Competition, not sanctions, can check Russian aggression

Friday, Presidents Trump and Putin had their heart-to-heart talks on several ticklish subjects, one of which was undoubtedly trade. It is easy to figure out where President Trump has gone wrong. He is overly concerned with trade deficits, which leads him to indulge in selective forms of protectionism that are both politically unwise and economically self-defeating. 

Trump should, for example, be derided for the heavy tariffs imposed on Chinese steel. Any restrictions imposed on our foreign trading partners also operate as unwelcome restrictions on American firms doing business with these foreign countries. Both sides are weakened by the protectionist enterprise. The free-trade norm produces a larger economic pie that allows all nations to prosper together.

{mosads}Vladimir Putin is no stranger to hand-to-hand political combat, and going into his private meeting with Trump, he has gone on the offensive where Trump is most vulnerable. He has thus declaimed, “Protectionism is becoming the norm, while unilateral, politically-motivated restrictions on trade and investment, as well as technology transfer, are nothing but masked protectionism.” And further, “We believe that these sanctions are not only doomed to fail, but also run counter to the G20 principles of cooperation in the interests of all countries.”

Alas, Putin is inaccurate in his analysis of trade in the points that he mentions, and he is vulnerable to tough criticisms on points he does not mention at all. His first error is to treat these distinct practices as though they are the same. He is wrong to single out the United States on protectionism. If protectionism is becoming “the norm,” it is because others nations — not just the United States — have decided to engage in the practice.

The great strength of the World Trade Organization is that multilateral agreements concluded under its auspices reduce tariffs and other restrictions across the board. But these are not perfect. The European Commission and China, for example, are masterful at imposing antitrust sanctions against foreign firms as a substitute for tariffs. 

On the other hand, the question of foreign investment is more complex, especially as it is tied to restrictions on technology transfer. It is widely understood that the principles of free trade are overridden where foreign nations seek to acquire American technology, much of which relates to sensitive military and national security projects. 

These are technologies that the U.S. government often keeps from American firms who do not work in the area. When they are shared with domestic firms, it is always done under the protection of confidentiality agreements that ensure the recipients do not disclose that information to any third party or to use it in unauthorized ways. Subjecting foreign firms, over which we exercise far less control, to these same restrictions should not be tarred with the protectionist brush.

Sanctions, moreover, are the furthest thing from protectionism. These sanctions are a direct limitation on the ability of American firms to sell overseas, in ways that cramp their profits. Imposing sanctions on Russia for its takeover of Crimea cannot be attacked as a matter of high principle. But, as Putin notes, these activities are likely to be self-defeating.

The use of sanctions opens up opportunities for other nations to sell to the target nation at prices that are above the competitive level but below the market price once the sanctions are put into place. Hence, they are ineffective. The sanctions also force American companies to lose opportunities and profits and thus the ability to lobby against the continuation of the program. So the system does not work, except in very limited circumstances.

Given the weakness of sanctions, what can and should be done to hurt the Russians? It is an open secret that the Russians have used their control of vast natural gas resources by Gazprom as a political lever in their dealings with nations in Western Europe and Ukraine. To counter that threat, Western Europe needs to urgently diversify its sources of natural gas.

Instead, German Chancellor Angela Merkel, as Paul Gregory reports, has exercised her typically questionable geopolitical judgment by backing the Russian plan to build Nord Stream 2 — a second pipeline through the Baltic Sea that increases the Russian presence in European market.

At this point, Donald Trump should use free trade policies to undercut that activity by hastening — as his administration has started to do — the proliferation of American natural gas exports in order to undercut Gazprom dominance. That is a move the wily Putin has to fear because low prices offer a far more durable countermeasure against Russian dominance. 

No potential user of natural gas needs to have his or her arm twisted to purchase gas at a lower price. The larger supplier strengthens both the American firms that sell at a profit and our allies, who can buy gas at a lower price. Donald Trump should remember that free trade is our powerful ally because it can change the flow of wealth and the political allegiances of all nations.

The Putin screed against protectionism is helpless against this form of competition. Now the rest of the world, Germany included, has to understand how competitive markets in natural gas lead to stability in the global political arena — a lesson that should outlast the Hamburg round of G20 meetings. 

Richard A. Epstein is the Peter and Kirsten Bedford senior fellow at the Hoover Institution, the Laurence A. Tisch professor of law at New York University Law School and a senior lecturer at the University of Chicago. 

The views expressed by contributors are their own and not the views of The Hill.