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Trading Down: Protectionism Reduces Prosperity

March 20, 2018 4 minute Read by Matthew Rooney
Unilateral tariffs on Chinese products just raise prices for American families and are unlikely to produce a real change in Chinese behavior.

As the White House continues its experiment with protectionism, it is worth noting that the $50 billion tariffs on imported Chinese products could serve a pro-market purpose, if properly targeted and managed.  This is a big “if,” of course. 

To the extent it is true that globalization has cost American jobs, it is due mostly to the rapid emergence of China as a manufacturing power, and to the fact that China has taken advantage of World Trade Organization (WTO) rules to access global markets, while keeping its own market closed.  This neo-mercantilist policy, combined with China’s state-led development model, has flooded the global market with subsidized Chinese steel and other products. 

These abuses of the WTO rules by China demand a response, and strong American leadership can and should play a central role.  An actionable response would be:

  1. Use the tools of the WTO to call China out on its failures to make good on its commitments to curb subsidies and reduce barriers to foreign goods and services. In this effort, we would have many potential allies: the European Union, Japan, and Canada, to name a few. 
  2. Give ourselves new tools to discipline Chinese behavior, by negotiating commitments with China’s neighbors and other major trading partners that would further limit the possibility of mischief through state-owned enterprises, currency manipulation, forced transfer of IPR, and interference in e-commerce and other services where the U.S. has a clear competitive advantage.
  3. Focus Chinese attention on the urgent need to address its free-ridership by levying tariffs on Chinese products targeted to hit Chinese leaders in the pocketbook.

A strategy like this would certainly succeed.  After all, China is hardly a strong competitor of the United States. The George W. Bush Institute’s analysis of global competitiveness shows that China is nowhere near the U.S. by any measure:  business environment, legal system, investment environment, macroeconomic stability, trade policy, even health, and education.

At the end of the day, China appears to be a redoubtable competitor only because it has a very large population.  Our playbook of an open economy, driven by consumer choice, buttressed by broad capital markets and focused on innovation, quite frankly works better.

The strategy announced by President Trump in his inaugural address and carried out over the past year is different.  In withdrawing from the Trans-Pacific Partnership (TPP), we relinquished the opportunity to form new rules that would have further projected our strengths.  By calling into question the market opening of the North America Free Trade Agreement (NAFTA), we have added uncertainty and therefore cost to our own supply chains, hobbling our own global competitiveness.  By levying global tariffs on steel and aluminum we have picked needless fights with our closest trading partners and weakened the coalition we will ultimately need to discipline China successfully. 

In this context, our unilateral tariffs on Chinese products just raise prices for American families and are unlikely to produce a real change in Chinese behavior.


Author

Matthew Rooney
Matthew Rooney

Matthew Rooney joined the Bush Center in June 2015 following a career as a Foreign Service Officer with the U.S. Department of State. At postings in Washington and abroad, he focused on advocating market-driven solutions to economic policy challenges in both industrialized and developing countries, and on protecting the interests of U.S. companies abroad.

In Washington, Mr. Rooney was on loan to the U.S. Chamber of Commerce to create a high-level private sector advisory body for the Summits of the Americas, working closely with the U.S. private sector and with companies and business associations from throughout the Americas to negotiate an agenda to promote economic integration in the region.  Previously, he was Deputy Assistant Secretary responsible for relations with Canada and Mexico and for regional economic policy.  In prior Washington assignments, Mr. Rooney worked for then-Senator Fred Thompson, and supported negotiations to open global markets to U.S. airline services.

Abroad, Mr. Rooney was Consul General in Munich, a Consulate General providing a full range of Consular and export promotion services, supporting a permanent presence of 30,000 U.S. forces in two major base complexes, and carrying out a media and public relations initiative in support of U.S. diplomatic objectives in Germany. As Counselor for Economic and Commercial Affairs at the U.S. Embassy in San Salvador, El Salvador, he laid the groundwork for free trade negotiations between the United States and the five countries of Central America, and promoted market-based reforms for electrical power. Prior to this, he served in various posts in Germany, Gabon and Côte d’Ivoire.

Mr. Rooney studied Economics, German and French at the University of Texas at Austin and received his Master’s Degree in International Management at the University of Texas at Dallas.

Full Bio