The Trump-Lighthizer Trade Revolution

This is Part II of a review of former U.S. Trade Representative Robert Lighthizer’s latest book, No Trade Is Free: Changing Course, Taking on China, and Helping America’s Workers. Part I can be read here.

At some-point in the 1990s, American leaders turned upside down the logic and history of American trade policy. Rather than continue the understanding that economic prosperity among democratic regimes was what was required to allow them to hold off communist challengers, American leaders came to believe that somehow greater wealth and prosperity among communist states would lead them to become democracies and no longer be threats.

It was this delusion which drove the elite consensus in favor of policies that could only be described as designed to supercharge the Chinese economy. Today, it seems almost incomprehensible how anyone could believe that orchestrating the greatest surge in economic prosperity in 2000 years of Chinese history would weaken the hold of the Chinese Communist Party on power – or that a CCP which governed a China whose economy was 75 percent the size of America’s would be more amenable to American interests than if America’s GDP was five times China’s.

But that is exactly what a generation of policymakers believed. They thought that by making China rich and powerful now, including by bending the rules, that in return – owing, presumably, to gratitude — a stronger China would make concessions it refused to consider when weaker.

It is hardly a surprise the opposite happened. Rather than creating incentives to reform and liberalize, the economic advantages granted to China in the name of free trade removed any need for the CCP to loosen its grip. Furthermore, it removed the need to liberalize further.

Until China joined the WTO, its trading status with the U.S. had to be reviewed annually by Congress. This created an incentive for the CCP to carry out cosmetic reforms, respond to complaints, and promise future change to convince Congress to go along. Once China’s position was secure, the Chinese lost this incentive. The annual carrot disappeared, while the episodic stick in trade talks was all that remained. Domestically, China has largely reversed economic and political liberalization since 2009.

By the early 1990s, America’s bipartisan elites had noticed the steady decline of American manufacturing, something that had already become apparent during the 1980s trade war with Japan. They may not have cared about what they saw as a speed bump on the way to the information economy they dreamed of, but they had to respond to the political unrest it was generating.

This was especially true of the Democrats. Bill Clinton had been elected on a platform opposed to NAFTA but ended up pushing it through, along with Chinese membership into the WTO. Evidence of the costs America was paying for free trade did not cause Clinton or his GOP counterparts to rethink their course. They were certain the richer China became under the CCP, the more likely China was to spontaneously reform into a liberal democracy.

Rather than seeing China, or even Europe, Mexico, or Japan as threats to their economic agenda, U.S. leaders identified the American people as their most dangerous foes, and moved to strip them of oversight. The creation of the WTO in 1993 was a key turning point.

Until that year, as former U.S. Trade Representative Robert Lighthizer notes in his new book No Trade is Free, even if multilateral trade agreements existed, disputes were still dealt with on a bilateral basis. When the United States had issues with Japanese behavior in the 1980s, the United States talked with Japan, and when Tokyo was not talkative, the United States limited Japanese access to the U.S. market to loosen lips.

The creation of the WTO changed that. Suddenly, a new international body existed with its own dispute network. Rather than the United States and Japan litigating the behavior of a Japanese company or arguing over whether a decision to exclude American goods was protectionist, the complaint would be sent to the WTO, where impartial judges would rule on it.

In theory, the creation of the WTO represented mutually agreed upon disarmament. Ireland gave up the right to unilaterally retaliate for American tax policy just as the United States agreed to give up its right to unilaterally retaliate for Ireland’s.

However, in practice, Ireland gave up relatively little. The U.S. market was of vital importance to Ireland, but the Irish market was of marginal importance to the United States.

The reality was, as Lighthizer notes, as if the United States had agreed to a proposal to give an international body oversight over the use of military force of all countries.

This might have been bearable if the WTO worked, but it did not. In theory, the WTO was supposed to resolve disputes within 90 days, with rulings that were binding, but both promises went unfulfilled. Cases began to drag on for months, and then for years. Furthermore, enforcement became largely voluntary.

The WTO also quickly developed a structure of bias against the interests of the United States. Americans who went to work for the WTO, like many on international bodies, tended to be true believers in the spirit of “cooperation,” while non-Americans acted as advocates for their own governments. WTO proceedings thus rapidly descended into negotiations between Americans, bending over backwards to not appear partial to the United States, and non-Americans eager to be overtly partial to their own home countries.

The United States never had a chance. It suffered a steady stream of defeats, and even when it prevailed, states like China would simply ignore the rulings. The WTO bound only the United States. Not only did it prevent the United States from using its leverage to defend American workers, but it actively served as a tool for America’s rivals.

The post-2001 legal situation was so favorable for America’s rivals that the campaign for free trade stalled. There has not been a single successful round of WTO talks since China joined. Ever more lopsided U.S. concessions were needed to persuade countries to even discuss new agreements when the existing system was so advantageous.

It was not that Lighthizer was the only American figure aware that globalization had been weaponized against the United States, or that Donald Trump was the first president to conclude that the WTO was biased. The Obama administration grew disenchanted with the WTO, and for the first time ever, vetoed the reappointment of a judge to the Appellate Body, the highest court of the WTO, in 2011.

This was a start, but the Obama administration was still imprisoned by the ideological belief that the specific interests of American workers and companies were subordinate to the interest of the United States in presiding over a global order, the benefits and goals of which became ever more obscure. Obama might concede that China was taking advantage of the U.S. on trade, but to secure cooperation on climate change and other international issues he shied away from confrontation.

Obama and his team grew concerned that the E.U., dominated by German Chancellor Angela Merkel, was blatantly discriminating against U.S. firms while underfunding NATO, but the fear of “losing” Merkel and her ilk, whom they viewed as a bulwark against “extremism,” meant the United States tolerated it. Even when Obama sought to confront China, such as through the Trans-Pacific Partnership, the Obama administration saw the agreement in terms of creating an economic bloc in Asia and was willing to allow the TPP states to, in effect, exploit the U.S. economy to make alignment with the U.S. more attractive than alignment with China.

That was the point at which Donald Trump entered the scene. It was not that anyone, Democrat or Republican, except for the libertarian “Koch” wing of the Republican Party at the time, passionately defended globalization as working. Rather, they, like Hillary Clinton in the debate, were resigned to it as the only option. Everyone knew, or would have known if they had bothered to think about it, that the U.S. was being treated like a sucker. But only Donald Trump hated being a sucker enough to risk doing something about it.

Robert Lighthizer and Donald Trump hit it off quickly. Lighthizer was a lawyer with decades of experience in trade litigation who had spent two decades fighting for the rights of American companies in the WTO, with the sympathy but not the support of succeeding White Houses. Trump knew a bad deal when he saw one.

What united the two was that Lighthizer had a plan to do something about the problems that Trump had identified. He would use the leverage the United States still held to lower trade barriers – only these trade barriers would not be those other countries faced in selling to the U.S. market, but rather those Americans faced in selling abroad.

The tool would be Section 301, which allows the president to impose a variety of temporary tariffs. For Lighthizer and Trump, the approach was clear: They had a ready-made list of grievances with virtually the entire globe which the Obama team had spent years fruitlessly negotiating on.

Rather than haggling with foreign governments over what the United States would “trade” to close those “loopholes,” only to see new loopholes opened, the United States would demand the loopholes be closed and impose tariffs which would only be lifted when other governments agreed to fix the outstanding issues.

If, as foreign partners argued, pressure would cause them to collapse, then they would be more eager to negotiate new agreements once it was clear Trump would invoke Section 301.

Here, Lighthizer turned America’s greatest economic weakness, its lopsided trade deficit, into an asset. Precisely because the United States ran a lopsided trade deficit with virtually every other major economy, it was virtually impossible for the United States to lose a trade war with anyone.

This was evident during the confrontation with China prior to the eventual 2019 agreement. As the U.S. placed tariffs on selected Chinese goods, China retaliated. Until the U.S. hit $350 billion of Chinese imports, which was more than the entire value of U.S. exports to China, Trump and Lighthizer could continue to levy additional tariffs on Chinese goods to the tune of $400 billion, $500 billion, $600 billion, but China had already hit 100 percent of U.S. exports. The Chinese folded.

The second change implemented by Lighthizer and Trump was that they did not seek to fix individual flaws within the existing trading system, but rather to rebalance trading entirely.

Lighthizer is outspoken in his belief that in a genuine system of free trade, there should not be persistent trade deficits. As prices vary, one country should run a surplus one year, and a deficit the next. He points to Anglo-American trade as an example of healthy exchange. The U.S. ran a surplus for two of the preceding five years, the U.K. for the other three.

The premise that the U.S. should not be running persistent trade deficits with anyone, and that the existence of such persistent deficits proved that the current trade arrangements were unfair to the United States, broke the logjam of haggling that trade talks had descended into under Obama. Lighthizer did not horse trade. He did not start from the premise that the status quo was good, and any deviations from it must be zero-sum. He made clear that the status quo was unacceptable, and that America’s trade partners must do something about it, or the United States would use tariffs.

“There’s a cadre of 75-year-old white men in the trade realm who just want to turn back the hands of time,” an anonymous official told ProPublica from unnamed professionals in the USTR for a 2020 feature on Lighthizer’s tenure “They don’t understand that the world has changed.” Lighthizer was to prove that the “professionals” had never understood their own field, something many would grudgingly admit by the end.

Two of the greatest successes of the Trump administration were the 2018 United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA, and the Phase One Agreement with China, reached at the end of 2019. Both have come under criticism for being limited in scope and failing to resolve all outstanding issues. Critics of Lighthizer have taken to noting in reviews of his book that the U.S. trade deficit did not vanish overnight following these agreements and worsened with some parts of the world during COVID-19. This is whataboutery.

First, the agreements involved substantial changes which greatly affected how trade between the parties worked. The USMCA for the first time extended many of the nominal conditions of NAFTA to Canada, which the Clinton administration had largely allowed to exclude itself from the commitments. There was a reason Lighthizer and Trump reached an agreement with Mexico first, and only after, with the risk of being left out of the new agreement and losing NAFTA, did Canada accede.

USMCA redefined rules of origin for manufactured goods to prevent Chinese and European products from being shipped to Mexico, assembled, and then sold duty-free in the United States. It included one of the greatest reforms of Mexico’s labor system since the revolution, requiring regular elections for the infamously corrupt Mexican unions. It also removed the arbitration clause.

As for the Phase One Agreement with China, not only did China commit to a host of measures, including buying U.S. goods, but they committed in writing. Past agreements with Obama, Lighthizer notes, were oral, something he learned when he requested a copy of one Obama had announced, only to discover no written copy had ever been created.

Secondly, and most importantly, no matter how moderate the changes were, every single one was in favor of the United States. There was no haggling. The position adopted by Ligththizer and Trump with China, Canada, and Mexico was that the existing trading arrangements were unfavorable to the United States, and that the purpose of the talks was to alter them to be less unfavorable. Otherwise, the U.S. would leave.

The United States might suffer from losing the Canadian or Mexican markets, but their economies could not survive losing America’s. No one, including China, could. This meant America’s trading partners would make whatever concessions they needed in order to maintain that access. They might bargain and come up with political arguments to try and bring that level down, but at the end of the day the United States would determine what the price of entry into its own market was.

This, Lighthizer explains in his book, was the true revolution. During the Trump administration, the USTR turned the entire nature of trade negotiations on its head. For decades, foreign representatives had gone into talks asking themselves how much they could get out of the United States. Suddenly, they had to enter every talk wondering how much they would need to give the United States.

While Biden, concerned with climate change and with maintaining a coalition against Russia, has been more willing to accept political arguments to lower concessions, one element has continued. Lighthizer’s critics conceded that his actions caused companies to question whether they should be investing abroad, especially in China, if the United States might suddenly change its trade policies.

The result has been a major shift in investment, with companies moving their operations back into the United States. The Biden team may not accept the primacy of the economic arguments over the political, as evidenced by their willingness to make concessions to Europe when it comes to China. But where economics and politics intersect, they have embraced Lighthizer’s tactics. Whether it is the CHIPs act subsidizing the U.S. semiconductor industry or a steady stream of restrictions on high-tech exports to China, the Biden team has wielded many of the tools that, until Lighthizer became USTR, no one in power believed existed.

Lighthizer’s book is a vital read for anyone who wants to understand the history of trade. It is vital for understanding U.S. trade policy.

Most importantly, however, it is vital for its optimistic tone. Lighthizer saw a problem. But he didn’t just think about it, he did something about it. He proved that no matter the challenges, tools exist to solve them. America needs more men like Robert Lighthizer in positions of authority if it wants to become great again.

Walter Samuel is the pseudonym of a prolific international affairs writer and academic. He has worked in Washington as well as in London and Asia, and holds a Doctorate in International History.