Time to Quit Pining for a “Level Playing Field” in International Trade

Ian Fletcher

One of the most common plaints from those who are upset about America’s current trade mess is “just give us a level playing field.”  In particular, this is what one tends to hear from American businesses (at least those which have resisted the siren song of offshoring) that are hard pressed by “unfair” foreign competition.  It’s hard not to be sympathetic, and on an individual basis, my heart goes out to them.

Unfortunately, the whole idea of a level playing field in international trade is basically a mirage as an aspiration, and we’ll all be better off if we stop pining for one right now.

As I pointed out in a previous article, the concept of “fair” trade, while of some finite usefulness in the context of things like fair trade coffee, is basically a non-starter as a serious solution for economic problems, either here or abroad.  And unfortunately, the cry of  “all we want is a level playing field” is just another way of asking for fair trade. 

The fundamental problem is this: a true level playing field would require not just equal rules for international trade, but also that nations have the same domestic economic policies, as these can also confer an export advantage.

First, consider international trade rules. Foreign protectionism doesn’t only mean obvious policies like tariffs and quotas; it also includes local content laws, import licensing requirements, and subtler measures (some of them covert, hard to detect, or infinitely disputable) such as deliberately quirky national technical standards and discriminatory tax practices.

That’s not even mentioning outright skullduggery such as deliberate port delays, inflated customs valuations, selective enforcement of safety standards, and systematic demands for bribes. One study by the Congressional Research Service identified 751 different types of barriers to American exports worldwide.

Now consider purely domestic ways in which foreign governments put their thumbs on the scale in trade.  There are literally thousands of places in an economy where export subsidies can be hidden, from the depreciation schedules of the tax code to state ownership of supplier industries, land use planning, credit card laws, non-performing loans, cheap infrastructure, and tax rebates.

Thanks to all these practices, a true level playing field would require America to supervise the domestic policies of foreign nations, which is obviously not feasible. Even if we reached agreements on paper to end these subsidies, we would still have to enforce these agreements on the ground, as the other side would have a multi-billion dollar incentive to cheat.

Foreign governments often face strong domestic political pressures to keep these subsidies in place even when they want to strike a deal with the U.S. to eliminate them. China, for example, is full of effectively bankrupt state-owned companies that can’t be allowed to collapse for fear of unleashing a tidal wave of unemployment.

In other nations, subsidies are products of the day-to-day political bargaining that goes on in every country as governments buy political support and buy off opposition, so eliminating subsidies just to keep America happy would risk unraveling the balance of power.  Our own difficulties abolishing unjustified agricultural subsidies illustrate just how hard it is to repeal entrenched subsidies.

Level playing fields tilt the other way, too: Americans tend not to realize how many subsidies our own economy contains. But judging by the same standards the Commerce Department applies to foreign nations, they are legion.

Agricultural subsidies are just the beginning, and already a flashpoint of international trade disputes. (They basically scuttled the Doha round of WTO talks in 2008.) But there are thousands of others, ranging from the Import-Export Bank (cheap loans for exporters) to the Hoover dam (cheap electricity).

This is just on the federal level; states and localities constantly bid subsidies against each other to attract businesses. Every tax credit, from R&D and worker training on down, subsidizes something, and if that something is exported, then it constitutes an export subsidy.

So unless we are prepared to have foreign bureaucrats pass judgment on all these policies, subsidies both here and abroad are unavoidable and a true level playing field is impossible. And if a level playing field is impossible, then no free-market (or to be realistic, “free” market) solution will ever balance trade, and balanced trade will have to be some kind of managed trade.

Managed trade doesn’t have to be a scary word.  It doesn’t imply a bunch of Soviet commissars determining who buys what.  We basically had a system of managed trade under the 1945-71 Bretton Woods system of fixed exchange rates and capital controls. During that period, we had more economic growth, and much lower trade deficits, than we have today.  There’s a lesson in that.