Global Trading Futures
For the world to avoid closing, the US remains indispensable still
International trade is in trouble after the global financial crisis and, with the new Trump administration, the world faces a protectionist onslaught. Here I present three scenarios for international trade – one ‘more likely,’ and the other two ‘less likely.’
Three features stand out in the global state of play. First, global trade growth has slowed markedly. (Some have called this ‘peak trade.’) International trade grew twice as fast as world output in the quarter-century before the global financial crisis. It slumped during the crisis, then picked up, but since 2012 has barely kept pace with global GDP growth. Last year, it hardly grew at all, falling below the rate of world GDP growth.
Second, protectionism has increased since the global financial crisis. It has not escalated to 1930s’ heights, nor has it reversed existing globalization. Instead, it has been creeping up – mostly through anti-dumping duties and insidious non-tariff barriers like subsidies, onerous standards requirements and public-procurement restrictions.
Third, President Trump has announced the US’s withdrawal from the Trans-Pacific Partnership (TPP). The TPP is the most ambitious trade deal in 20 years, with hard rules for freer trade and foreign investment. Furthermore, it is meant as a geopolitical signal of American re-engagement in Asia – the vaunted US ‘pivot.’ Now these economic gains are foregone. A dangerous missive of US disengagement from Asia has been dispatched.
This leaves the field open for China to assume trade leadership in Asia. It is already doing so on infrastructure. China is the leader of the Regional Comprehensive Economic Partnership (RCEP), which brings together the 10 ASEAN countries plus six others. But RCEP is shaping up to be a typically ‘trade-lite,’ intra-Asian agreement. While it will eventually remove most import tariffs, it will likely do little to tackle the non-tariff and regulatory barriers that are by far the biggest obstacles to trade and foreign investment in Asia.
The ‘more likely’ scenario is that of trade winds blowing in a more protectionist direction, starting in the US. In addition to withdrawal from the TPP, President Trump plans to renegotiate NAFTA, and has threatened high tariffs against China and also US companies that relocate production abroad. He has said that he will ignore the WTO. The US’s other major trade initiative – a free-trade agreement (TTIP) with the EU – is either stalled or dead. Trump’s appointees for senior trade-policy positions are fellow economic nationalists. All are obsessed with trade deficits, China-bashing, and industrial policy to revive American manufacturing.
New US protectionism could begin with a spike in anti-dumping and countervailing duties, aimed first at China. Import taxes, euphemistically called a ‘border tax adjustment,’ could be part of a US tax reform package. Other measures that would cause a flood of WTO disputes might follow. To be sure, other players would follow the US protectionist lead, starting with the EU and China. If this happened, it would only accelerate trends since the global financial crisis. Protectionism would no longer be creeping – it would accelerate, affecting bigger chunks of international trade, and disrupting global value chains. That would drive global GDP growth even lower.
Still, there are powerful countervailing forces – the most potent of which is existing globalization through global value chains. US companies are woven thickly into these chains, and they will likely lobby against Trump-led protectionism. American producers and consumers will suffer from US protectionism and other countries’ retaliation. The Congressional Republican leadership, some Cabinet members, as well as Republican and some Democrat state governors, could restrain the economic-nationalist impulses of Trump and his senior trade team.
A more pessimistic scenario would be a full-blown trade war: unrestrained US protectionism, escalating tit-for-tat retaliation by the EU, China and others, the possible breakup of NAFTA, and the severe disruption of global value chains. This would be a lurch back to 1930s’-style protectionism, de-globalization and depression. For now, this still seems unlikely.
A more optimistic scenario would have others take up the baton of open-market trade leadership. The EU might be up for it; China also. International cooperation would be more equally shared. The WTO would be revived. And yet this scenario is doubtful, as both the EU and China have ever bigger internal weaknesses that limit their ability to lead abroad. Absent the US, prospects for international trade cooperation are bleak – not least in the WTO.
Outward-looking US leadership is still essential for international trade. Without it, the world economy would be worse all-round – more unstable and less open. That is true for other areas of global economic policy, and indeed for global security. Bref, contrary to gathering conventional wisdom, the US is still the ‘indispensable nation.’
Razeen Sally is Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore, and Chairman of the Institute of Policy Studies in Sri Lanka.