A new world order for trade
Rising trade tensions could be contagious
President Trump’s vow to drastically reorder world trade to greatly favour the US will damage the US and wider global economy. But if other countries fight back by devising more effective trade agreements, then the world will be better off.
Trade was in trouble before Trump. Its growth has slowed sharply in recent years. The cause is likely mainly structural, such as the impact of deep integration of supply and value chains, rather than cyclical.
However, protectionism is rising too. G20 economies introduced some 120 discriminatory rules in 2009, but triple that number last year; and the long, tortuous and deeply contentious negotiation of the Trans Pacific Partnership showed how out of touch governments were with the public and new economic realities.
Good, new trade agreements will need five main qualities:
Strong mechanisms to promote better integration of economies and value chains.
High environmental and labour standards.
Effective ways to support workers and communities adversely impacted by international trade.
Dispute settlement processes based on sovereignty principles and judicial practices.
Transparency and accountability to build public trust. Trump’s ‘‘America First’’ doctrine, though, is the complete antithesis. He sees trade as a zero-sum game. The US can only win if another nation loses.
Every dollar of Mexican exports has 40 cents of US value embedded in it, or GM and its local affiliates sell 50 per cent more cars in China than GM sells in the US.
Likewise, Trump is determined to wipe out essential US regulations, notably environmental ones, and to promote fossil fuels while the rest of the world is trying to clean up its act, and respond to climate change.
Peter Navarro and Wilbur Ross, Trump’s leading trade adviser and nominee for Commerce Secretary respectively, laid out this blueprint for him last September. It’s available at nz2050.com/TrumpTradeDoctrine
‘‘The frightening fact is that the people who seem closest to Mr Trump believe things that are almost entirely false,’’ Martin Wolf, the chief economics columnist of the Financial Times, wrote this week, available at nz2050.com/WolfTrump
Here are some of the crashing contradictions in Trump’s agenda: his plans for public spending on infrastructure will create looser fiscal policy and higher inflation. This will result in tighter monetary policy, higher interest rates, a higher US dollar, weaker exports, stronger imports, fewer jobs and a bigger trade deficit.
On trade, the pivotal issue is how Trump responds to the damaging advice he’s getting. If he has only enough attention span to win some Tweetable victories, real or fabricated, then companies and nations could cope.
Moreover, he already has legitimate trade dispute mechanisms to pursue. Last year, for example the US and EU
Every dollar of Mexican exports has 40 cents of US value embedded in it
imposed swingeing tariffs on coldrolled plate steel which Chinese producers are selling far below cost.
But if Trump launches a fullblown attack on Mexico and China with the likes of the high, acrossthe-board tariffs he’s talked of, they have ample opportunities to retaliate. Then the risk is high of contagious damage elsewhere in the global economy.
While they and other trading partners will have to push back against the US in the short-term, their most effective response longterm will be to change the rules of trade for the better.
For example, China and the EU are strongly committed to action on climate change. They could legally impose tariffs based on the carbon-intensity of products, thereby penalising dirty and profligate energy users like the US. Similarly, they could develop new protocols on investment and labour standards to improve the quality of their economies.
Doing so, they would help make the global economy fairer and wealthier, even as the US was retreating behind its borders. These, though, are very big ambitions requiring new thinking.
In recent years NZ and other countries have got stuck in our own zero-sum game. For all the massive complexity of TPP, it was only ever going to deliver miniscule economic gains.
Now though, the US is forcing us to achieve international progress worthy of the 21st century.