Is There No Going Back on Trade? What Is the Path Forward? A Response to Lighthizer

Former U.S. Trade Rep. Bob Lighthizer has a new essay in Foreign Affairs called "The New Trade Order," and – as I often do with this sort of thing! – I have some thoughts. I'm going to start with his brief big picture points on the direction of U.S. trade policy, and then go through a couple of the specific concepts he emphasizes.

On the big picture points, the essay concludes with the following on the world trading system:

... There is no going back. The path forward is clear.

Is there really no going back? And is the path forward clear? To some extent, I would say the path forward depends on the results of the approach to U.S. trade policy that has been underway since the first Trump term. Will it achieve what the proponents think/say it will? That's going to matter for the debate over the path forward.

And, of course, we'll need to see how the next elections play out. The voters will weigh in, and the next group of leaders they choose could have very different views on these issues.

Ultimately, I don't think we will go back to the exact trade model of 2006 or 1996 or whenever, with its specific mix of protectionism and trade liberalization or its governance structure. But I do think we could end up with something more similar to a prior period than what we are experiencing now.

Turning to the concepts Lighthizer highlights, two of his key points of emphasis are "balance" and "sovereignty":

Trump’s agenda represents a necessary first step toward what should be Washington’s larger, more ambitious goal: replacing a defunct old trading system—predicated on illusions and vulnerable to abuse—with a new one built on the principles of balance, transparency, and sovereignty.

Let's start with balance. Here, a big issue – or it should be a big issue anyway, in my view! – is what to do about the long-standing U.S. federal budget deficits that are a contributor to the trade imbalances Lighthizer is worried about. Lighthizer says nothing about this, however, and instead focuses solely on what he thinks other countries are doing:

Yet by the 1980s, most countries had concluded that running a trade deficit was bad and running a trade surplus was good. A consistent trade surplus made a country richer by allowing it to buy assets abroad, including equity, debt, real estate, and technology. A consistent deficit, by contrast, made a country poorer by transferring ownership of its assets overseas in exchange for current consumption. Only the United States and some other anglophone countries failed to reach this judgment. By the early 1970s, the United States had gone from consistent trade surpluses to trade deficits. By the early 2000s, those deficits had become very large. And in recent years, they have become massive: from 2020 to 2024, the U.S. trade deficit in goods grew 40 percent, to $1.2 trillion.

Were countries in the 1980s trying to run trade surpluses because they thought "[a] consistent trade surplus made a country richer"? Let's dive a little deeper into this. Just to make the comparison simple, I'll focus on one specific country comparison: The U.S. and Germany.

First of all, I think there is widespread agreement – which shows up clearly in the data – that for most of the period in which the U.S. has been running large bilateral trade deficits with Germany, U.S. income levels were higher and rising faster than income levels in Germany. This seems like it should be a key point to be considered here. Would the U.S. having trade surpluses and lower incomes be preferable to having trade deficits and higher incomes? I'm not sure why it would. (Some of the data for Germany could be a little thrown off because of the impact of reunification, but you can see similar things with Japan, etc.).

Second, my sense – based in part on various conversations I've had with German friends and colleagues over the years – is that Germany doesn't care about running a trade surplus and isn't trying to achieve that. It does, however, care about have a sound fiscal policy with low budget deficits, and this fiscal policy has been a contributing factor in its trade balance. This brings us to a crucial part of the trade deficit issue that I mentioned above but that Lighthizer and others with his view tend to ignore: One of the reasons for the U.S. trade deficit is the high levels of public and private consumption/low levels of savings in the U.S., and a big part of that is the large U.S. federal budget deficits. As long as that continues – and there is no sign of it stopping as Trump and then Biden and then Trump again have driven up U.S. federal budget deficits to extremely high levels – we are likely to continue with relatively large U.S. trade deficits (I can imagine some minor shifts happening based on recent policy developments, but trade deficits are nevertheless likely to remain high). And I don't see U.S. fiscal policy changing any time soon.

Getting back to Lighthizer, along the same lines, he also says he wants to "lean on the broader principle of balanced trade":

The way to build a new trade order that achieves those objectives is to lean on the broader principle of balanced trade. This does not mean attempting to achieve balance in every bilateral trade relationship: in some cases, longer-term bilateral trade imbalances are beneficial to both sides. But every country should agree to maintain an overall balance in its international trade, not on an annual basis, since exigencies might make a deficit in any one year benign, but averaged over a reasonably short period—say, three years.

And he wants to penalize countries that run trade surpluses:

Participants would establish objective methods of officially determining each other’s exports and imports. Countries that achieved balance would be subject to a low-tariff regime by the other countries in the group. Those that breached the agreement by running surpluses over a period would face higher tariffs from the other members until they came into alignment and achieved balance. The least developed countries would be free to run deficits if they determined that this would assist their short-term development needs. Countries outside the new regime would be subject to much higher duties.

But again, this only looks at one side of the equation, and ignores the issue of countries with loose fiscal policies that contribute to their trade deficits. If Lighthizer is on board with the U.S. becoming more fiscally responsible, I think that would be great in and of itself, and it could have an impact on the trade deficits about which he is concerned. But he doesn't say anything about U.S. fiscal policy, and as noted the U.S. has been moving in the other direction here since Trump came into office.

Lighthizer also mentions the importance of "sovereignty," although he doesn't elaborate on his specific views on this point. Here, I'm not sure I've seen a trade policy that respects sovereignty less than what the Trump administration is doing at the moment. To be clear, the administration is trying hard to protect U.S. sovereignty. But it is trampling all over foreign sovereignty in the way it is pressing against domestic regulations abroad and trying to coerce other governments to follow U.S. security policies. Over the long term, I'm not sure such an approach can provide the foundation for a stable system. Governments might make short-term, formal concessions to the U.S. as part of a trade negotiation, but giving up the ability to regulate in the public interest is not likely to be sustainable in terms of their domestic politics.

In my view, what you need in the area of sovereignty (or policy space/regulatory autonomy, which are other terms used in this context) is to craft the trading system in a way that carefully balances international rules and domestic autonomy. What we've seen from the Trump administration so far, however, does not come close to that. There were difficult debates about these issues going on pre-Trump, but they have been mostly pushed aside. Ultimately, I think this aspect of the current approach to trade policy could go badly for U.S. producers and service providers, as their sales in foreign markets could be hurt in the long run by a backlash against U.S. companies. While some people in the U.S. have in mind a blunt prying open of foreign markets, it could turn out that those markets were opened in terms of formal access for U.S. goods and services, but the consumers there might now be inclined to look elsewhere.

Summing up, where is trade policy going? And for that matter, where is any policy area going? I don't know! It feels to me like the U.S. electorate has a lot of things to sort out. As polls consistently show, these voters don't necessarily care much about trade policy, but as they make broader choices about the direction of the country in the coming years, there will be implications for U.S. trade policy and U.S. participation in the world trading system. These choices are likely to have an impact on sovereignty, and perhaps a bit on trade balances too (although, as noted, for that issue macroeconomic factors are the most important). At this moment, though, it seems to me that where we are headed on trade policy is largely up for grabs, and in the coming years everyone will have an opportunity to make their case for which direction we should go.