are relative to other countries, naming China, Germany, and Ireland in particular. But then his proposal does not fully address this key issue. He doesn't spell all this out explicitly, but my sense is he thinks that high U.S. consumption rates/low U.S. savings rates are fine and do not need any adjustment, whereas everyone else's low consumption/high savings rates have to change. I don't think that's realistic or workable though. In this regard, I think most people would agree that, for example, Germany is going to continue to save more and consume less than the U.S. When you combine that with U.S. policymakers continuing to insist on the dollar being the world's reserve currency and on adopting policies that promote a strong dollar, you will not end up with trade that is balanced bilaterally between the two countries. Lighthizer's tariffs will protect domestic industries from foreign competition, but they won't eliminate trade deficits, because those deficits are mainly the result of macroeconomic factors (also, new U.S. tariffs could increase the value of the dollar).
Further on this point, Lighthizer says that "[l]ow domestic consumption is largely a result of policy, not the peculiarity of national character." I agree that policy plays a role here (although I think he underestimates the role of culture), and I would point out that if you are an influential American political figure, as I think it's fair to say Lighthizer is, you have an opportunity to influence U.S. policy. In this regard, Lighthizer could advocate for the United States to change its approach to government/private savings, for example by adopting policies to rein in its fiscal debt. I would be very interested to see what that change in policy did to the trade balance. (The fiscal debt is not the only thing that matters for the trade balance, but I think just about everyone agrees that it matters to some extent.)
