Why Lighthizer's trade claims should matter

Author: Zhang Chunlin; Source: Comparison

Editor's note: In 2018, the Trump administration not only launched a trade war against China, but also changed the process of globalization and free trade to a certain extent. This article reviews the works of Lighthizer, the trade representative during the Trump administration, and outlines Lighthizer and his ideas and policy propositions on free trade, which may help us to have a more comprehensive and in-depth understanding of the United States' future policy stance on globalization and trade.

Robert Lighthizer, who served as the United States Trade Representative in the Trump administration from 2017 to 2020, published a memoir in July 2023, entitled No Trade Is Free: Changing Course, Taking on China, and Helping America's Workers. Harper Collins. New York. This book aims to review his work in the field of international trade during his four years in office and to explain his ideas and policy propositions. The book is divided into five parts and eighteen chapters. The three chapters in the first part are of an overview nature, discussing several basic issues, including the history of US trade policy and why the establishment and operation of the World Trade Organization (WTO) are not in the interests of the United States. The seven chapters in the second part are the focus of the book, with China as the theme. First, it discusses why China is a strategic rival and threat to the United States, then introduces the detailed process of his manipulation of the trade war with China and the negotiation with China to reach the first phase of the Sino-US economic and trade agreement, and finally puts forward policy recommendations on how to deal with China. The three chapters in the third part are based on North American trade relations, introducing the process of his negotiations with Mexico and Canada and the signing of the United States-Mexico-Canada Agreement (USMCA) in 2018. The fourth part talks about trade relations with other countries in the world, including his process of dealing with trade relations with Germany, France, Ireland, Japan, India, South Korea, Vietnam and other countries, as well as several common problems in the trade relations between the United States and various countries. The fifth part has only one chapter, which comprehensively puts forward his propositions on the future trade policy of the United States.

The ideas and policy propositions expounded by Lighthizer in this book deserve attention. First of all, they are also largely a consensus between him and Trump. Lighthizer and Trump worked together for four years and cooperated very well. In the book, Lighthizer was respectful to his former boss and did not hesitate to praise him. He specifically mentioned that he could get strong support from Trump every time he encountered something, and there was no unpleasant meeting between the two. There are rumors that if Trump wins the 2024 election, he is likely to use Lighthizer again. Of course, many of Trump's followers are also his supporters, such as Peter Navarro, who was Trump's aide in the White House at the time and later spent four months in prison for being involved in the Capitol Hill riots and defying Congress in subsequent investigations. He is a staunch supporter. Secondly, these ideas and policy propositions are also supported in the Democratic Party. The Biden administration's trade representative, Katherine Tai, has largely retained Lighthizer's legacy, and Lighthizer also praised her in the book. Because the agreements reached in trade negotiations often need to be passed by both the House and the Senate, Lighthizer also has extensive connections among Democratic lawmakers. According to the book, Trump's mortal enemy, former Speaker of the House of Representatives Nancy Pelosi, is Lighthizer's bosom friend. As early as the late 1990s, the two held the same view on opposing China's accession to the WTO. When Lighthizer was holding secret negotiations with Mexico for the US-Mexico-Canada Agreement, although Pelosi was busy presiding over the impeachment of Trump, she spared no effort to mobilize people to provide strong support to Lighthizer (Chapter 14). Lighthizer also maintained a good cooperative relationship with the union leaders in the Democratic camp. Strictly speaking, in terms of trade policy, Lighthizer's real opponent is not that party, but what he calls "free traders" and "globalists", that is, advocates of free trade and globalization, especially most economists, the financial community represented by Wall Street, multinational corporations, and companies like Walmart whose profits are highly dependent on imports.

"America First"

Lighthizer's philosophy on trade policy is to put "America First" as the highest purpose. This is of course first of all a nationalist banner that Trump holds high in politics, which means that the interests of the United States take precedence over the interests of other countries. The two of them are like-minded, and their common "patriotic" enthusiasm is an important bond. According to the book, as early as September 2, 1987, Trump left a deep impression on Lighthizer. On that day, the 40-year-old lawyer Lighthizer accidentally saw an open letter to the American people that Trump spent nearly $100,000 to publish in the New York Times and other major newspapers. In the letter, Trump claimed that the whole world was laughing at American politicians because they allowed countries like Japan to enjoy the security protection of the United States on the one hand and take advantage of the United States on the other. The so-called taking advantage of the United States refers to the huge trade deficit that the United States has with Japan (page 10). Lighthizer found that Trump's view on the trade deficit coincided with his.

However, the meaning of "America First" is actually far more than just a simple choice between the interests of the United States and the interests of other countries. An example mentioned in Lighthizer's book helps to illustrate the problem (page 303). He said that the US auto industry lost 17% of its jobs from 1994 to 2018, and real wages fell by roughly the same amount. However, one market segment is an exception, that is, "pickup trucks." He said that most of the profits of American auto companies come from American-made pickup trucks, and this market segment is an exception because, for historical reasons, the tariff on pickup trucks remains at a high level of 25%. Otherwise, this market would have been won by Korean companies long ago. The new trade agreement he successfully negotiated with South Korea in 2019 can ensure that this tariff rate will not change before 2038 (page 288).

In doing so, he certainly insisted on "America First" between South Korea and the United States and protected American jobs, but it was more than that. He also made a choice between the interests of American pickup truck manufacturers and consumers. Because American consumers could have used Korean pickup trucks at a lower cost. Through the 25% tariff, he actually imposed an invisible tax on American consumers and transferred it to the pickup truck manufacturers, saving their jobs. Therefore, "America First" means not only that the United States takes precedence over foreign countries, but also that American producers take precedence over consumers. In his book, he also clearly opposes giving consumers a higher priority (page 311).

Not only that, he does not give "priority" to all American producers or American workers, but only to those workers who cannot withstand the impact of international competition. Generally speaking, these are mainly blue-collar workers who have not received higher education and work in the manufacturing industry and some farmers. He also made this very clear (pages 24-25).

Such challenges are certainly not unique to the United States. In any open economy, there will be situations where an industry or enterprise is difficult to maintain in the face of international market competition and has to make adjustments, and such adjustments will inevitably lead to job losses. Therefore, not only the United States, but also the government of any open economy will face the same dilemma: should we protect such industries and enterprises? Of course, they can also shout "my country first" and protect such industries and enterprises. Doing so may save jobs and give themselves the halo of "patriotism" in politics. But the economic loss that must be borne is protecting backwardness and sacrificing efficiency. For example, in the above example, if pickup trucks were imported from South Korea, the cost of pickup trucks in the entire US economy could have been lower. Although Lighthizer is not an economist, he understands this principle very well. But he still clearly stated that a balance must be maintained between efficiency and jobs, just like finding a balance between efficiency and environmental protection (page 23). In other words, in order to protect jobs, efficiency can be sacrificed at all costs. In this sense, another meaning of "America first" is to sacrifice American efficiency to protect the interests of some American workers.

Trade deficit

So, specifically when it comes to trade policy, how to achieve "America first"? The basis of Lighthizer's ideas and policy propositions is his eccentric understanding of the trade deficit. Originally, import and export trade is just like all other trades, which is "one hand for money and one hand for goods". As long as each transaction is fair and reasonable, once the money and goods are settled, the buyer and seller will no longer owe each other anything. However, according to Lighthizer's concept, things are not like this. If a foreign businessman does business with an American businessman, and in a year the foreign businessman buys $10 billion worth of goods from the American businessman, and the American businessman buys $20 billion worth of goods from the foreign businessman, he believes that the United States has suffered a great loss: $10 billion worth of wealth has been transferred to that foreign country. In other words, a trade deficit is equal to "wealth transfer" (pages 205 and 259), or giving money to others for free. This is not enough, because the foreign country received $20 billion in banknotes and only bought $10 billion worth of goods from the Americans, leaving $10 billion in banknotes in its hands. So the country's businessmen will use these banknotes to invest in the United States. For example, give $5 billion of them to American companies in exchange for shares of these companies and participate in their dividends, and give the other $5 billion to the US Treasury in exchange for its bonds and earn its interest. Lighthizer believes that in this way, the United States has once again let foreigners take advantage. Because Americans invest less in foreign countries and foreigners invest more in the United States, the United States has negative net investment, and he believes that only countries with the largest net investment are the richest countries (page 28). In short, although there are two columns of "income" and "expenditure" in his account book, he only sees expenditure and no income. For example, he only sees that American businessmen paid $20 billion in banknotes to other countries, but forgets that they received $20 billion worth of goods from other countries; he only sees that investors from other countries have obtained shares and dividend rights of American companies, but ignores the funds that American companies have received from investors from other countries.

However, it is this understanding of the trade deficit that constitutes the cornerstone of the trade policy advocated by Lighthizer. His view on trade, in his own words, is: "Trade is good. More trade is better. Fair trade is fundamental. But trade balance is necessary" (page 319). The so-called trade balance is to eliminate the deficit. For him, the implementation of "America First" in terms of trade policy first requires eliminating the huge trade deficit that the United States has accumulated over the years.

As a superpower, why does the United States have a huge trade deficit that has lasted for many years? Lighthizer analyzed many reasons, including that the value of the US dollar cannot rise and fall with the trade balance like other currencies, most of the United States' trading partners implement value-added tax, tax imports and give export tax rebates, while the United States mainly implements income tax and has no value-added tax, etc. However, he also believes that the key is that the United States' trading partners are all practicing unfair trade with the United States. Is it possible that there is a situation where the United States' trading partners and the United States are completely fair trade, but as a result, American workers are still not competitive and cannot keep their jobs? If this happens, should the US trade policy insist on fair trade and let American workers lose their jobs, or should it abandon fair trade in order to protect the interests of American workers? For Lighthizer, this paradox should not exist because his book does not mention this situation. He accused all countries that have large trade surpluses with the United States of having "mercantilist" trade policies that are unfair to the United States, with China at the forefront.

He quoted the Cambridge Dictionary and defined mercantilism as the accumulation of national wealth through government intervention, the establishment of trade barriers, the encouragement of exports (page 113). Mercantilism is a label often used by the United States to attack China in the WTO and other occasions. But in this book, not only China, but also other countries that maintain trade surpluses with the United States are labeled with this label, such as Germany (page 263), Japan (page 273), and India (page 281). Of course, according to Lighthizer, the reason why these countries can take advantage of the United States is that the successive US governments before Trump entered the White House were weak and incompetent and failed to effectively protect the interests of American workers.

Market Access

So, specifically, how to eliminate the trade deficit? He lists three possible solutions (pp. 317-318). The first one is proposed by Buffett, and its essence can be summarized in Chinese terms as "exports in accordance with imports", that is, to issue a certain import license to importers, and any import of foreign goods of a certain value must be backed by the export of American goods of an equivalent value. This will of course ensure that imports will never exceed exports. The second solution targets the return of US dollars to the United States formed by foreign trade surpluses. Those who support this solution include senators from both parties who proposed the "Maintaining the Competitiveness of the Dollar for Competition and Prosperity Act" in 2019. Suppose a country exports $20 billion to the United States and imports $10 billion, it will have a surplus of $10 billion. Since these dollars are not used to import from the United States, they can only buy American assets. The key to the second option is that when the $10 billion returns to the United States to invest in American assets, a certain percentage of market access fees will be levied on it. For example, if $10 billion is used to purchase U.S. Treasury bonds, in addition to general Treasury bond transactions, an additional access fee will be levied. This will reduce the value of the dollar, increase the cost of the country to maintain a trade surplus with the United States, and prompt it to either increase imports from the United States or reduce exports to the United States. The third option is very simple, which is to impose taxes on imports until a trade balance is achieved. Lighthizer said that he agrees with all three options, but he believes that the third option is easier to implement, the effect is easier to predict, and it can also increase fiscal revenue, so he prefers the third option.

However, no matter which option is adopted, it is wishful thinking on the part of the United States. What if the trading partners do not accept it? Lighthizer's idea is very clear, that is, relying on the huge market of the United States, threatening market access to force trading partners to make concessions. The United States has more bargaining chips when its major trading partners maintain a surplus with the United States. This is what Trump meant when he said that "trade wars are easy to win."

In the trade negotiations that Lighthizer presided over, which he introduced in his book, the basic means for him to force the other party to make concessions was to threaten to increase tariffs or to threaten to cancel the market access that the other party already enjoyed. For example, in August 2017, the first round of negotiations between the US delegation led by his deputy and the South Korean delegation on the Korea Free Trade Agreement did not go smoothly. The South Korean side took a tough attitude, and the US delegation was so angry that it almost left the venue in protest. However, in February 2018, Trump imposed tariffs on steel and aluminum products exported to the United States. Because South Korea exports a large amount of steel to the United States, it was under great pressure and had to lower its posture and return to the negotiating table. In the subsequent negotiations, South Korea made a series of concessions that helped the United States reduce its trade deficit with South Korea (pp. 287-288).

Using market access as a threat to force trading partners to make concessions is of course based on the United States' economic advantages. Lighthizer does not shy away from this. He said, "We need trade, but not as much as other countries. Our economy is huge and we can produce most of what we need" (page 319). However, this practice is a unilateral act that ignores the rules. Perhaps because of this, Lighthizer dislikes the WTO very much and believes that the creation and operation of the WTO are not in the interests of the United States (Chapter 4). One of the important reasons is that the WTO has a dispute settlement mechanism. If this mechanism makes a ruling on a trade dispute, even if it is not in the United States' favor, the United States must obey and implement it. In his book, he listed a series of examples in which the United States was forced to amend laws and change policies to comply with WTO rulings. Simply put, with WTO rules in place, the United States cannot take unilateral actions at will. One of Lighthizer's major "political achievements" is that with Trump's firm support, he took measures to paralyze the WTO's appellate body. In some of the trade agreements he negotiated, he also firmly opposed any third-party expert group or other mechanism to adjudicate disputes. The mechanism he likes is that when a dispute occurs and the two sides cannot reach a consensus through consultation, each side can take further unilateral actions; if one side believes that the other side's actions are well-intentioned, it is not allowed to take retaliatory actions; if it believes that the other side's actions are out of bad faith, it can withdraw from the agreement.

"Strategic decoupling"

To achieve trade balance, of course, the first step is to achieve trade balance with China, because China accounts for the largest share of the US trade deficit. However, for Lighthizer, China is not only a trading partner that takes advantage of the United States, but also the United States' "biggest geopolitical threat" and "deadly opponent" (lethal adversary, page 205). Although the European Union, Japan, and South Korea also take advantage of the United States in trade, they are friends in geopolitics. Therefore, trade policy towards China is not just a matter of achieving trade balance. Lighthizer believes that the core of trade policy towards China should be "strategic decoupling" (page 205). The first meaning of strategic decoupling is of course to achieve trade balance, because the United States has "transferred" $6 trillion of "wealth" to China, its rival, through the deficit in goods trade.

On the basis that the Trump administration has already imposed tariffs on imports from China, what other ways can be used to achieve trade balance? He proposed two further measures. The first is to revoke China's most-favored-nation treatment in the United States, that is, to stop "normal trade relations" with China. In the 1990s, China did not enjoy most-favored-nation treatment in the United States, and China's trade status - including the tariffs and other treatments enjoyed by Chinese exports in the United States - was debated and reviewed by the US Congress every year. It was not until October 10, 2000 that Clinton signed the "US-China Relations Act of 2000" to grant China permanent normal trade relations (PNTR), that is, most-favored-nation treatment. Lighthizer's intention is to return to the status before this bill, review China's trade status once a year, and thereby control China's trade balance with the United States. Before Lighthizer's book was published, in January 2023, Arkansas Senator Tom Cotton and several other senators had jointly submitted a bill, the main purpose of which was to revoke China's PNTR. This bill is still under debate. However, Lighthizer believes that the revocation of PNTR alone cannot achieve trade balance, and a second measure is needed, which is to impose tariffs on all imports from China, which has now entered Trump's campaign platform.

But balanced trade is only the first of the eight measures proposed by Lighthizer for strategic decoupling. The other seven are: making it easier for American companies to take action against China's unfair trade practices; reducing interdependence, including reducing imports of medicines and raw materials from China; reducing mutual investment between the two countries; implementing strong export controls; stopping technological interdependence, including stopping all cooperation in security and dual-use technologies; adhering to the principle of full reciprocity on market access issues; and legislating to respond to China's attempts to influence American politics and society.

"Fair Trade"

In the last chapter of the book, Lighthizer puts forward a policy agenda for the future. He first accused American leaders of pursuing trade policies that did not serve the interests of the American people over the past few decades. He believes that a different trade policy must now be implemented, "in which the goal of every decision must be to help the American working people. Economic efficiency, low prices, and corporate profits are important goals, but they should be secondary to improving the lives and opportunities of ordinary working people in this country" (page 311). He further pointed out that after the Biden administration took over, it continued the policy direction he and Trump had set in terms of boycotting the WTO, maintaining tariffs on China under Section 301, and starting to implement industrial policies. So the general direction of US trade policy has changed. If we continue to move forward in this general direction, the first priority is of course to deal with China and implement strategic decoupling. On this basis, he proposed five other specific matters.

First, we need to demand fair trade in the domestic market, and make full use of legal means such as anti-dumping, anti-subsidy, and Section 301 to require trading partners to give equal treatment. Secondly, we need to demand fair treatment in the export market. He specifically pointed out that the United States has the largest market in the world. No country can enjoy market access to the United States on the one hand, and not give the United States true most-favored-nation treatment on the other hand. If this situation does not change, the United States must be prepared to take unilateral actions and refuse to grant the other party market access. The United States must rely on this policy and the traditional principle of reciprocity to protect its own rights and interests. Third, the United States needs to significantly revise its import laws and tighten the standards for environmental protection, labor rights protection, food safety, etc. in imports. Products that are cheaper than domestic products in the United States because of lowering standards in these areas cannot be allowed to enter the United States.

All of the above fall into the category of "fair trade" he mentioned. On this basis, he further proposed two other items. The fourth item is to improve the subsidy policy for key industries. On the one hand, he accused other countries of mercantilism, and on the other hand, he so clearly advocated that the United States should implement industrial subsidies. How to establish its rationality? The basic logic is still "America First": "Generally speaking, industrial subsidies are not a good thing. Subsidies exacerbate inefficiencies in the market, and because the political considerations behind subsidies are not always in the best interests of the people, they often lead to misallocation of resources. However, in some areas, we cannot compete without subsidies. There are some economic competitions that the United States cannot afford to lose." He gave an example, saying that in order to manufacture F-35 fighter jets, the United States must import chips. He believes that this is not acceptable. The United States must manufacture them itself, and this cannot be done without government support. (Pages 316-317). In addition, the fifth item is to balance trade by means of tariffs, not only for China, but also for other countries that have large trade surpluses with the United States. Trump's current campaign platform also includes tariffs on all imports.

So, for Lighthizer, "fair trade" is actually just a means, and "America First" is the goal. Problems that can be solved by fair trade are solved under the banner of fair trade; those that cannot be solved are directly solved by anti-fair trade means, such as industrial subsidies and unilateral tariffs.

A few comments

The trade policy direction advocated by Lighthizer is, of course, an anti-free trade and anti-globalization direction. He said that no trade is free, intending to advocate an unfree trade. However, if Trump wins the 2024 election, this is likely to be the policy direction of the United States for the next four years. Even if Harris wins, it is not clear whether the trade policy will continue the trade policy established in the Lighthizer era like the Biden administration. However, there are also optimistic opinions. At a forum jointly organized by the WTO and the Peterson Institute for International Economics in the United States on September 10, 2024, Adam Posen, director of the Peterson Institute, said that the United States will return to the world trend of free trade and globalization in a few years. In the United States, the Peterson Institute is a major town where what Lighthizer calls "free trade factions" and "elites" gather. Posen did not explain the basis for his optimistic prediction. However, one thing is certain: although the set of ideas advocated by Lighthizer seems to be extremely "patriotic" on the surface and full of humanistic care for the grassroots "working people", it is in sharp contrast to the "elites" and high-sounding economists on the East and West Coasts. In fact, it is "harming others and not benefiting oneself" and it is difficult to last long.

The loudest slogan shouted by Lighthizer and Trump is to protect the interests of the "working people" in the United States, that is, to protect the jobs of American workers threatened by free trade and globalization, including workers employed in manufacturing and some farmers. Geographically speaking, these jobs are concentrated in the Midwest (heartland) of the United States rather than the East and West Coasts. So, during their tenure, they launched a trade war against China, raised tariffs on imports from China, and later maintained them without lowering them. Did these trade protectionist measures really protect jobs in these areas?

In January 2024, David Autor, a famous economist at the Massachusetts Institute of Technology, and three collaborators from the World Bank, the University of Zurich, and Harvard University jointly published a working paper①, announcing one of their research results. After analyzing the employment data of the United States, they found that, by the time they conducted their research, the tariffs imposed by the Trump administration on foreign imports during the trade war between 2018 and 2019 had neither positive nor negative effects on employment in protected industries in the Midwest; retaliatory tariffs from foreign countries had a significant negative effect on agricultural employment, and the compensatory measures taken by the United States could not offset these negative effects.

Not only that, American consumers and other parts of the American "working people" have also paid a heavy price for the trade war. American economists and policy researchers have also done a lot of research and estimates on this②. For example, according to a study by the Congressional Budget Office③, the total loss of US output and the increase in consumer prices caused by Trump's tariffs from January 2018 to January 2020 amounted to an average of $1,277 per household in 2020. A study completed by Tom Lee and Jacqueline Varas in 2022④ found that the total tax cost to the United States caused by the Trump administration's tariffs on steel and aluminum products imported from the United States under Section 232 and tariffs on imports from China under Section 301 was $51.1 billion. A study by Mary Amiti et al⑤ found that the total welfare loss of Americans was 3%.

These research results certainly do not mean that the suffering of ordinary workers and farmers in the Midwest of the United States who have fallen into difficulties due to technological progress and the impact of globalization is not worthy of attention; nor do they mean that the policies of free trade and globalization do not need to be adjusted. It has long been a consensus around the world that free trade and globalization must be more inclusive and more equal than in the past. The "World Trade Report⑥" released by the WTO in September 2024 is based on this theme. However, as the report emphasizes, although achieving such a goal is not easy, trade protectionism is not an option (page 13).

Notes

⑥https://www.wto.org/english/res_e/booksp_e/wtr24_e/wtr24_e.pdf。

Of course, for Lighthizer, trade protectionism is not completely without winners: David Autor and others also found that residents in the Midwest, which were affected by import tariffs, did become more likely to vote for Trump and Republican lawmakers in the 2020 election after the trade war.

Reading Lighthizer's book, a very strong feeling is that "America" ​​is not a monolithic entity. In many ways, the United States is a highly divided country. Although hostility towards China seems to be a consensus today, it is only a very shallow consensus. For example, in terms of trade policy, people like Lighthizer and Pelosi opposed the United States' support for China's accession to the WTO in the 1990s, but their opinions did not prevail in China policy at that time. Today, the United States has both extreme "hawks" like Cotton who advocate the withdrawal of PNTR and a large number of moderates who oppose it. In terms of ideology, staunch opponents of free trade like Lighthizer and the free traders and globalists he accuses and despises often have very different views and positions on many major issues. Therefore, the attitude of "the United States" towards free trade actually depends on which people in the United States dominate its trade policy.