INTRODUCTION 116 I. A MACROECONOMIC SOLUTION TO TRADE IMBALANCES 118 II. ECONOMIC NATIONALISM AMERICAN STYLE 123 A. Objectives of U.S. Policies 123 B. Executive Orders and Actions 129 C. Trade Agreements 131 D. Currency Manipulation 134 E. Tariffs 137 F. On the Defensive in the WTO 142 III. FALLACIES OF ECONOMIC NATIONALISM 143 A. Jobs and Wages 145 B. Trade Deficits 154 1. Trade as a Zero-Sum Game 155 2. Global Supply Chains: Behind the Trade Deficit Numbers 156 3. The U.S. Balance of Payments 157 C. Perils of American Unilateralism 160 1. The Search for Reciprocity 161 2. Leverage to New Trade Agreements 164 a. WTO Norms 167 b. Trade "War" with China 168 IV. THE PATH FORWARD: MULTILATERALISM 177 A. China Shock 179 B. The Smart Way to Deal with China 183 1. Box China in with Regional Free Trade Agreements, the TPP and the T-TIP 184 2. A "Trump Round" of Trade Negotiations 189 3. Use of the WTO Dispute Settlement System 190 4. Use of WTO Councils, Committees and Working Groups 192 5. Continued Bilateral Engagement 193 CONCLUSION 194 INTRODUCTION
After more than two decades of relative quiet, international trade and investment law has once again taken center stage in importance in the annals of international law. (1) In an historic shift the United States has taken steps to implement new trade and investment policies sparking anxiety and anger in capitals all over the world. (2) The administration of President Donald J. Trump has announced new trade policies based on an ideology of "economic nationalism." (3) The purpose of these new trade policies is to improve the terms of trade of the United States with respect to its economic partners. (4) The Trump administration's trade policy singles out China for special opprobrium because of its large trade surplus with the United States; however, no economic partner of the United States is exempt from criticism. (5) Even NATO allies in the European Union, Canada and Mexico are caught up in this new movement. (6) As a result, important economic treaties, the North American Trade Agreement (NAFTA) and the World Trade Organization agreements achieved in the historic Uruguay Round in 1994, are under fire. (7)
The Trump administration's actions concerning international trade are unprecedented in the post-World War era. They are troubling because, for the first time in modern history, the United States is blatantly and unapologetically disregarding established rules of international trade and the multilateral trading system developed under U.S. leadership during the past seventy years. (8) The Trump administration's trade policy seeks to promote U.S. interests through protectionism, bilateral "deals" to rebalance trade flows between countries, and by managing trade sector-by-sector notwithstanding objective legal rules. (9)
Our thesis in this article may be simply stated: we believe economic nationalism is fundamentally wrongheaded. Economic nationalism is based on flawed economic analysis and false economic assumptions. (10) However, we agree that serious unanticipated problems have come to the fore in the political economy and the law of international trade that need to be addressed. First, the U.S. trade-in-goods deficit, $807.5 billion in 2017, (11) is excessive. This problem, long ignored by policymakers, needs attention. Second, certain rules of the multinational trading system and trade pacts such as the North American Trade Agreement, are out of date and need revision. (12) Third, fundamental economic interface problems exist between the United States and certain countries, especially China. (13) In short, the terms of trade between the United States and the rest of the world need improvement.
We therefore not only offer criticism of the economic nationalism policies of the Trump administration; we also outline alternative solutions to the trade problems that plague the United States. Specifically, we call upon the Congress to act to provide macroeconomic cures for trade deficits. We also suggest ways of engaging China to deal with American grievances with that nation.
This article, proceeds in four parts. In Part I we explore what we believe are the real, underlying causes of U.S. trade imbalances, macroeconomic factors largely within the control of the United States. We propose macroeconomic solutions that should be undertaken by the Congress and the administration. In Part II we summarize the doctrine of economic nationalism put forward by the United States and the specific steps being taken to implement that doctrine. In Part III we analyze the tenets of economic nationalism to expose its falsehoods and flawed assumptions. In Part IV we propose international law-based solutions to present trade problems and the so-called "China Shock" that currently plagues the multilateral trading system. The United States and other trading nations must find common ground to manage present difficulties and to achieve new settlements in international trade.
A MACROECONOMIC SOLUTION TO TRADE IMBALANCES
The underlying cause of the U.S. trade deficit is the macroeconomic imbalance between the low U.S. savings rate and the United States' need for domestic investment capital. Since U.S. domestic savings fall far short of fulfilling the United States' need for capital, the U.S. economy is sustained by massive amounts of foreign investment capital. (14) The sources of this investment capital are the dollars earned when U.S. trading partners run trade surpluses with the United States. (15) Understanding these macroeconomic facts is key to understanding trade imbalance problems.
Superficial analysis may lead to the conclusion that the U.S. trade deficit may be cured by erecting trade barriers to imports and getting U.S. trading partners to revalue their currencies against the U.S. dollar. This is the basic premise of the Trump administration's economic nationalism. Empirical evidence shows that this approach has not worked in the past. The Reagan administration employed this strategy with respect to Japan in the 1980s. (16) Not only did this strategy not work, (17) it resulted in economic disaster for Japan. (18) In the 1980s the Reagan administration, to reduce the growing trade deficit with Japan, adopted trade restrictions in the form of "voluntary" quotas on autos, machine tools, and other Japanese exports. (19) In the 1985 Plaza Accord, Japan agreed to accept a large degree of appreciation of its currency, the yen, against the U.S. dollar. (20) These actions failed to make even a small decrease in the U.S. trade deficit with Japan. (21) In 1985, the trade deficit was forty-six billion dollars; (22) and in 1989 the deficit was forty-nine billion dollars. (23) In Japan the doubling of the yen contributed to an asset bubble, which caused great economic problems in that country. (24) The U.S. trade deficit with Japan was temporarily lowered only in 1990-92, when Japan's bubble economy collapsed. (25) But the deficit with Japan rebounded in 1993 to over fifty-nine billion dollars, and it remains high today. In 2017, it was sixty-nine billion dollars. (26)
The Trump administration's tariffs and other measures have failed to reduce the U.S. trade deficit. Despite the administration's tariffs and other trade measures, and notwithstanding a huge rise in U.S. energy exports stemming from greater U.S. production of oil and gas, Americans are buying ever more foreign goods and services. In October, 2018, the last statistic available before this article went to press, the U.S. trade deficit widened to $55.5 billion, the highest monthly deficit in ten years. (27)
Trade import restrictions and currency changes will not sink the trade deficit because excessive foreign imports constitute only the symptoms not the root cause of the trade deficit. The root cause of the U.S. trade deficit is the current macroeconomic structure of the U.S. economy, which emphasizes consumption and government spending and disincentives saving. The four components of U.S. GDP are: (1) consumer spending; (2) investment; (3) net exports; and (4) government spending. (28) Of these the most important are the first and last, consumer and government spending. Consumer spending is emphasized in the United States, in recent years hovering around seventy percent of GDP. (29) The second major component, government spending, is excessive and virtually out of control. According to the Congressional Budget Office (CBO), the combination of the unfunded tax cut enacted by the Congress in 2017, and the $1.3 trillion government spending bill enacted in 2018, mean that the U.S. budget deficit will rise to $804 billion in fiscal 2019, and will exceed one trillion dollars in fiscal 2020. (30)
The structure of the American economy that emphasizes consumer spending means that the personal savings rate in the United States is quite low. In December, 2017 the U.S. personal savings rate fell to 2.4%, a twelve year low. (31) The U.S. personal savings rate since 1960, has averaged only 8.2%, (32) one of the lowest rates in the developed world. (33) From a macroeconomic standpoint, the United States has a severe shortage of domestic savings with which to fund two very important items of its economy--investment and the fiscal deficit.
Where does the money come from every year to fund these two critical items? Answer: foreign capital. The United States needs and is dependent upon importing massive amounts of foreign capital every year to fund needed U.S. investment and the U.S. budget deficit because domestic savings alone cannot do the job.
And where do foreign countries get the dollars to supply the capital needed by the U.S. economy? Answer: from their trade surpluses with the United States. George P. Schultz, former U.S. Secretary of Labor, Treasury and State, and Martin Feldstein, professor of economics at Harvard and former Chairman of the U.S. Council of Economic Advisors, put it succinctly: "If a country consumes more than...