THE DEATH OF FREE TRADE?
Trump has thus far done a good job of alienating key allies in Europe and the Middle East through a mixture of threats and patronising rhetoric, writes S. MUBASHIR NOOR
THE World Trade Organisation (WTO) is presently caught in the crossfire of sharply worded threats between Washington and Beijing.
United States President Donald Trump routinely threatens to pull out of the global trade-regulating agency and pursue protectionist trade policies because the WTO “has treated the United States very, very badly”.
He has, since assuming office, acquired a reputation for tearing up international agreements like the Trans-Pacific Partnership and the Paris Agreement on climate change. This, in turn, makes America’s allies very antsy about the future of free trade.
Trump believes WTO is partially responsible for its long-running trade deficits, especially with China. Also, while the US has for decades kept open its markets to foreign brands with minimal barriers, the agency has willfully turned a blind eye to the rest of the world’s unreasonably restricted access to China’s domestic consumers.
This ties into Trump’s previous accusations that Beijing systematically manipulates its currency to boost exports, and steals technology from foreign manufacturers to create cheap knockoffs that eventually flood the market and elbow out the real deal.
Moreover, invoking Washington’s classic mantra of “national security”, he has decided to review the US licenses of Chinese companies operating in technology industries, besides denying the state-owned China Mobile access to the US cellphone network.
And, on July 6, broadband tariffs against China to the tune of US$34 billion (RM137.31) snapped into place that portend stock market volatility in the coming days. Trump also has Canada, Mexico, the European Union (EU) and Japan in his crosshairs, with steel, aluminium and automotive tariffs ready to roll out.
China, meanwhile, has responded in kind with its own set of import levies on US goods and promised to match the ante, while urging Washington to refrain from Cold War — style rhetoric and reducing international trade to a zero-sum game.
The WTO, unsurprisingly, has been made a scapegoat to explain the decline in American industrial competitiveness despite the US having a net positive record of winning trade disputes through the forum. Perhaps, the problem is the agency had always striven to remain objective as opposed to turning into Washington’s policy lever like the International Monetary Fund (IMF).
Hence, a cursory understanding of why the WTO matters is important to refocus this debate away from the dissonant media chatter being generated by all parties.
There are a few cardinal things the WTO stands for: international trade regulated by rules-based consensus, resolving disputes through an impartial framework, and promoting “comparative advantage” as the cornerstone of global commerce.
Consequently, there are broad harms to American interests should Trump eventually quit the WTO.
First, China’s targeted reciprocal tariffs on US agricultural products will greatly hurt American farmers, so in essence they benefit one constituency at the monetary expense of another equally influential demographic. China as the world’s largest soybean buyer has already cancelled most of its annual orders from the US, its largest seller, and instead opted for Brazil to cover the difference.
Second, the value of Trump’s aluminium and steel tariffs are contingent upon domestic producers quickly stepping in to cover for their high demand in industries such as automobiles, aerospace and construction. If there is a supply lag, as forecast, input costs will rise significantly for American businesses that rely on imported metals as raw material.
The American Automotive Policy Council in fact estimates the tax burden on domestic manufacturers will rise by US$90 billion annually as a result. The tariffs have also alarmed foreign carmakers like Nissan, Honda and BMW that have invested millions in US manufacturing plants and employ thousands of workers.
Third, conventional economics dictates a sudden increase in the price of production inputs will have a three-fold effect. First, it will most certainly raise the prices of finished goods for American consumers, while also reducing the choices available to them should China, the EU and Japan decide to bail from the US market in terms of both exports and local manufacturing facilities.
Moreover, many of these industries are price sensitive and when faced with customer desertions may drastically scale back operations, retrenching thousands of blue-collar workers and forcing them to seek government handouts. Also, the ensuing sluggish demand for these products could have a deflationary effect on the economy and thereby set the US, and likely the globe, on the slippery slope to recession akin to 2007.
It also bears remembering that
Trump believes WTO is partially responsible for its long-running trade deficits, especially with China. Also, while the US has for decades kept open its markets to foreign brands with minimal barriers, the agency has willfully turned a blind eye to the rest of the world’s unreasonably restricted access to China’s domestic consumers.
The writer is an Ipoh-based independent journalist