The recent imposition of high tariffs and tariff-rate quotas on solar cells and modules (among others) did not come as a complete surprise. First, the United States had already filed a complaint with the World Trade Organization in May 2017. Second, the current administration has been unambiguous about its views on global trade. Pulling out of the Trans-Pacific Partnership, renegotiating the North American Free Trade Agreement, questioning the institutions such as the World Trade Organization, or lashing out at countries from Canada to China to – most recently – EU member states, have pointed towards a new vision for the United States in the global economy: Global is bad, local is good. Recently, before world leaders in Davos, President Donald Trump may have spoken softly, but he still carried the big stick of protectionism behind his back.
The question is why? The most commonly used argument is, of course, the trade deficit. For all goods and services, the trade deficit is larger today than it was when NAFTA came into force in 1994. At the same time, however, it has also declined steadily over the last 10 years as exports grew at a higher rate than imports. NAFTA may have even helped to grow U.S. exports to other regions, including Mexico and China, by making U.S. products more competitive.
Then there is the question of jobs. Most studies agree that certain U.S. jobs were lost due to NAFTA. The same studies also agree that these jobs most likely would have been lost anyway due to shifts outside of the United States and because of technological advances. In the current case of solar cells, the higher cost of imported products may actually lead to job losses in installation and service that exceed the number of jobs protected.
Other arguments for protectionism include unfair practices such as China’s exploitation of WTO loopholes. There is something to the latter argument, but withdrawing from established mechanisms may be the wrong way to address this issue.
Global trade must follow global rules to unleash its full potential. It simply doesn’t make sense for one player to follow the rules of checkers while all others are playing chess. The 11 TPP countries that remained after the United States’ exit from the agreement have decided to move forward by themselves. Our neighbor to the North will be one of the winners, participating in the positive effects that the agreement will have. And given the incremental progress of NAFTA negotiations, the new agreement will most likely be somewhat, but not fundamentally different.
The Valley Industry and Commerce Association, a business advocacy group that represents some of the largest employers, many of them manufacturers in the San Fernando Valley, strongly supports free trade and NAFTA. Even California’s vulnerable agriculture industry sees the vast advantages of free trade. Ask, for instance, Edgar Terry of Terry Farms in Ventura. As a fresh produce grower, he lives with the challenges of cheaper competition from outside the United States, but he clearly also sees the upside of access to foreign markets. “The bottom line is,” said Terry, “that free trade is good for agriculture overall, and it is good for the consumer!”
In 1791, Alexander Hamilton delivered his Report on Manufactures to Congress, advocating for self-sufficiency of the newly formed country through a strict policy of import substitution. Hamilton’s argument was correct for a country in the making and at a time when international trade played a minor role globally. Today, the environment is different, and protectionist policies, time and again, have been proven to hurt domestic economies in the long run. In the case of the United States, they may even do damage to the global economy (and they will certainly hurt L.A.’s regional, export-driven economy).
In my graduate course on International Business, I often start by showing students a chart that maps exports against imports for the largest trading nations. Seeing that outbound and inbound trade has very similar levels for most countries, they quickly realize that international trade is not a one-way road. We don’t have the luxury of going back in time to conduct an experiment without NAFTA or the WTO. That leaves us only with the way forward. Let’s fix the loopholes and make sure that U.S. companies become more competitive internationally. Isolating the United States from the global economy is an extremely short-sighted approach.
Gerhard Apfelthaler is dean of the School of Management and a professor of international business at California Lutheran University.