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When Protectionism Is Not Protectionism

Daniel J. Ikenson

In the Wall Street Journal last week, Commerce
Secretary Wilbur Ross shared some of his views about free trade and
protectionism, which were widely and deservedly criticized for
their misguided obsession with trade deficits and their
mercantilist disregard for U.S. consumers. But Ross also offered a
more nuanced take on what does and does not constitute
protectionism, which is a matter of great relevance in this
atmosphere of increasing trade frictions.

Attempting to offer an explanation for U.S. goods trade deficits
with China and the EU, Ross presents a bar chart showing the
average tariffs for 22 manufacturing industries in the United
States, Europe, and China. U.S. tariffs are lower than
China’s in 20 of 22 industries and lower than the EU’s
in 17 of 22 industries. Does that mean that China and the EU are
more protectionist than the United States? In the category of
applied tariffs, yes, it does. Does that means that China and/or
the EU are engaging in “protectionism,” which might
warrant a ruling from the Dispute Settlement Body of the World
Trade Organization, and possibly authorization for the United
States to retaliate? No, it doesn’t.

Tariff differentials among members of the World Trade
Organization today are the product of multilateral trade
negotiations, beginning in 1947 and spanning six decades, which
lead to gradual reductions in global trade barriers. The formulae
for tariff reductions permitted countries with smaller economies
and at earlier stages of development to reduce tariffs more slowly
and less steeply. Among the rationales for permitting asymmetric
tariff liberalization was that it was the only way to bring more
countries into the rules-based trading system. Countries at
different levels of development with different-sized economies,
different factor endowments, different political sensitivities to
trade liberalization, and different tariff practices would never
have been able to agree to identical tariff rates.

The “bound” tariff rates of the United States
(meaning the highest rates the United States can assess on imports
under its GATT/WTO obligations) are, in fact, lower than those of
the EU and China. We can argue over whether that’s fair or
whether or how much the differentials contribute to U.S. trade
deficits or how much better off U.S. consumers and consuming
industries are when their government taxes their purchases at lower
rates. But, while it is appropriate to consider tariffs
“protectionism,” the higher average tariffs in China
and the EU are not protectionist in the sense that they violate
either government’s obligations under the WTO.

It is certainly desirable to reduce all tariffs to zero, but
that’s probably not feasible multilaterally—within the
WTO—anytime soon. However, U.S. bilateral free trade
agreements with China and the EU, in which the United States asks
for zero tariffs, are possible. Whether this administration has the
interest or wherewithal to pursue that course is unclear. After
all, President Trump withdrew the United States from the
Trans-Pacific Partnership during his first week in office. Under
the TPP, 88 percent of tariffs in 12 countries would have gone to
zero immediately, with nearly all going to zero over a period of 16
years.

Ross then goes on to defend certain U.S. trade remedy
actions—duties imposed under the U.S. antidumping and
countervailing duty laws to redress “unfair”
trade—as “measures necessary to ensure a level playing
field.” Ross laments the fact that U.S. trade remedy measures
are often characterized as protectionism, when in fact—he
argues—those laws are consistent with WTO rules.

Secretary Ross is right. Although antidumping and countervailing
duty measures are forms of protectionism, their application by
member governments is not considered protectionist under WTO rules.
In fact, they are specifically authorized by the WTO, as a means to
redress injurious dumping and injurious subsidization. However,
those domestic laws and their administration must comport with
provisions in various WTO agreements. When they don’t
comport—because, perhaps, the U.S. Commerce Department has
been too aggressive in its assumptions, too partial in its
calculation methods, or too capricious in its
adjustments—governments representing the foreign exporters
can challenge the United States at the WTO and, unless the issue is
resolved in the consultations stage, the DSB will issue a
ruling.

On 38 occasions since 1995, the WTO DSB has found aspects of
U.S. trade remedy law administration to be “out of
conformity” with U.S. WTO obligations. That’s another
way of saying that the protectionism accorded U.S. industries under
the trade remedy laws is in fact protectionist by WTO standards at
least some of the time.

Secretary Ross then turns his attention to China’s and
Europe’s “formidable non-tariff trade barriers against
imports.” He alludes to onerous certification standards,
sanitary and phyto-sanitary measures (e.g., food safety
regulations), non-science based prohibitions against genetically
modified goods, local production requirements, and forced
technology transfer. He also mentions low-cost loans, energy
subsidies, and other forms of support bestowed upon China’s
and Europe’s exporters by their respective governments.

Certainly, government subsidization and behind the border rules
and regulations can have protectionist intentions or consequences,
and where there are agreed upon rules to heed, the WTO provides a
reliable forum for addressing these issues—and resolving
most. But there are a couple of important points Secretary Ross
should bear in mind about protectionism.

First, the U.S. government is not an angel; it’s part of
the problem. In the United States, there are “Buy
American” rules that restrict most government procurement
spending to U.S. suppliers, ensuring that taxpayers get the
smallest bang for their buck; heavily protected services
industries, such as transportation and shipping, that drive up the
cost of everything; apparently interminable farm subsidies; quotas
and high tariffs on imported sugar; high tariffs on basic consumer
products, such as clothing and footwear; energy export
restrictions; the market-distorting cronyism of the Export-Import
bank; trade remedies actions that violate WTO rules and strangle
downstream U.S. industries and tax consumers; regulatory
protectionism masquerading as public health and safety precautions;
rules of origin and local content requirements that limit
trade’s benefits; restrictions on foreign investment, and
more.

Second, if the Trump administration intends to ramp up
enforcement to tackle what it sees as foreign protectionism, it had
better do it by the book. Don’t act unilaterally, as judge,
jury, and executioner. Mind the rules of the WTO, which provides a
legitimate path for challenging and resolving issues, such as those
mentioned above. The minute the U.S. government goes rogue by
implementing trade restrictions without following WTO protocols,
the United States will be the violator, the protectionist. And
acting unilaterally, such as by conducting a Section 301
investigation and them imposing measures in response to Chinese
forced technology transfer policies, for example, will set a
terrible example, invite immediate Chinese retaliation, and
encourage all members to abandon their WTO commitments.

The global economy remains rife with protectionism. The worst
way to address it is by being a protectionist.

Daniel J.
Ikenson
is the director of Cato Institute’s Herbert A. Stiefel
Center for Trade Policy Studies.