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.