The Future of Trade in an Era of Disruption

The Future of Trade in an Era of Disruption

Edward Alden’s speech on October 28, 2024, at the Yeutter Institute for International Trade and Finance at the University of Nebraska provides parameters and principles for future trade policy.

October 2024

Testimony
Testimony by CFR fellows and experts before Congress.

I want to start by extending my thanks to Christena Bach Yeutter, to Jill O’Donnell, and to others at the institute here for their generous invitation to deliver this opening keynote. And I am honored to be here with such a talented and committed group of scholars and practitioners who have dedicated their lives to strengthening a trading system that has helped to build broadly based wealth here in the United States and across the world. And it is a pleasure to be with a group of excellent and motivated students looking to carry on this important work. For all its many challenges, the modern trading system is one of the great accomplishments of human ingenuity and cooperation. Adam Smith rightly noted the “human propensity to truck, barter and trade,” and trade is as old as human civilization. But the creation of a global rules-based system for organizing trade on a once unimaginable scale was an extraordinarily successful undertaking. As the World Trade Organization’s most recent World Development Report noted, between 1995—when the WTO was created—and 2022, extreme poverty in developing countries fell from 40 percent of the population to 11 percent, driven in no small part by growing trade opportunities.

Here in the United States, for all the loud criticisms we have heard in the last several presidential campaigns about the negative consequences of trade, if you gave almost any American the choice they would prefer to work for companies and organizations that are involved in international trade.  Export-oriented industries pay their workers on average nearly 20 percent more than companies that are just producing for the domestic market, which should be no particular surprise. The big, successful companies in the United States—which remain the envy of the world—are successful in good part because they compete everywhere in the world. I have written extensively about the regions and workers “left behind” by growing international trade competition, which has been a huge, under-addressed challenge that helped fuel the current backlash against trade. I am encouraged, though, by the positive steps that the Biden administration and Congress have taken through such pieces of legislation at the Bipartisan Infrastructure Act and the Chips & Science Act to try to revitalize economies in these struggling regions—which, as many of you know, will be the places that largely decide the outcome of our national election next week.

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The title of my talk for today is “The Future of Trade in an Era of Disruption.” I probably could have made it easier for myself—five years ago when I addressed this group, I argued that the only certainty in trade policy these days is “uncertainty.” I could have saved us all a lot of time and effort today by just saying “ditto” and walking off the stage.

Instead, I am going to try to make the case that it is still possible to reframe our discussions of trade in ways that can allow for positive progress. I will make the case for going back to first principles in an effort to take some of the heat out of the trade debate and return the trade discussion to a more modest and appropriate place in economic policy. I may eat my words after next Tuesday, but here goes!

I do not want to understate the challenge here. We live in a time of extraordinary uncertainty, with no short-term prospects that trade relations among nations are going to become any more stable. I’m not just talking about the election—we must, I think, take Donald Trump quite seriously when he says he would impose stiff tariffs, perhaps 60 percent or higher in the case of Chinese goods, on a broad range of imported goods. Kim Clausing and Mary Lovely of the Peterson Institute have estimated that at the higher level of Trump’s threats—a 20 percent across-the-board tariff and 60 percent on Chinese imports—the average American family would see a $2,600 loss in income, with the poorest families being hit the hardest.

I have not seen good estimates of the likely costs of retaliation by other countries, but we know for certain there will be retaliation and that our agriculture sector is usually the primary target. European officials told Politico for a story last week that, if Trump imposes new tariffs, they will hit back hard and hit back quickly. “Last time we didn’t believe how far Trump would actually go,” a senior EU diplomat said. “This time we’ve had time to prepare. Europe has changed a lot, and we will be ready to act.”

Last time was bad enough. In response to Trump’s 2018 tariffs on steel and aluminum imports and more broadly on imports from China, other countries raised their own tariffs on U.S. goods, much of it targeted at imports of U.S. farm goods. The U.S. Department of Agriculture later reported that the export losses to U.S. farmers between mid-2018 and the end of 2019 were more than $27 billion. It is safe to say that the losses this time around would be far higher than that.

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Kamala Harris has taken a more nuanced position, saying that she favors “strategic tariffs,” which appears to refer mostly to tariffs on China, though the definition is a bit murky. U.S. Trade Representative Katherine Tai earlier this month spoke at a steel plant in Pennsylvania and referred to tariffs that “can be used constructively to level the playing field, to give all of us a fighting chance.” She contrasted that that with how tariffs can be used “recklessly,” which was a veiled reference to the Trump proposals. Harris has tried to distance herself from such a broad use of tariffs, which she has called a “national sales tax” that would hurt middle class families—there has even been an ad touting this argument during the World Series games. But none of this should be misread to conclude that Harris is any sort of free trader—she was one of only ten senators to vote “no” on the U.S.-Mexico-Canada Agreement (USMCA) that Trump negotiated to update NAFTA, saying especially that it did not do enough to protect the environment.

All of this is taking place against an ever more conflictual international environment. We have seen China doubling down on industrial subsidies and export-led growth, creating huge and distorting overcapacity in sectors from solar panels to electric vehicles. Among the bills before Congress last year was the China Trade Relations Act, introduced by Republican senators including vice-presidential candidate J.D. Vance, which would strip China of the Permanent Normal Trade Relations (PNTR) status it gained when it joined the WTO in 2001. Russia has largely been cut off from trading with the West as a consequence of the war in Ukraine. U.S. trade with Russia has fallen from nearly $30 billion in 2019 to just over $5 billion in 2023, and likely less this year.

So, back to my topic on “the future of trade.” In such an environment—with serious divisions both domestically and internationally—can we find our way back to a more sensible, forward-looking trade policy? The last time I spoke with you all, in 2022, I focused more on the mechanisms that might allow for some progress— “friendshoring,” “values-based trade,” a new, though modest, work agenda for the WTO. In retrospect, I think I needed to go further back—not just to mechanisms but to first principles. Trade has become so contentious in our political debates that a new set of arguments is needed for why it matters, and how to address some of the negative consequences of trade without throwing out all the benefits.

We should start, I think, by trying to get the trade debate back on some factual grounding. Republicans, we know, are making absurd claims for the revenue that would be raised and the jobs created by stiff tariffs. There is copious economic research belying those claims.

But to be fair, for many years business and agricultural supporters of trade liberalization made similarly outsized claims for the benefits of whatever trade deals they wanted Congress to approve. One of the more unfortunate claims was made by the head of the U.S.-China Business Council during the 2001 debate over granting PNTR to China, when he claimed that “opening China’s markets to U.S. products and services under this agreement is the biggest single step we can take to reduce America’s growing trade deficit with China.” In 2001, our trade deficit with China was $83 billion; today it is four times that large.

At its best and worst, the costs and benefits of trade for the United States are far more modest than is claimed in political debates. The International Trade Commission’s 2019 study on the then proposed USMCA, for example, estimated that it would raise U.S. gross domestic product (GDP) by $68.1billion (0.35 percent of the economy) and create 176,000 jobs (0.12 percent of the U.S. total). These are barely rounding errors. This should not be a surprise—the United States’ economy depends much less on trade than most of the world, and even significant liberalization is only going to have modest benefits. Similarly, while the costs of trade are concentrated, on a national scale they are not large. Even the upper bound estimate of about 2.5 million jobs lost to Chinese competition in the 2000s is a tiny number in an economy where tens of millions of jobs are lost (and created) every year.

Can we actually start to have a more grounded discussion on trade?

Some things, I think, should be relatively uncontroversial.

  1. Trade produces wealth, through the basic laws of comparative advantage and greater efficiency. That is a good thing. The world is far wealthier as a result of trade occurring on a global, or near-global scale.
  2. The wealth created by trade is not equally distributed, and sometimes exacerbates wealth inequalities, across regions and among individuals.
  3. Trade is a tool to create wealth, encourage innovation and efficiency, and improve living standards. It is not an end in itself. Sometimes trade growth will need to be subordinated to other goals. These could include protection of national standards—labor and environment being the two most discussed. And national security necessarily takes priority over trade expansion (though the two are not necessarily in conflict).

 

If we start with those parameters—and I’m sure we could add others—can we begin to build some principles for further action?

First, I would argue, freer trade should be the default, because wealth generation is vital to modern economies—it makes everything else easier. Wealthier countries have more money to redistribute, more to invest in education, in innovation, in public health, and more resources for national defense.

Secondly, deviations from free trade should be the least costly means to achieve other big priority goals. The Biden administration has tried to do this with its export controls on China—National Security Advisor Jake Sullivan famously talked about “small yards and high fences” where trade restrictions will be focused on a subset of products with real security implications. Semiconductors are the most obvious one currently.

Third, it’s silly and self-defeating for the United States to take market access off the table in negotiations, as it has done in the Indo-Pacific Economic Framework for Prosperity (IPEF) talks. If the United States made a mistake in assuming that cutting tariffs and increasing market access is always a good thing, it makes no more sense to think that market access is always a bad thing. Tariff reductions can make a big difference for Americans, the agriculture sector being the most obvious. Last year, for example, the United States successfully negotiated with India to lift the 20 percent tariff on imported apples that had been imposed in retaliation for Trump’s steel and aluminum tariffs. India had been a $120 million market for U.S. apples, and it is beginning to recover after nearly disappearing.

Fourth, as I mentioned briefly above, we need to get serious about dealing with the dislocations from trade, even when—indeed, especially when—they are focused on just certain regions in the country. One of the things I find tragic about this election is that the Biden administration gets no credit for doing far more than any other to do just this: Congress passed and the administration is implementing a host of programs to bring greater economic opportunity to regions left behind by trade. But sadly, this is not well understood in the country.

Finally, we need to be more creative with tools. There is an urgent need to get more Americans into electric vehicles (EVs), for example, and there’s no short-term likelihood of U.S. companies bringing the costs down enough quickly enough to appeal to all segments of the market. Yet we currently have 100 percent tariffs on Chinese EV imports, which totally freezes them out of the market. Why not negotiate a tariff rate quota (TRQ) on Chinese EVs, with the quota permitting imports of lower-end vehicles below a certain value that are not profitable for U.S. companies to produce? It would give U.S. companies some protection while encouraging more rapid adoption of EVs. A similar response may make sense in the case of solar panels or other products.

None of this is an especially exciting agenda, to be certain. But that’s exactly the point. The United States led an extraordinary undertaking in encouraging the world to build the modern global trading system. Most of the pieces are in place. Some—like binding dispute settlement—were steps too far. The challenge now is not to construct some grand new edifice. The challenge is to prevent damaging backsliding, pursue modest new opportunities when they arise, and find a best-possible balance—it will shift constantly—between expanded trade and other national priorities.

That may not sound too thrilling for those of you contemplating careers in trade. But we are not in a heroic moment of construction on trade; we are at a moment of managing, preserving, and, if possible, making small gains on the benefits that trade brings to the United States and the world. It will be better for the country if trade gets off the front pages and becomes again a slightly obscure, even wonky, undertaking.

I even have a measure for success—if all goes well, this conference next year and in the years to come will be far more boring than it has been since I started coming here.

Thank you very much.

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