An unravelling of free trade
Shots fired! Shamubeel Eaqub reviews the Trump tariffs.
America has fired the first shot of a trade war. A fullon trade war may still be averted. But the spirit of global cooperation, which has shaped the world since World War II, is unravelling to be replaced by fear, division and isolation.
In such a world, New Zealand will lose its outsized global standing, unless we can forge new relationships that don’t follow a centralised approach.
Trade protection was common. The US had a long history of it to encourage self-sufficiency and to build up industry.
Evolution to free trade followed World War II. These were hardfought gains, for a common rulebook to engage in more liberal global trade.
Arguably, the increase in trade around the world, transfer of knowledge and capital, have contributed to the massive reduction in global poverty over time.
Poverty has fallen and inequality between countries has shrunk. But many rich countries have experienced widening inequality at home. The loss of jobs, particularly in manufacturing, has stirred up isolationist and antiglobalisation attitudes.
In the US, Trump promised to make America great again. The exact policies have been elusive, until the latest and surprising announcement of tariffs.
The tariffs will increase the cost of imported steel by 20 per cent and imported aluminium by 15 per cent. It will help local producers, but the higher cost of inputs will hurt industries that use these raw ingredients.
Metal processing employs about 0.4 million people. Industries that use steel and aluminium employ about 6.5 million. The tariffs are likely to lead to greater jobs losses across the economy than the gains in the smelters.
These kinds of policies are unlikely to make America better off, otherwise everyone would be doing it.
Surprisingly, China was not singled out for dumping, as Trump alleged repeatedly during his election campaign. Instead, the tariff will hit its friends and allies, who are the largest exporters of steel and aluminum to the US: Canada, EU, South Korea, Mexico, Brazil, Taiwan.
The EU is considering counter measures against iconic US exports from swing states: Harley Davidson motorcycles, bourbon, and orange juice.
These would likely break World Trade Organisation (WTO) rules.
If the largest economies in the world disregard WTO rules, the legitimacy of global organisations will crumble.
It will be the beginning of the end of an era that rose from the ashes of World War II.
It may not come to that. Already US trade negotiators have taken a more conciliatory tone than the bold announcements by Trump.
The EU may stop shy of breaking rules. But it may be too late to stop the crumbling of the legitimacy of the WTO and other supranational agencies.
If it does, it could trigger a vicious cycle of measures and countermeasures designed to exclude foreign producers and protect domestic producers.
Our experience of this kind of trade war in the early 1900s was not good – everyone lost. A global recession can’t be ruled out.
For New Zealand, the current global order gives us outsized influence, relative to our puny share of the global economy (0.2 per cent of global trade and 0.1 per cent of global economy).
It is in part about our historical role in World War II and in part earned by taking positions of moral authority that only small, distant and insignificant places can.
The latter is possible in a safe global framework, where size and might are not the only considerations.
Any erosion of these institutions will increase the importance of regional co-operation.
New Zealand has long neglected its own backyard, the Pacific and Asia. China, Australia and others have been more active.
We should look to re-establish and strengthen those ties. Or we will find our outsized position of influence is unravelling alongside the global order.