This week President Donald Trump heads to Canada for a tense G7 Summit with leading industrialized nations. Under the looming threat of trade wars, huge countries threaten to impose duties on each other with hundreds of billions of dollars at stake. It’s shocking that the U.S., the ringleader of the world’s free-market economies, helped bring this about by so boldly defying the international trade conventions that we took the lead in developing.
The best way out is not a fight with our trading partners—it’s to fix the outdated trade rules that are helping to cause international tensions. In fact, the World Trade Organization recently expressed openness to such an approach.
With 20/20 hindsight, it’s clear now that these tensions have been a long time coming. America has experienced significant adjustment pains as a result of large developing countries joining the world economy. In 2001, when China joined the WTO, 1.2 billion people suddenly appeared on the world stage and were willing to work at a fraction of the going rate.
American businesses and workers had to bring more to the table, and fast, if they were to stay competitive. Many have thrived, and U.S. manufacturing today looks a lot different than it did in the 1990s. But many manufacturers did not survive, and too many workers have simply dropped out of the labor force.
The Chinese were eager. They were poor, they were hungry, and they were willing to do whatever it took to work their way out of poverty toward better lives. Income growth in China has been spectacular, with average household income catching up to about 80% of the world average. There are still stories of Chinese rural parents leaving their children to fend for themselves as they seek better paying work in the city.
But why have the West’s adjustment costs been so much greater than most people expected? How did we miss the writing on the wall? Maybe we were too comfortable in the booming 1990s and just not tough enough for the competition.
Or maybe we didn’t think hard enough about the rules. Nearly nothing was done to improve or strengthen WTO trade rules as we opened the doors to large, developing countries with very different approaches to government subsidies, intellectual property, and open market economies.
It is probably a bit of both.
International trade is a key tool for economic development, and it’s clear that China and the world are the better for it. The U.S. is better off, too, even with the rough adjustment for some blue-collar workers. Better access to health care, education, and other social programs, as enjoyed in Australia and Canada, may have eased some of our adjustment pains. But given our fiscal struggles and partisanship, those have not been real options.
Looking forward, the Trump administration needs to get back to the drawing board and think hard about how to improve global trade rules. In countries that don’t have a strong rule of law or legal recourse avenues, U.S. and other foreign firms are at a disadvantage. Many countries still get away with overly restrictive trade and investment policies that hinder our otherwise strong financial, telecommunications, and insurance sectors, among others.
Areas ripe for improvement include strengthening intellectual property rights in developing countries, creating a more consistent approach to dealing with the unfair advantages enjoyed by state-owned enterprises, and eliminating unnecessary restrictions on foreign investment. Creating a fair set of rules is far more productive than heavy-handed tariffs and threats to roll back free-trade agreements.
The Trump administration rightly claims that the WTO is slow. But to its credit, the WTO recently offered to “strengthen and safeguard” the international trade system and make sure it “remains responsive and relevant to members.” We should, therefore, jump at the chance and lead that charge to reform the system from within.
If the U.S. does not lead or even participate in making the world trade system better, then the next 20 years are going to be even harder than the last 20. We built the WTO, and Trump promised us he would be a law-and-order president. This is his chance to prove it on the world trade stage, rather than retreating into the false comfort of protectionism.
Christine McDaniel, a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary, is a senior research fellow with the Mercatus Center at George Mason University.