Trade Policy at the Crossroads: Realities of Trade Today The Economist’s Seventh EU-Southeast Europe Summit Remarks

First of all, I’d like to thank the organizers of this conference for inviting me to speak.  I’m also grateful that they accepted my request that I not be lumped into the previous panel, as originally planned, since I did not believe I had much to contribute to the debate on BREXIT.  As punishment, however, they asked me to talk about trade, an issue fraught with political overtones at present.

Before I get there, however, do allow me to share a few words about the U.S. economy in general.  Simply put, the U.S. economy is very strong.

Growth is rising, and may reach 4% this year – a level considered inconceivable in a mature economy until recently.  Inflation remains in check.  Employment is rising, as are real wages.  At the peak of the recession in 2009, there were over 15 million people in my country unemployed.  Since then, we have added over 19 million new jobs in America, or an average of nearly 190,000 new jobs each month over the last eight and a half years.  We now have more job vacancies than we have workers to fill them.  Consumer confidence is at an 18-year high.  Our stock market is hitting new records.  Manufacturing optimism is high, and investment is rising.

With that as background, let me turn now to the subject of trade.  For 35 years of my career, I along with all other American diplomats, have argued that America stands for tearing down barriers to free trade.  We have advocated lower tariffs, and warned against protectionism.  Oh, and too often as just an afterthought, we have also noted that free trade must also be fair, and reciprocal.  But the leitmotif was always that America, as a rich and prosperous nation, would lead through example.  That we would be ready to show the rest of the world that we are committed to free trade, even if we didn’t necessarily get reciprocal treatment in return.

When World War II ended, and the modern trading system was being developed, that was almost certainly a wise policy.  The United States was essentially the “last man standing” in a world devastated by war.  We could afford to be magnanimous.  But we also expected that in due time, when other countries regained their footing, they would follow our lead and lower their barriers to America just as we had to them.  Seven decades later, we are still waiting.

The thing that makes Donald Trump so unique in American politics, and in leading America on the world stage, is his readiness – nay, desire – to challenge commonly-accepted dogma, to overturn conventional wisdom.  And so it is in the field of international trade.  Since assuming office, he has done exactly what he said he would when he ran for the presidency – he withdrew the US from large-scale trade deals that he judged unfair to U.S. workers and American interests, he has imposed new tariffs on countries that he is convinced have been taking advantage of the U.S. and the international trading system for too long.  Instead, he seeks to renegotiate long-standing deals to gain a more favorable position for the United States.

The fundamental American commitment to the principle of free trade remains.  But President Trump was also clear when he said before the United Nations last week that “We believe that trade must be fair and reciprocal. The United States will not be taken advantage of any longer…. For this reason, we are systematically renegotiating broken and bad trade deals.”

Now, this approach is shocking to many people.  Disruptive.  Even heretical.  But it is yielding results.  Last month, the U.S. government announced a groundbreaking U.S.-Mexico trade agreement.  Canada has also now agreed to sign on.  Last week, we inked a new U.S.-Korea trade deal.  In July, Presidents Trump and Junker committed to the goal of zero tariffs across the board for U.S. and European products.

And yet many – I would dare say almost everyone in this room in fact – question America’s claims that the world trading system is treating us unfairly.  But I can tell you this: the perception in the American heartland is quite different.  Americans cannot understand why American products should face far higher tariffs and non-tariff restrictions in foreign lands than products of those countries face in the American market.

Let me give you just a few examples to illustrate why they might think so.  In the wealthy and prosperous EU, the unweighted average EU customs duty is 5.2 percent, versus the US rate of 3.5 percent.  In the sensitive automotive sector, imports of European cars into the US have to pay a tariff of only 2.5 percent, while exports of US cars to Europe face an EU tariff of 10 percent – four times higher than US tariff levels.  How is that fair?

China has been running trade surpluses with most of the rest of the world for decades, and their economy on a purchasing power parity basis rivals the size of the U.S. and EU economies.  Yet, according to the World Bank, the average effective tariff rate in China is twice the level of that in the U.S., and also substantially higher than EU tariff rates.  China has found other ways to avoid playing by the same rules as the rest of us:  Our Commerce Department has counted approximately 100 different ways in which China subsidizes its companies, avoids anti-dumping duties by transshipping products, and uses forced technology transfers and intellectual property theft to gain trade advantage.

The World Trade Organization, which tracks tariffs, reports regularly on especially high tariff rates than can skew trading patterns – those over 15%.  According to the WTO, 7.1 percent of Canadian imports face these high tariffs, 4.1 percent of imports to the E.U. face them, but only 2.8 percent of imports to the United States are hit with high tariffs.

And this is not only a problem with major trading partners.  Closer to home, in Serbia, we see the same unfair treatment of American exports.  Serbia’s stated foreign policy is to maintain close and good relations in four directions – China, Russia, the EU, and the US.  But when we look at trade relations, it is difficult to say that Serbia treats all of its partners equitably.  Is it fair to the United States that:

Over 3,500 Serbian products are eligible to enter the US market duty-free under our Generalized System of Preferences, over and above the thousands of other products which have a zero tariff level for all of our trading partners.  In fact, of the top 50 Serbian export products to the USA last year, only seven products are subject to any tariffs in the United States.  In contrast, of the top 50 U.S. export products to Serbia, 30 were subject to tariffs. This is not fair or reciprocal treatment of the United States.

Even more vexing from our perspective is that American products face consistent discriminatory treatment compared to competitors from third countries.  California wines, for example, are among the world’s best.  They consistently compete with the best French and Italian wines.  But here in Serbia, a US wine faces a 30% tariff duty, while a French or Italian wine has no tariffs imposed.

U.S. agriculture leads the world in production and quality, and Caterpillar or John Deere are global names.  Yet a US tractor faces a 15% tariff in Serbia, while a similar tractor produced in the European Union enters Serbia duty-free.  Is that fair trade from the American perspective?

Should iconic American manufacturers like Harley Davidson have to produce in Europe in order to sell in Europe, because otherwise the tariffs imposed are too high to be competitive?  Is that fair?

Or is it fair that whole categories of American agricultural products are totally banned here in Serbia for specious consumer safety concerns, even though these same products are consumed throughout the world and have been judged perfectly safe by scientific study after scientific study?  Where is the fairness there?

So in conclusion, the world trading system is being pressed by one of the largest trading nations to confront some of its uglier realities.  The United States believes in free trade.  We believe in playing by the rules.  But we also believe these rules are stacked against us in many ways, and we will seek to have them adjusted so that trade is not only free, but also fair, and reciprocal.

Thank you for your attention.