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Trump’s Trade War in Perspective

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SYDNEY & KUALA LUMPUR – US President Donald Trump’s recent announcement of steep tariffs on steel and aluminium imports seems to have shocked US allies, even though these were among his 2016 election promises. The European Union (EU), Australia and Canada reacted sharply, in contrast to the more restrained response from China, the main target of earlier actions.

By Anis Chowdhury and Jomo Kwame Sundaram

During his 2015-2016 election campaign, Trump repeatedly claimed that the US is being unfairly treated. He reiterated this recently, accusing the EU of being “particularly tough on the United States”, adding “They make it almost impossible for the United States to do business with them. And yet they send their cars and everything else …”.

This trade war has been raging for some time, especially since the 2008-2009 global financial crisis (GFC). The World Trade Organization (WTO) has been quite helpless in preventing the resurgence of protectionism, or stopping developed countries from effectively sending the WTO’s Doha Development Round (DDR) into a coma.

Slowing output, trade: chicken and egg?

The WTO’s World Trade Statistical Review 2017 showed that world merchandise trade growth slowed down from 2.6 per cent in 2015 to 1.3 per cent in 2016, the slowest since the GFC. World merchandise trade grew about 1.5 times faster than output after the Second World War, accelerating to more than twice in the 1990s. After the GFC, this ratio dropped to around one, and then to 0.6 in 2016, for the first time since 2001.

Explaining the trade growth slowdown by blaming prolonged slower global economic growth ignores the output-trade growth dialectic. It does not explain why trade expansion has been faster – or slower – than output growth at different times. After all, trade liberalization was associated with general economic liberalization and globalization despite slower world output growth during the 1990s.

The relationship between the output growth decline and the trade growth slowdown since the GFC raises similar doubts. Rising protectionism may explain trade growth falling below tepid output expansion. Yet, increasing protectionism is not only a response to slower growth, but may also contribute to it.

According to research by law firm Gowling WLG, the world’s top 60 economies adopted more than 7,000 protectionist trade measures between 2009 and 2016. It also found the US and EU mainly responsible for harmful trade policies! Since the GFC, the EU has adopted some 5,657 trade-restrictive measures, while the US has introduced 1,297 measures ‘harmful’ to international trade.

According to the WTO, G20 economies had implemented 1583 restrictive trade measures by October 2016 compared to around 300 eight years before, i.e., about 1300 more. Between mid-October 2015 and mid-May 2016, G20 economies applied 145 new trade-restrictive measures – averaging almost 21 monthly, up from 17 between mid-May and mid-October 2015. The latest WTO report observed that G20 economies have implemented less traditional and more opaque measures, making it more difficult to monitor and report.

All this despite G20 leaders repeatedly reiterating the mantra from their first Summit in Washington DC in 2008 declaring: “We underscore the critical importance of rejecting protectionism and not turning inward … Further, we shall strive to reach agreement … that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. ….. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome”. As is well-known, subsequent actions did not match these words.

An earlier WTO report with wider geographic coverage found 2,557 new trade restrictions by October 2015, up 17% from the previous year. Countries have increasingly resorted to discretionary, non-transparent, non-tariff barriers (NTBs), instead of more traditional, transparent trade barriers such as tariffs. These NTBs include subsidies, domestic content requirements, health and safety requirements, state-owned enterprises and public procurement. They involve much discretion, and greatly affect developing country exports.

Trump’s difference

So, what is so special about Trump’s announcement? With characteristic bluster, he announced transparent tariff measures – rather than non-transparent NTBs. Equally significantly, they were to be imposed on all others – US ‘friends’ and ‘foes’ alike, without discrimination. The Trump difference lies in his ‘America First’ brazenness. Belatedly realizing the likely political impact of treating all other parties equally, Trump later announced possible exemptions for ‘national security’ reasons.

Frustrated by the slow progress of protracted multilateral negotiations, many countries have turned to bilateral and plurilateral free trade agreements (FTAs), especially after the Obama administration and European Trade Commissioners put the DDR on hold. As Jagdish Bhagwati has long argued, such non-multilateral FTA ‘termites’ not only undermine multilateral solutions, but may – ironically – slow global trade growth.

The plurilateral Trans-Pacific Partnership (TPP) and its replacement, the Comprehensive and Progressive TPP, for the 11 other TPP countries after the January 2017 US withdrawal, have mainly been about non-trade issues. These include extending intellectual property protection and non-judicial investor-state dispute settlement, besides limiting state-owned enterprises and public procurement. Such measures involve other types of protectionism sacrificing the national interest, particularly of developing countries, while benefiting influential transnational corporations.

If the developed world really wants to avoid all-out trade war, they must return to and advance multilateralism for sustainable, comprehensive solutions. Fairly concluding the Doha Round, while keeping its development promise, as pledged by G20 leaders, will be prerequisites in this endeavor.

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