The Rise of the New Mercantilism (Part II)

With many countries around the world engaging in unfair and distorting trade practices, U.S. trade policy suffers from two major limitations. First, it is largely focused on opening markets through new trade agreements, but has given short shrift to enforcing existing agreements.

Second, as documented in Part I, the range of tools other nations can use to erect trade barriers has grown significantly, and in many cases they fall under the radar screen of traditional WTO processes.

There are a number of reasons why the Office of the United States Trade Representative (USTR) has let the balance shift away from enforcement. One reason is that it is simply easier to want to work in cooperation with trade officials from other nations — especially to develop new trade agreements. Taking aggressive action against mercantilist policies is much harder.

It’s a natural inclination to want to play the “good cop” instead of the “bad cop” who is complaining, confronting and pressing for change. That is why creating a Chief Trade Enforcement Officer and a Trade Enforcement Working Group within USTR, as the Senate Trade Enforcement Act of 2007 proposes, is so important. It makes it clear that at least one portion of USTR is expected to play the role of the bad cop.

U.S. companies, for their part, will have to play a larger role. But there are two reasons why U.S. companies don’t bring more cases. First, they are expensive. Second, the “free rider” problem means that companies can benefit if they can convince other firms in their industry to bear the burden of helping USTR to bring a trade case.

In order to remedy that, the U.S. Congress should encourage companies to build WTO cases by allowing them to take a 25% tax credit for expenditures related to bringing WTO cases. This tax credit could be piggybacked on top of the R&D tax credit.

In response to calls for tougher trade enforcement, some free traders argue that getting tough with other nations over their mercantilist and protectionist trade policies is actually a form of protectionism. Others worry that it is better to be lax on enforcement since being more aggressive risks a trade war. Both views could not be more wrong.

Aggressively working to reduce other nations’ government-imposed trade distortions is, in fact, the polar opposite of protectionism.

Stronger enforcement is important to preserve the integrity of the global trading system — and ensure that trade is based on markets and the decisions of consumers and businesses, not on mercantilism and government intervention. Being more aggressive on trade enforcement will not promote a trade war.

Apologists for the current enforcement system also argue that the United States is hardly in a position to complain. Invoking the Biblical message of “let he who is without sin cast the first stone,” they imply that since the United States has mercantilist policies of its own for some sectors, we have no right to complain about other nations’ policies.

Yet while we Americans are “not without sin,” the U.S. market is perhaps the most open in the world. Moreover, the very fact that we are running huge trade deficits negates any legitimacy of this argument.

Many trade advocates argue that the major response to issues of globalization and trade must be to get Americans to once again support trade and globalization — by doing a better job of compensating those who are hurt from trade.

Yet that will not be enough. Regaining Americans’ support for trade and globalization requires that Americans believe that the playing field is level — and that requires significantly stepped up trade enforcement. Americans need to know that their government will stand up for their rights as workers by aggressively fighting unfair, mercantilist trade practices.

In stepping up trade enforcement, the United States will not only help U.S. workers and firms. It will lead the world down the right path by rigorously enforcing international and bilateral trade rules — and by showing the world that market-driven commerce is the best way to achieve robust and sustainable domestic and global prosperity.

Editor’s Note: Read Part I here.