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The US's "Free Trade" Isn't Very Free

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Tags Protectionism and Free Trade

02/27/2020

The false notion that the US has eliminated virtually all of its barriers to foreign imports has been repeated more and more in recent years. The claim is made both by advocates for free trade and by its critics. For instance, Patrick Buchanan has claimed that only American elites "are beneficiaries to free trade," implying that the US either has free trade or something close to it. Rather than insulate US companies from global competition, Buchanan insists, the US practices "globalism" and has all but erased the US border when it comes to foreign goods.

Meanwhile, in many articles on tariffs, readers may encounter a graph like this one, which suggests that trade barriers have almost vanished:

tar
 

But things are not nearly as free as they seem. Indeed, the idea that the United States embraces unconditional free trade—while being victimized by foreign protectionists—is based largely on fantasy.

Nevertheless, a common narrative persists in which protectionism disappeared in the US thanks to a bipartisan consensus in favor of free trade following the Second World War. In the olden days, the story goes, the US protected American workers with high tariffs rates, but now that tariffs are low jobs have been sucked out of the US by this near total absence of protectionism.

But tariffs and protectionism are not the same thing. Many researchers treat tariffs as a reliable proxy for protectionism, but the rising prevalence of nontariff barriers in recent decades suggests that looking only at tariffs is a mistake.

Although the US did indeed cut tariffs and other trade barriers—often unilaterally—during the 1940s, "enthusiasm for further tariff cuts waned after 1950. The U.S. government made limited tariff reductions in the four rounds that followed the inaugural GATT [the General Agreement on Tariffs and Trade] conference in 1947."1

Although it is true that tariffs did not significantly rise again in response to mounting opposition to lowered trade barriers, other forms of protectionism did. What were these nontariff barriers? They include a wide variety of policies that include, among others:

  • Subsidizing US industries so as to help them outcompete foreign goods.
  • Requiring government procurement of domestic products only (known as "public procurement" policies).
  • Placing quotas on imports.
  • "Rules of origin" preventing "transshipment" of goods from third parties through countries with "free trade" access.
  • "Sanitary and phytosanitary measures," which are controls on the importation of foods affected by substances such as beef hormones and "genetically modified organisms."
  • Regulatory requirements on the production of foreign goods, including mandates on foreign wages, labor unions, and environmental regulations.
  • Requirements for packaging, labeling, and product standards.

Since the 1950s, these barriers have been increasingly used by the US government and other governments to reduce imports, and "[n]ontariff barriers [have] spread to substitute for the tariffs previously bargained away. Pressure began to surface for retaliation to punish trade partners for unfair trade barriers and unreciprocated tariff cuts. All of this was a prelude to the changes that would overtake U.S. trade policy in [the 1960s."2

As political scientist Kerry Chase notes, by the 1980s "pillars of US trade policy crumbled," including "the commitment to trade liberalization, as pressure for nontariff barriers erupted in the 1970s."3

These strategies were applied for the same reasons that tariffs were raised in the past: to protect domestic industries in response to pressure from constituents and lobbying groups. From the late 1960s to the late 1980s,

Domestic producers in certain vulnerable industries, particularly labor-intensive manufacturers, pushed for legislation against imports….Those domestic producers in favor of restricting trade were initially successful in reducing imports from a limited number of countries via quota-based agreements or voluntary export restraints (VERs)….These practices were gradually applied to other vulnerable industries, as well as to a broader set of countries. The effect was a significant loss of momentum in the reduction of trade barriers and an increase in trade barriers in certain areas.4

Indeed, the total proportion of imports affected by nontariff measures increased from 25 percent in 1966 to 48 percent in 1986.5

By 1990, trade liberalization again began to gain ground, and this helped drive political support for the North American Free Trade Agreement (NAFTA), which went into effect in 1994.

Yet, it is doubtful that NAFTA approaches what can really be referred to as "free trade." Both NAFTA and its successor agreement USMCA include numerous nontariff barriers around rules of origin, labor requirements, and environmental regulations.

Since the financial crisis of 2008, many nations have embraced larger numbers of nontariff barriers as a means of increasing protectionism. The US has most certainly not been immune. In fact, in a ranking of regimes based on the implementation of new barriers since 2009, economists Erdal Yalcin, Gabriel Felbermayr, and Luisa Kinziusthe rank the US first:

The United States implemented by far the largest number of non-tariff barriers. With close to 800 non-tariff barriers the US government implemented twice as much protectionist policies as the Indian government, which ranks second.6

By this measure the US is indeed the "by far most protectionist country," and since 2009

The United States made extensive use of discriminatory state aid measures and subsidies as well as public procurement policies. It accounted for more than 70% of all worldwide implemented public procurement policies and about 25% of all subsidies and state aid barriers.7

Among developed countries, tariffs now account for only a small amount of the trade barrier strategies employed by regimes. All of these new nontariff measures, of course, are piled on top of what nontariff barriers already remained from earlier periods of protectionism. Thus, through a complex system of mandates, rules of origin, domestic subsidies, anti-dumping laws, and other barriers, the US has erected a wide variety of impediments to trade that are significant for a wide variety of trade partners. (Yalcin, et al. suggest that were it not for its nontariff barriers the US would export $48 billion more in goods and import $74 billion more.)

Not surprisingly, comparisons with other countries' trade policies today does not reveal a United States that is a world leader in trade freedom. According to economist Agnieszka Gehringer:

The United States has the highest non-ad-valorem average duty rate of 8.7%, the third highest maximum duty rate of 350% and offers a duty-free rate only to a moderate share of its imports (45.9%, compared with 75.8% in Canada, 53% in Japan and 50.1% in Mexico)….The U.S. appears to be the most intensive user of non-tariff barriers in general and in their main categories….This is true when looking at the total count of measures applied and at the number of product lines…to which such measures apply.

Total Count and Number of Product Categories of Nontariff Barriers in Place at the End of December 2016

comp
Source:  Agnieszka Gehringer, Flossbach von Storch Research Institute

This strongly suggests that the picture of US trade policy often painted by protectionists—namely that the US naively pursues free trade at all costs and is thus victimized by more protectionist regimes—is highly inaccurate.

The US government employs a wide variety of trade controls, but it prefers tools other than tariffs. Thus, attempting to compare US trade policy with the policies of other regimes based solely on tariff rates is misleading at best.

Unfortunately, there is very limited information as to how trade policies across nations compare when both tariff and nontariff barriers are combined. This stems largely from the fact that nontariff barriers are extremely difficult to quantify. Tariffs, of course, are easy to observe and to compare across regimes. Nearly all governments compile and openly publish this information. Nontariff barriers, on the other hand, are extremely diverse and vary in their impact. There is not even agreement among researches as to which policies even constitute nontariff barriers.

This also means we are unable to answer a key question: given that tariff rates are not in themselves a complete picture of the nation's level of protectionism, how does protectionism in the United States today compare to protectionism in the past? Even granting that protectionism is less now than in the past, how much more liberal is trade policy today? This is a difficult question to answer.

While the US had haphazardly used nontariff barriers in the nineteenth century, they were nothing like what we encounter today in the enormous trade bureaucracy we now have. Moreover, we can't measure liberalization in terms of trade. Although there is no doubt that international trade has increased for most countries in recent decades, it remains unclear whether this is due primarily to liberalization or to many other factors that have been shown to increase international trade.8

Even if liberalization has been sizable, the fact remains that most protectionists greatly overstate the extent to which US import controls have been abolished. We cannot assume that increases in international trade and increased competitiveness for domestic US firms has been simply a function of liberalization. Nor can we accurately portray global US trade efforts as ones in which the US dogmatically embraces free trade.  Yes, many tariff rates are now very low. But in many cases those low tariffs are contingent on meeting a large number of requirements imposed by US policymakers.

Those who fail to meet these requirements, of course, will see their goods refused at the border, or subject to much higher tariffs. Those on the American side of the border who trade with non-government-approved foreigners in a non-government-approved way will ultimately be subject to fines and imprisonment. This, of course, is the end game of all protectionists: enforcement requires that Americans be locked in cages for violating US trade law. And there are many trade laws indeed.

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  • 1. Kerry Chase, Trading Blocs: States, Firms, and Regions in the World Economy (Ann Arbor, MI: University of Michigan Press, 2005), p. 110
  • 2. Ibid., p. 110.
  • 3. Ibid., p. 181.
  • 4. United States International Trade Commission, The Economic Effects of Significant U.S. Import Restraints (Washington, DC, 2009), pp. 70–71, https://www.usitc.gov/publications/332/pub4094.pdf.
  • 5. United States International Trade Commission, The Economic Effects of Significant U.S. Import Restraints, p. 101. Data from Sam Laird and Alexander Yeats, “Nontariff Barriers of Developed Countries, 1966–86,” Finance & Development (March 1989).
  • 6. Erdal Yalcin, Gabriel Felbermayr, Luisa Kinzius, Hidden Protectionism: Non-Tariff Barriers and Implications for International Trade (Munich, Leibniz Institute for Economic Research, 2017), p. 13.
  • 7. Ibid., pp. 13–18
  • 8. Other factors beyond liberalization include higher rates of productivity in tradables, falling transport costs, regional trade associations, converging tastes, the shift from primary products toward manufacturing and services, and growing international liquidity. For more, see Andrew K. Rose, "Do We Really Know that the WTO Increases Trade?" (working paper, National Bureau of Economic Research (NBER) Working Paper Series, Cambridge, MA, October 2002), https://www.nber.org/papers/w9273.pdf. See also: "Why Has International Trade Increased So Much?," On the Economy (blog), Federal Reserve Bank of St. Louis, Apr. 27, 2015, https://www.stlouisfed.org/on-the-economy/2015/april/why-has-international-trade-increased-so-much.
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Contact Ryan McMaken

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for Mises Wire and The Austrian, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

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