Cao, Lan, Pride and Prejudice in U.S. Trade (September 19, 2016). 7 Notre Dame J. Int’l & Comp. Law (2016 Forthcoming). Available for download at SSRN: http://ssrn.com/abstract=2840911

“Trade has become a highly contentious issue in the United States, as major Presidential candidates line up to denounce trade as “fraudulent” and “disastrous for the American worker.” Populism from both the left and tfhe right has played into nativist fears of openness, including fears of open economies and free trade. Trade is equated with job loss and trade deficit, caused by foreigners who cheat and don’t play fair. Much of the corrosive anti-trade rhetoric has taken on nationalist overtones and is regularly targeted against China and Mexico and other countries that make up the non-white global poor. The United States also has trade deficits with the European Union generally and Germany particularly, for example, and yet Germany has escaped American wrath and derision.  What underlies the current trade controversy in the United States is the belief that jobs, particularly manufacturing ones, should not be allowed to leave the United States and that if they do, trade is generally bad and particularly bad if shifted to apparently undeserving countries like Mexico, China, and India.  But the controversy is not just about job loss. Job loss is but a proxy for a resurgent economic nationalism at odds with the international order established by the United States after World War II. Indeed, technology has phased out millions of jobs in both the manufacturing and service sectors, yet technology is not demonized.  The Article makes two main points – the need to zoom in and understand how the nature of trade has changed and the need to zoom out and see trade broadly, as intertwined with U.S. national security and dollar supremacy.  First, zooming in and looking at trade deeply show that 80 percent of world trade is characterized by interconnected global supply chains. Production is integrated vertically across different countries. It is fragmented, task by task, via integrated chains and involves “multilocation” processes transcending national territory. Yet trade continues to be conceptualized in old terms – single-country or “monolocation” production. This antiquated framework has resulted in misleading trade figures that overstate import figures and the trade deficit and misrepresent the relationship between imports and job loss, further fueling nationalist backlash.  The iconic Apple iPhone, for example, is made everywhere and thus nowhere. U.S. import statistics as to the true origin of the product are misleading. The design, development and marketing, as well as the software creation, are done by Apple in the United States. But the parts that make up the iPhone are made everywhere: Japan, Netherlands, Korea, Germany, the United States and elsewhere. These parts are finally assembled by a Taiwanese company in Shenzhen, China. The iPhone is labeled “Made in China” because China is the final assembly site. The entire unit cost of $179 is credited to China, although China constituted only $6.50 per unit or about 3.6 percent of the total cost. Such distortions facilitate the demonization of trade and trade with China in particular, and paint a gloom-and-doom picture of supposed U.S. economic decline that is more fiction than fact. In a world of vertical integration, U.S. imports are also likely to contain many parts made in the United States by U.S. workers, which means that a large portion of the money U.S. consumers spend on such imports actually goes to U.S. companies and workers. Moreover, exports and imports are two sides of the same coins. The Article shows how restricting imports will end up harming the much prized export sector. Erecting trade barriers to protect manufacturing jobs will also harm the much prized service sector because manufacturing and services are intertwined along global supply chains. Interconnectivity can be seen in other ways. Much of U.S. imports are affiliated transactions, in which US-headquartered firms import from their foreign affiliates or alternatively, in which foreign firms operating in the United States import from their parent corporations. The United States pays for its imports with dollars, which the world gets and reinvests in assets – stocks, bonds, real estate – in the United States. Indeed, the trade deficit is offset by a corresponding financial surplus and foreign investment surplus. Boundaries are indeed blurred. The second argument involves a call to zoom out, so trade can be examined broadly. The Article shows how trade and development are linked to national security, as acknowledged by the U.S. National Security Strategy since September 11. It is in U.S. interest for poor countries to be plugged into rather than severed from the international trade system. As Cordell Hull, Secretary of State in the Franklin Delano Roosevelt Administration said, “When goods don’t cross borders, armies will.”  U.S. trade also cannot be separated from the U.S. dollar and its supremacy as international reserve currency. Even trade between countries that have no contact with the United States is most likely conducted in dollars. Central banks hold reserves in dollars. Even when President Nixon closed the “gold window” in 1971 and ended U.S. promise to redeem dollars for gold, the dollar remained unrivaled. U.S. agreement with Saudi Arabia to price oil in dollars means the world needs dollars to pay for oil – hence the term petrodollars. While the United States can print dollars, the rest of the world cannot. They get dollars by exporting. If the United States were to erect trade barriers to impede exports by other countries, it would hurt the dollar’s unique status and diminish the dollar’s “exorbitant privilege,” as charged by French Foreign Minister Giscard D’Estaing. In fact, from a nationalist standpoint, free trade and dollar supremacy have been great for the United States. It is, at the very least, ironic that trade is under attack in the United States on nationalist grounds.”