JOAKIM REITER AND GUILLERMO VALLES
GENEVA
– While US President Donald Trump has promised an “America first”
approach to economic policy, it is simplistic – even misleading – to
describe that approach as merely protectionist. Rather, Trump’s modus operandi is revanchism. As he put it in his Inaugural Address:
“We must protect our borders from the ravages of other countries making
our products, stealing our companies, and destroying our jobs.”
Trump
believes that the global economy is rigged against America, and he
wants to change the rules fundamentally. But what revanchism will look
like in practice is an open question. During the campaign, Trump said
that he would be prepared to impose significant and comprehensive
tariffs on imported goods. Frankly, however, this is unlikely to happen.
Terminating existing trade agreements, or disregarding the global trade
rules that prevent the US from unilaterally raising tariffs, would
invite a trade war, which would have immediate and harsh economic
consequences. It is hard to believe that the US Congress would allow
this.
A more realistic scenario is that the new administration will employ four other instruments.
The
first is trade remedies, such as anti-dumping duties, which are
generally used to combat unfair trade practices, but can easily be
exploited by politicians who seek to blame other countries for their own
industries’ lack of competitiveness.
The
Trump administration’s extensive leeway to pursue this option does not
bode well for global trade. Duty hikes are problematic not just because
they can be imposed on questionable grounds; they also tend to trigger
domino effects, because other countries – many of which have much
practice using and abusing these instruments – will adopt similar
measures.
A
second instrument at Trump’s disposal is managed trade, which entails
cutting deals directly with companies in order to reduce exports to the
US, or to cap their market share. Such deal making is usually
accompanied by a threat of new barriers if companies do not cooperate.
For
example, in the 1980s, the US entered into such agreements with foreign
car, microchip, steel, lumber, and machine-tool manufacturers. Some of
the conditions imposed then have since been banned by the World Trade
Organization. But, just a few years ago, the US auto industry pushed for
a requirement in a trade deal that would have granted it a minimum
market share of US exports to South Korea. Trump is likely to dust off
these tools, and to develop them further. If Trump wants to prevent
production from moving overseas and encourage investment from abroad, we
may soon see companies pushed to agree “voluntarily” to outsourcing
restrictions and localization requirements.
A
third instrument is bilateral “grievance” negotiations, whereby the US
will compel reciprocity from countries that are seen as piggybacking on
American openness. In the 1980s, the US used such bilateral initiatives
in an attempt to pry open foreign markets, not least in Japan. The
frustration with Japan then has obvious parallels with the new
administration’s attitude toward China today. America’s inclination to
use its home market as leverage to demand concessions from other
countries can be expected to be a prominent feature of bilateral
negotiations targeting China. But many other countries, especially those
with large trade surpluses with the US, are also likely to be potential
targets.
The
fourth tool Trump might use is enforcement – either unilaterally, by
“shaming” countries that he claims aren’t playing fairly, or through the
WTO’s dispute-settlement system. If he pursues the latter option, a
sharp increase in the number of disputes could overwhelm the WTO’s
“court,” which is already stretched thin. Meanwhile, the US itself could
face WTO litigation for Trump’s initiatives. If Trump then refuses to
respect the WTO’s rulings, the entire system’s credibility will be in
jeopardy.
There
will be significant repercussions for the rest of the world if America
moves to unravel today’s system of open, rules-based global trade – a
system of which the US has been the chief architect. Only if other
countries absorb the lessons of previous periods when revanchist trade
techniques were used can they preemptively mitigate the effects of
Trump’s measures.
For
starters, all countries should redouble their efforts to diversify
their exports to new markets. There is much untapped potential in
regional integration and trade among developing countries. Meanwhile,
countries involved in negotiations over the Trans-Pacific Partnership,
the Trade in Services Agreement, and the Environmental Goods Agreement
should carry those initiatives to completion – with or without the US.
That is not just the right thing to do; it makes sense in today’s world,
where America’s share of global trade has shrunk considerably.
Second,
key trading countries must shoulder more responsibility for the global
trading system. China made a display of leadership at the World Economic
Forum’s Annual Meeting in Davos this year, but no single country can
fill the void. The European Union and other emerging economies also need
to step forward, with the goal of forming a North-South alliance of
countries willing to defend and promote global trade.
And,
third, trading partners must reach a common understanding that they
will avoid emulating the US’s revanchist trade measures, lest they cause
a global cascade. Contagion is a very real threat to shared prosperity,
and a strong, mutual commitment to self-restraint is the only
prophylactic against it.
In
the long run, piecemeal arrangements with companies – or even for
specific products – and unilateral action against countries are no
substitute for international principles, rules, and institutions. In
fact, a revanchist US trade agenda may have a silver lining. Just as in
the 1980s, today’s situation could spur other countries to move forward
on global trade rule-making.
Emerging
technologies and the global resurgence of populism and nationalism that
Trump’s presidency embodies, will not make this process easy. But they
also make it more important than ever.
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