The Import of Exports

When Donald Trump became president in 2017, he made a radical break with the free trade ideology that had defined US foreign economic policy since the end of World War II. At the core of this shift was a particular hostility to China, chiming with Trump’s general nativism. His sharpest instrument was a set of tariffs that eventually rose to 25 percent on most Chinese imports.

President Biden, to the dismay of foreign policy traditionalists and free trade economists, kept the Trump tariffs. He also complemented them with trillion-dollar domestic investment programs aimed at recapturing US industrial leadership. US trade law and international trade agreements permit tariffs in some circumstances to offset dubious foreign tactics such as gaining market share by selling exports below their cost of production (“dumping”). But Biden went well beyond tariffs. He created explicit subsidies to promote domestic production, including the $53 billion CHIPS and Science Act, aimed at recapturing semiconductor production, and the much larger $891 billion Inflation Reduction Act.

These measures violate the global free trade principles that American presidents since Harry Truman spent decades trying to build and spread. One of the first such Biden policies, which I wrote about in these pages, was a blueprint for a comprehensive strategy to rebuild US-based supply chains.^* The rationale was partly to counter the disruptions of the pandemic, but the decision signaled a clear embrace of the sort of national economic planning rejected by previous presidents (except during wartime) and a drastic shift from past bipartisan policy.

Free trade ideology once aligned with America’s economic and security interests. After World War II, open markets were good for domestic industry because the US had come out of the war economically preeminent. America had a huge trade surplus based on exports of a whole range of manufactured goods, as well as raw materials such as steel, aluminum, and farm products. This meant it could be generous about accepting offsetting imports. Openness to trade also helped anchor Washington’s cold war alliances, as its NATO allies earned dollars from exports that helped them rebuild after the war.

Not surprisingly, free trade became an article of ideological and diplomatic faith. With America’s economic dominance, the US government could overlook the fact that in Japan and much of Western Europe, postwar reconstruction (some of it initiated by the US-sponsored Marshall Plan) was anything but laissez-faire. Even in America the Pentagon had become a kind of closet planning ministry. Many military investments (aircraft, computers) had commercial applications, and Pentagon funding helped incubate the Internet, as well as US prominence in tech.

As a global strategy, the free trade credo became even more contradictory beginning in the 1970s. US markets were open, but others were not. Japan and South Korea paid lip service to free trade doctrine but actually relied on subsidies, quotas, cartels, and close coordination among banks, governments, and industry. These strategies, all of which violated free market norms, helped Japan and South Korea gain market share at the expense of the US in sectors ranging from steel to automobiles, machine tools, computer chips, and consumer electronics. The US government ignored the violations because Japan and South Korea were such loyal cold war allies. But by 1976 the US trade surplus had turned into a deficit that only deepened.

Before the loss of domestic industry that began in the 1970s, corporate interests didn’t entirely clash with the national interest, because large corporations provided domestic production and good union jobs. This alignment, granted, was far from perfect. But then multinational corporations began to find that profits rose if they manufactured less at home and offshored production to low-wage countries.

In the decades that followed, American business and political leaders intensified their support for what the Harvard economist Dani Rodrik has criticized as “hyperglobalization.” American tech firms became the world’s standard, even though few of their products were made in the US. The idea was that gains in service sectors like finance could offset losses in manufacturing.

The US government has promoted this ideology globally. It is codified in the US-sponsored World Trade Organization, which was created in 1995. The WTO not only committed its members for the first time to refrain from subsidizing domestic products or discriminating against imports but also provided enforcement mechanisms (which were often evaded) and promoted global deregulation of banking on grounds of freer access. This entire set of premises and policies served to displace workers, enrich capitalists, drive more production offshore, and widen America’s wealth and income gap. In time they invited the right-wing populist reaction that culminated in Trump’s election in 2016.

The assumptions of global free trade eventually crashed into the reality of China. The Chinese economic system is an improbable hybrid of communist dictatorship and dynamic state-led capitalism. Some of the country’s largest companies are state-owned and explicitly controlled by the Communist Party. Others are nominally private but depend heavily on government subsidies, cheap capital, and regulations that shelter them from foreign competitors, as well as on the extensive theft of intellectual property from multinational corporations with operations in China (such as GE). China also benefits from the transfer of patented technologies via facilities where Chinese nationals work on production for US-based tech companies (such as Micron).

The overall model has worked superbly—for China—but it has its own contradictions. China has gained global market share in part by keeping labor costs well below gains in productivity. In 2022 household consumption accounted for only 37 percent of China’s GDP, compared with 68 percent in the United States. But because China is an effective dictatorship, any labor restiveness is contained or else brutally repressed. China’s private capitalists are indulged and nurtured only as long as they are totally loyal to the regime.

Until Trump, Washington was wishfully indulgent of China. In 2000 the Clinton administration convinced itself that letting China into the WTO, with no enforceable quid pro quos, would make China less statist and more democratic, while narrowing the country’s trade surplus. That view proved to be illusory. China became more of a dictatorship, it continued to practice its successful recipe of state-led development at US expense, and its trade surplus with America grew from just under $86 billion in 2001, when China formally joined the WTO, to $382 billion in 2022. China also became far more of a force across the globe.

As a candidate in 2016, Trump was intuitively nationalist but had little knowledge of the details of trade. To turn his nativist bluster into policy, he hired Robert Lighthizer as his chief trade official. This was one of Trump’s rare smart appointments. Lighthizer, who had worked as a senior trade negotiator for Ronald Reagan, considered himself a Republican. However, his critique of hyperglobalism for its destruction of the US industrial economy and the livelihoods of American workers paralleled that of many Democrats. Under Reagan he had been the leading trade official challenging Japan’s protectionism.

After leaving government in 1985 Lighthizer spent his career as a trade lawyer, representing American companies that had been harmed by the mercantilist policies of other countries—at first Japan and then, increasingly, China. Many of his clients were domestic steel companies damaged by heavily subsidized Chinese exports. But by the time a case was finally resolved by the WTO or by US government action, and retaliatory tariffs (known as countervailing duties) had been authorized, the injured American competitor would sometimes be out of business. The WTO dispute resolution process often favored China, as a developing nation entitled to special treatment. “It became increasingly obvious,” Lighthizer writes in No Trade Is Free,

that WTO decisions too often were not founded on the trade agreement text and went against our national laws. Problems of unfair trade would not be solved at the WTO. Indeed, it was making matters worse.

Having seen up close how trade actually worked, Lighthizer had precise knowledge of just how far practice departed from theory. In a sense, he had been waiting forty years for a president who would rupture the bipartisan self-deception about trade. Had Trump not appointed him US trade representative, Lighthizer might have been remembered as a prescient voice in the wilderness, but his career would have been a footnote. Instead he found himself in a position to upend the entire hyperglobalist trading system.

Lighthizer knew that it would be futile to proceed case by case against China’s intricate predatory trading practices, so he promoted the idea of levying one grand tariff against Chinese exports generally. He suggested 25 percent as an offset to the value of China’s subsidies and other illegal trade practices. This unilateral tariff violated the rules of the WTO and appalled free traders. But Lighthizer went a step further. He also deployed a tactic for Trump to put the WTO out of business as a dispute-settlement agency.

The WTO has a kind of supreme court known as the Appellate Body. New appointees require US approval, and by late 2019 the body was shy of a quorum. Trump, on Lighthizer’s advice, refused to approve any new judges. No Trade Is Free makes clear why. Lighthizer demonstrates that the WTO Appellate Body was close to a kangaroo court: it repeatedly violated its own rules, ignoring the ninety-day limit for appeals, appointing panels whose members had conflicts of interest, and using its power to go well beyond the review of evidence to make new law.

Behind the image of a crudely nativist Trump was the strategic brilliance of Lighthizer. No Trade Is Free combines memoir with a critique of how the trading system actually works. The book is the best-informed analysis I’ve read of how US administrations, overly influenced by corporate executives and bankers, backed themselves into a corner, supporting a brand of globalization harmful to most Americans. It also provides a lucid description of how Chinese mercantilism works in practice and of the possibilities for US–China relations going forward. The details of trade negotiation can be arcane and tedious, but Lighthizer brings to life stories about fighting with the globalists in Trump’s cabinet such as the Wall Street veteran and treasury secretary Steven Mnuchin, bargaining over possible terms of reengagement with China (which came to naught), and navigating the pitfalls of the WTO system.

As the Washington Post columnist Josh Rogin recounts in Chaos Under Heaven, Trump’s China policy in his first term was an ongoing three-way struggle. Besides Lighthizer, the China hawks included Matt Pottinger, the well-informed China specialist on Trump’s National Security Council, and even more radical economic nationalists such as Peter Navarro, who headed Trump’s short-lived National Trade Council. These were offset by the Wall Street wing of the administration represented by Mnuchin and Gary Cohn, head of Trump’s National Economic Council, both veterans of Goldman Sachs.

This tug-of-war was further complicated by Trump’s own penchant for making corrupt deals that could benefit him or his family. As Rogin explains, Trump’s son-in-law Jared Kushner often sided with Mnuchin and Cohn because of side deals that Xi Jinping offered the Trump family. At Trump’s first summit meeting with Xi at Mar-a-Lago in April 2017, the threat of tariffs was put off, and Trump agreed not to formally brand China as a currency manipulator, breaking a campaign promise. “While Xi was at the resort,” Rogin writes, “the Chinese government approved three provisional trademarks for Ivanka’s company, allowing her to sell jewelry, hand bags, and spa services in China.”

After the April summit, which ended with the announcement of high-level “dialogues” to be held on economic and trade issues, military security, and cybersecurity, Trump met with his senior staff for a postmortem. Navarro railed at Mnuchin and Cohn, warning “that everything the Chinese side had put forth over the past two days had been lies,” adding, “You’ve got to be fucking kidding me, what are we, stupid?” Though the Wall Street internationalists won the early rounds, it became clear that China’s fundamental economic strategy wasn’t changing, and Lighthizer, Pottinger, and Navarro soon gained the upper hand. A comprehensive report released by Lighthizer in March 2018 documented China’s intellectual property theft and forced technology transfer in a wide range of industries, from aviation to information technology. The report called for drastic countermeasures, including tougher export controls and bans on Chinese investment in US companies. For Trump’s entire term, China policy would zigzag between bluster and tariffs and friendly talk of some kind of grand bargain, lubricated by favors to Trump’s extended family. This had the unintended benefit of keeping Xi off balance, but it was the by-product of incoherence and infighting, not a deliberate strategy.

Biden, by contrast, worked to restrain China’s predatory economic tactics with measures such as a ban on exports of sensitive technologies, while trying to avert military confrontations over Taiwan and in the South China Sea and seeking to fashion a common strategy with the Europeans. His was a far more nuanced policy. But while Biden succeeded in strengthening NATO to contain Russia, a united front relative to China is harder to achieve. Several European nations, most notably Germany, have instead tightened their economic links with Beijing.

China’s global development finance totaled $498 billion between 2008 and 2021, almost equaling that of the Western-sponsored World Bank. Its Belt and Road Initiative, launched in 2013, sponsors multitrillion-dollar infrastructure investments across some sixty countries. These include rail lines from Nairobi to Mombasa in Kenya and from Budapest to Belgrade in Europe, and routes linking cities in Thailand, Singapore, Laos, Cambodia, Myanmar, and Vietnam with the rail hub of Kunming in China. Chinese interests now own or partly own port facilities in Piraeus, Haifa, Antwerp, Bilbao, and, fittingly, Dunkirk.

China has bought large shares of national electrical systems, such as Portugal’s, as well as some European airports. In many of these deals, especially in the Global South, China provides the capital, controls the development, and encumbers the project with extensive debt. All of this gives China commercial and diplomatic influence, as well as extensive economic intelligence. Countries that accept this bounty must think twice about crossing Beijing.

In addition, China has become a major diplomatic presence in international disputes, including Russia’s war with Ukraine and Israel’s unending conflagration with Palestine. It has become more aggressive with regard to Taiwan, which it claims as a province of China. This puts the US in the awkward position of simultaneously pursuing economic and military containment of China while seeking Beijing’s help in constraining Russia and Iran. Trump plans to reverse that set of priorities, pivoting away from Europe and looking for an early settlement of Russia’s war with Ukraine, in order to focus on the China threat. Even if the US does succeed in blocking some of China’s predatory trade practices, China’s global presence will continue to grow. So will the policy challenges to the US.

Biden’s China stance was aimed at containing both the country’s global economic influence and its increasing military power. His policy complemented new industrial policies aimed at restoring US manufacturing strength, supply chains, and good domestic jobs.

Not long ago such policies were broadly condemned as ignorant “protectionist” economics and dangerous politics, especially when they came packaged with Trump’s brand of racist nativism. But a more benign version of this approach is now getting a respectful hearing in mainstream venues. Though “economic nationalism” has long been used as a pejorative, well-informed commentators are increasingly acknowledging the merits of pulling back from globalism and rebuilding the domestic economy.

Rana Foroohar, a columnist for the Financial Times, makes the case for doing so in Homecoming, a detailed tour of the pitfalls of excessive globalization and the alternatives. “Huge areas in many nations, rich and poor,” she writes, “have been hollowed out economically, or environmentally degraded, or left behind politically by globalization.” While advocates tout freer global trade based on general economic theorems, critics such as Foroohar explore the real-world results.

“The truth is that free trade doesn’t work as well when there is no shared political economic value system between partners,” she finds. She quotes a Chinese general remarking on Americans’ naiveté about China’s economic nationalism, who tells her: “In China, there is no line between the company and the country.” In the US, by contrast, the first duty of a corporation is said to be to its shareholders. The idea of a patriotic American corporation is a contradiction in terms. It takes policies such as Biden’s CHIPS and Science Act to lure US companies into looking homeward.

One of Foroohar’s persuasive themes is the way globalization promotes excessive concentration at the expense of resilience—for instance, in the industry that she terms Big Food. “Three companies now control 70 percent of agrochemicals,” she writes. “Ninety percent of global grain is controlled by four multinational companies.” As agriculture has become large-scale and global, it has produced cheaper and more plentiful food, but

at great cost to everything, from our health to our food security to working conditions for people in agriculture—not to mention the treatment of animals and, of course, the disastrous consequences of it all for our environment.

Foroohar is no small-is-beautiful romantic; she meticulously reports the plausible road not taken. A wholly different course for agriculture, more localized and more resilient, could be efficient in different ways but is precluded by the sheer political power of Big Food and the symbiosis of hyperconcentration and hyperglobalism.

What’s true of food is also true of finance: the globalized character of the banking system made it much more difficult to reregulate the financial sector in the aftermath of the self-inflicted collapse of 2008. “As Wall Street gained more power, capital became freer, and the ethos of share maximization took hold, companies became far more global and their fortunes became disconnected from those of the countries in which they were based,” Foroohar writes. The attempt to control banking after 2008 foundered on the skill with which transnational banks played one nation against another. If Washington would not approve Goldman Sachs’s latest high-risk opaque security, London would.

Economists who praised the efficiency of cheap labor and low inventories, which became the norm in many globalized industries, had no metric for factoring in the system’s fragility. This research could easily have been done by simulating a crisis and modeling the impact on short supplies and higher prices. But fragility is one more cost of globalization left out of the standard models. Foroohar credits the prophetic work of Barry Lynn, whose 2005 book End of the Line pointed out that the combination of just-in-time production and far-flung global supply chains was a disaster waiting to happen, pending a random disruption (which turned out to be Covid-19).

Homecoming makes a strong case for a return to nation-based economics. Lighthizer goes further:

We need to agree upon the list of socially necessary policies and then set minimum standards that all products, whether domestically produced or imported, must meet…. Environment and labor are areas where this would be possible, but so are worker safety, food safety, and the like. Imports that aren’t produced meeting those minimum standards should have a duty applied to their import price that offsets the unfair and artificial advantage that they currently have.

Both Foroohar and Lighthizer find it easier to recommend unilateral US actions than to spell out the details of a new global trade regime or a diplomatic strategy for bringing one about. Any set of universal rules would need to be negotiated with the EU, other allies such as Japan, and the nations of the Global South as well as China. Today the US has far less influence than it did in 1944, when it was the prime sponsor of the postwar global economic system (or even as late as the 1990s, when the WTO was formed).

The least bad option may be for the WTO to wither into irrelevance and for each nation to regain more power to manage its own economy. This reversion is already becoming the de facto reality. Take the never-ending conflict between the US and the EU over which is the worse offender when it comes to subsidizing Boeing and Airbus, respectively, in violation of free trade norms. Ultimately it doesn’t matter: the head-to-head competition is good for the airlines and their customers. Both companies developed excellent products until Boeing tried to save costs by cutting corners on safety and quality. The existence of Airbus will help compel Boeing, which has been allowed to take over much of its domestic competition, to clean up its act.

In some respects, greater acceptance of national industrial policies takes us back to the early postwar era. At the 1944 Bretton Woods Conference, where the structure of the postwar economy was devised, both President Franklin Roosevelt and a conference leader, John Maynard Keynes, sought a global system that would complement and undergird national systems of managed capitalism like the New Deal. The Bretton Woods regime, with its fixed exchange rates and controls against financial speculation, deliberately allowed plenty of room for public capital, public planning, and regulation of the excesses of private finance. But as the trading system mutated into one that promotes universal laissez faire, global and domestic imperatives came to be increasingly at odds.

We could do worse than a global economic system like the one that anchored three decades of strong economic growth beginning in the late 1940s. That system also coexisted with the containment of one large renegade power, Soviet Russia. Containment of China, however, will be far harder. Unlike the USSR, which had limited economic links with the West, the Chinese economy by design has deep and intimate connections with Western corporations and banks as supplier, producer, and consumer. China, unlike Russia, has been deft at splitting up Western allies. It has also provided increasingly large benefits to third-world nations.

The economic historian Charles Kindleberger wrote, in his classic The World in Depression, that an anarchic global economic system requires the stabilizing influence of a dominant economic power, known as a hegemon. In Kindleberger’s account, Britain played that role for much of the nineteenth century, sponsoring a gold standard with fixed exchange rates, opening its own economy to the world’s exports, and supplying capital to the global economy.

After World War II the United States played much the same role. But the interwar economy—when rampant speculation led to global depression—was chaotic, in part because Britain, weakened by war, could no longer serve as hegemon, while an isolationist America was not ready to. One of the ironies of this story is that in both cases the hegemonic nation stabilized the global system at the expense of its own economy. In the late nineteenth century globalist Britain was surpassed by nationalist Germany, just as globalist America in the late twentieth century lost industry after industry to a rising nationalist China.

The United States today is the world’s largest economy, but it is far from hegemonic. The dollar is the dominant global currency only by default, US trade deficits are enormous, and China is aiming to surpass the US gross domestic product by about 2035. Not surprisingly, both Republicans and Democrats now expect the US to look more to its own self-interest. Biden tried to achieve that outcome while maintaining Washington’s position as keeper of an armed peace and tribune of a dwindling realm of liberal democracy. Trump will be more isolationist, belligerent, and autocratic.

It has been widely reported that Lighthizer will be named trade policy chief at the White House. That would put an experienced expert in an important advisory position. He has also been mentioned as a possible candidate for treasury secretary, which would allow him control over the trade portfolio as well. In Trump’s first term Lighthizer was often able to work with Democrats who shared his concerns about China’s mercantilist rise and the loss of US manufacturing. But several other Trump appointees, who span a right-wing spectrum that runs from poorly informed nativists to Wall Street globalists, suggest that trade policy in Trump’s second administration is likely to display the same kind of internal conflicts as his first. Xi will again be looking for ways to undermine US anti-China policy by personally enriching Trump, his family, and his close advisers, such as Elon Musk, with their own financial interests in China. Lighthizer, who has supported higher tariffs on China, will be a source of restraint on Trump’s more dubious ideas for higher tariffs across the board.

In the coming era, whether Trump’s successor is Republican or Democrat, the form of globalism that dominated the late century will be defunct. The international economy will be a far messier affair than the sublime set of universal free trade rules that US presidents once sought. It remains to be seen how the new course will serve the national and global interests.

—November 20, 2024