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USJI Voice Vol.43

The Era of “Fair and Balanced” Protectionism and US-China Trade War

September 25,2019
Kazuhiro Maeshima
Professor, Sophia University

  1. Transitioning from free trade to “fair and balanced” trade

The U.S. is currently undergoing a major transformation. One of the most striking changes is in its trade policy.

After the U.S. became a global hegemonic power after the end of the Second World War, it built up an international system to facilitate free trade. One important component of this effort was the General Agreement on Tariffs and Trade (GATT), which was established in the immediate aftermath of the war. In 1995, an even more authoritative body, the World Trade Organization (WTO), was founded as the successor to GATT. As an important system of international finance to support free trade, the International Monetary Fund (IMF) was founded in 1945 and continues to exist to this day, as an organization that helps facilitate free trade and stabilize exchange rates. In the 1944 Bretton Woods Agreements, the U.S. dollar was set as the standard currency in order to stabilize exchange rates. This determined a fixed exchange rate between gold and the U.S. dollar, which has supported the development of the post-war world economy for many decades.

Behind the efforts made by the U.S. to create an international system to facilitate free trade were the lessons learned during the global depression of the 1930s, a period that was marked by protectionist trade policies that weakened the world economy. In the U.S., Congress passed the Smoot-Hawley Tariff Act, a law that implemented record-setting tariffs on imports. Other countries responded with similarly high tariffs. The reason why free trade was a core component of U.S. trade policies following the Second World War was the fear that this tariff war led the people of Germany, a country that was suffering economically under the weight of the First World War reparations, to support the Nazi Party. The mantra of “there are no winners in a trade war” became a truism after the Second World War.

It seems that today, the U.S. has all but forgotten this crucial lesson. The America First doctrine, which has been the Trump administration’s slogan since the start, is in many ways heading in the exact opposite direction of the traditional American-led movement toward multinational free trade. The view that trade deficits are harmful to the country is a core principle in the Trump administration. In Trump’s view, it seems that when a country has a trade surplus with the U.S., it is equivalent to that country outmaneuvering the U.S. This way of thinking about deficits as losses and surpluses as wins can only be interpreted as a revival of an outdated, 16th to 18th-century mercantilism that defined a nation’s wealth by the sheer amount of money it had.

At the core of the Trump administration’s trade policy is the pursuit of what they call “fair and balanced” trade. However, the idea that the U.S. decides what is considered fair and balanced trade is troubling to the rest of the world. This is because to other countries, “fair and balanced trade” sounds like code for “protectionist trade.”

The Trump administration’s trade policy is in many ways a direct challenge to the ideals of free trade that the U.S. has built up following the Second World War.

 

  1. America’s panic and China’s rise

It goes without saying that this major transformation that the U.S. is going through is directly related to China’s rise in prominence in the past 20 years. As the U.S. trade deficit with China continues to drastically increase, the U.S. is in a panic to change the way things are done.

By the late 1990s, the future economic rise of China was already a very realistic prediction. As the prominence of China as a trade partner continued to grow larger, mainstream thinking in the U.S. viewed the participation of China in the free trade framework as a way of diminishing China’s system of state capitalism. This sentiment was symbolized in the decision in 2000 to extend permanent normal trade relations (PNTR) with China through legislation, which permanently granted China the status of most favored nation. As a result, China’s membership in the World Trade Organization (WTO) was recognized.

However, even after China became a member of the WTO, its state-capitalist economic system did not change at all. Upon deeper consideration, this might have been perfectly natural. The system of state capitalism, after all, is the foundation of China’s political system. This obvious course of events was not predicted at the time China was granted membership in the WTO.

As China achieved extraordinary growth, growing from being a developing country into the world’s second biggest economic superpower in terms of GDP in a short span of 20 years, America’s trade deficit increased, as can be expected. Meanwhile, China has been slow to adapt to norms such as the protection of intellectual property rights.

In the U.S., dismay toward this state of affairs, in which only China seems to be benefiting, began to grow significantly. Even with this sense of dismay, past U.S. administrations had difficulties confronting this situation as a country whose core ideals included the policy of free trade. However, with his electoral victory in 2016, Trump began shifting the trade paradigm from free trade to “fair and balanced” trade, with a force that is breaking down conventional norms.

 

  1. The trade war

The Trump administration began adding tariffs on Chinese products, which led China to impose retaliatory tariffs, a trend that has been continuing since 2018. There are voices within the U.S. that are decrying the harmful impact of this trade war, but most of them are on the left, marking a stark difference with the conservatives. The way trade wars are viewed is indicative of the political landscape that has become increasingly polarized.

Trump is pursuing a tactic of making threats (imposing tariffs), and following that with doing business, but China is reluctant to compromise so easily. Due to these circumstances, as long as the Trump administration is in power, these fraught U.S.–China trade negotiations are likely to continue for quite some time. Already, as this trade war continues, the U.S. tariffs targeting China have caused companies in countries like Japan to quickly move production to countries outside of China.

Within the framework of the WTO, China can now make the claim that other countries are not acting in the interest of free trade. The Trump administration is deliberately delaying the appointment of an appeals judge to the WTO’s Appellate Body, which handles dispute settlements, preventing it from filling its seven-member committee. The U.S. is effectively trying to paralyze the WTO and its functions. With China and its state-capitalist system now utilizing the WTO and free trade, which were built with the U.S. at the center, and the U.S. attempting to paralyze this system, we are witnessing a turning point in this phenomenon of reversal in free trade.

 

  1. Impact on Japan and other countries

China is not the only country that is viewed as a problem by the Trump administration. Japan, South Korea, Mexico, and Europe are viewed in a similar light. As of now, in August 2019, U.S.–Japan trade negotiations are mostly settled.

What we must understand is that this transition from free trade to “fair and balanced” trade (or, to put it bluntly, protectionist trade) is not something that will end with the Trump administration. In observing the climate in Washington today, it is clear that there is significant dissatisfaction with U.S.–China trade relations, even on the side of the Democratic Party. Even if a Democratic Party candidate defeats Trump in the 2020 presidential election, this situation will likely not change in any significant way. These fraught U.S.–China trade negotiations may very well continue into the next administration. It may even become a full-fledged and ongoing trade war with elements of a cold war.

As there seems to be no end in sight of this state of affairs, the world must confront this major transformation in U.S. trade policies. The world must also prepare for the fact that this transformation will continue for some time to come.

 


Aushor

Kazuhiro Maeshima

Kazuhiro Maeshima is Professor of American Government and Foreign Policy of Department of Global Studies at ophia University (Japan). Maeshima studied at two U.S. universities: Georgetown University (MA in Government) and University of Maryland (MA, PhD. in Government and Politics). Before his scholarly works in the United States, he worked as a print journalist for five years in Japan after finishing his BA degree at Sophia Univ. His research interest centers on American government and political communication. He is the author of many books and articles in those fields, including The Media in American Politics; Media as a Political Actor (in Japanese) and Internet Election Campaigns in the United States, Japan, South Korea, and Taiwan (co-edited in English, Palgrave, 2017)


The USJI Voice is a policy-related opinion paper produced by researchers at USJI-affiliated universities. The USJI Voice is written for experts in areas connected to U.S.-Japan relations. Please share with us your opinions and suggestions related to your areas of interest.
The USJI does not take specific political positions. All views and conclusions expressed in the USJI Voice are those of the authors in their private capacity and do not represent or reflect the views of the USJI as a whole.

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