Losing the trade war

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America's manufacturing sector is literally disappearing before our eyes. With 3 million manufacturing jobs gone, a once unimaginable trade deficit and daily evidence of the fading viability of American manufacturing, almost no one seriously denies that we are facing a trade crisis.

But despite the vanishing of our industrial base, policy-makers have thrown up their hands, declaring that we must adjust to the new realities of globalization. This tunnel vision on trade is fatalistic — and dead wrong. We must take a third way, rejecting protectionism and the current system of anything goes. If we are serious about allowing American manufacturers to compete, we must take serious steps to end the manipulation of international trading rules.

There are signs that Americans are not ready to accept the "inevitable" decline of American manufacturing. Polls show significant doubts that current "free" trade policies are working for America, and last year's elections produced big gains for trade "skeptics" who ran on the need for a fundamental shift in policy. Nevertheless, we continue sleepwalking down the same path.

The fact is that the policy debate on trade has been hijacked by a remarkably effective scare-mongering apparatus. Washington elites — as well as most of the mainstream press — speak with largely one establishment voice on trade, raising the prospect that any real change would only lead to protectionism, trade war and a global depression. This apocalyptic view has handcuffed policymakers and cowed many voters. The result is a Titanic-like fatalism — the view that working-class Americans cannot hope to maintain their current standard of living now that we have hit the iceberg of "globalization."

The great irony is that this accepted wisdom is precisely wrong. American manufacturing is not being harmed by market competition, but by well-understood foreign market distortions — cheating, for lack of a better word. The sad truth is that American manufacturing is dying not on the altar of the market, but by the sordid brushfire of mercantilist countries that refuse to play by the rules.

Take currency manipulation. Experts believe that China has kept the yuan undervalued by as much as 40 percent, giving its manufacturers a huge cost advantage over U.S. producers. Similar practices in Japan are estimated by U.S. automakers to cost them up to $9,000 per vehicle. Such practices have nothing to do with any true cost or "market" advantage, but have become a lead weight around the neck of American manufacturers.

Less well-publicized, but no less important, are international tax rules that blatantly disadvantage U.S. producers. Due to Byzantine WTO rules, U.S. manufacturers are essentially double-taxed when selling abroad — i.e., they must pay both U.S. income taxes and foreign value-added taxes. Foreign producers, by contrast, can sell here largely tax-free. These rules — which are routinely derided as irrational by economists — often add another hit of 12 percent or more on the bottom line of U.S. manufacturers when competing against foreign trade.

These issues are typically seen as too "big" to tackle, but all we need is the will. Congress should provide a set period for a solution through international negotiations, and make clear that the United States will apply additional duties to offset the unfair advantage if our trading partners refuse to come to the table.

And these are far from the only issues where the United States is playing the patsy on global trade. Massive subsidies in China go without remedy because we refuse to apply our anti-subsidy law. Foreign countries like Japan, India and others rig their home markets and then unlawfully dump excess production in the United States. In all of these cases, strong action to redress proven distortions is opposed by free-trade hand-wringers, afraid to anger our trading partners.

A single piece of trade legislation could address the bulk of these problems, be passed through Congress and almost overnight fundamentally change the competitiveness of American manufacturing.

We have all the leverage in the world if only we are willing to use it. Our $800 billion trade deficit is effectively financing the growth and exports of the rest of the world. And the prospect of losing access to the most lucrative and coveted market in the world will certainly focus the minds of our trading partners. That is the first step to real change, but we must have the courage to take it.

Fears of a trade war are both misplaced and beside the point. We are already in a trade war — and we are losing. The choices are simple: continue with the status quo and continue the loss of our manufacturing base, or embrace a "third way" on trade that rejects both protectionism and unbridled laissez-faire. A well-conceived and executed trade policy will enhance the efficiency of the global economy and lead foreign countries to change their behavior, rather than risk blowing up the global system.

The real question is whether it will ever be seriously considered, or if we will continue down the path of fear and resignation that has stymied any real policy response.

Robert Lighthizer is an international trade lawyer and a former Reagan administration trade official.