Wednesday 14 Nov 2018 | 13:18 | SYDNEY
Wednesday 14 Nov 2018 | 13:18 | SYDNEY

American trade policy returns to “aggressive unilateralism”

By

COMMENTS

9 April 2018 11:15

America’s new haphazard and confrontational approach to trade policy under President Donald Trump is rapidly taking shape.

Risks of escalating protectionism and a damaging trade conflict between the US and China are rising. The two have already exchanged tit-for-tat moves with regard to Trump’s steel and aluminium tariffs. Now, following US allegations of Chinese technology theft, the focus has shifted to potential tariffs on US$50 billion of each other’s exports, with Trump threatening to raise this to US$150 billion if China retaliates. Tense negotiations are also ongoing with Canada, Mexico, the EU, and others.

Critics widely condemn Trump’s approach as inherently damaging, based on flawed economics, leading only to protectionism and a potential trade war, and otherwise undermining the rules-based system built around the World Trade Organisation (WTO). The 1930s descent into global protectionism provides the cautionary frame of reference.

Yet Trump’s unorthodox and unpredictable style make it difficult to take anything at face value. The hope remains that this is all just negotiation bluster and that a deal will be struck that limits the damage. Indeed, Trump walked back his steel and aluminium tariffs partially by granting (temporary) exemptions to most allies, though not all. And top administration officials have been publicly making this argument in an effort to calm financial markets. Trump’s threats of further escalation, however, have not helped.

But did such a strategy ever make sense? Rather than the 1930s, proponents often point to the 1980s and early 1990s as the relevant historical precedent, when the US engaged in what economist Jagdish Bhagwati dubbed “aggressive unilateralism”.

That period saw the US deploy similar tactics to those on display today to pursue its grievances with a rising Japan, and others, as well as to force through changes to the multilateral trading system. In particular, threats of unilateral sanctions were frequently deployed as a negotiating tactic to prise open foreign markets. The primary tool was the same Section 301 provisions in US trade law used to justify the current set of tariffs being considered against China.

So-called “voluntary export restraints” were also frequently negotiated, most famously to limit Japanese car exports to the US. That move is also being replicated today, with the US considering quotas as the price to pay for permanent country exemptions from Trump’s recent steel and aluminium tariffs. American requests that China reduce its bilateral trade surplus by US$100 billion (about a quarter) suggests similar tactics may also be employed in its negotiations with China.

Useful questions to ask about this past experience are whether or not it lends support to Trump’s current approach, and what insights it can provide for today.

According to one systematic study, Section 301 investigations, America’s primary unilateral tool, were somewhat effective in prising open foreign markets. Almost half of 72 cases were judged at least partially successful against their stated objectives, although the gains were modest overall. At the same time, there was no descent into escalating protectionism or full-blown trade wars, with only a few instances of countries actually retaliating against unilateral US actions.

Also in contrast to criticism at the time, American unilateralism did not ultimately undermine the multilateral system. Instead, it arguably played a key role in strengthening it. Previously stalled negotiations under the General Agreement on Tariffs and Trade (the WTO’s predecessor) were reinvigorated. This eventually led to the creation of the WTO in 1994, which helped address US concerns at the time and, from the perspective of others, provided the basis to contain future American unilateralism. New rules governing a broader range of areas were agreed on, and the dispute settlement mechanism was given more teeth.

So far, so good. Yet several other factors suggest things are much more concerning this time around.

First, retaliation and tit-for-tat protectionism looks very likely and is already happening. That will magnify the damage of any unilateral actions and create risks of further escalation, of which there are already worrying signs. Global supply chains are also now distributed across many countries, so tariffs aimed at China will invariably hit others along the way, including the US. That will not only reduce their effectiveness as a threat but also set other trading partners offside.

Second, while both periods involved a misguided belief that trade deficits reflect unfair trading practices (rather than macroeconomic factors), the policy response has been very different. In the 1980s, the Plaza Accord was used to correct the real source of the US trade deficit at that time – an overvalued US dollar – and thus head-off protectionist pressures primarily emanating from Congress. US protectionism was thus partly only an outlet for blowing-off political steam.

Today, by contrast, it is the president who is leading the charge on trade deficits and protectionism. Yet he is also delivering a large fiscal stimulus that will further widen the trade deficit significantly, potentially fuelling additional protectionist pressures.

Third, the US seems more interested this time around in paring back the multilateral trading system rather than strengthening it. In particular, it sees the WTO dispute settlement body as engaging in judicial activism and has been blocking the appointment of new appellate judges.

The US essentially wants the WTO to limit itself to areas where the existing rules are clear-cut. But with negotiations to update those rules stalled, the WTO’s ability to mediate disputes and keep a lid on protectionism is at risk. America’s steel and aluminium tariffs are a case in point, utilising what it sees as a loophole in WTO rules to self-declare an issue of national security, no matter how spurious the argument.

Concerns about China are of course central to US complaints about both trade deficits and the WTO, particularly over its ability to deal with China’s unique party-state capitalist model. There are strong parallels with Japan in the 1980s, reflecting similar US concerns about a large bilateral trade deficit and Japan’s state-guided keiretsu (conglomerate) economy, as well as fears that America might be eclipsed both economically and technologically by a rising power.

Of course, the situation with China is likely to be far more difficult. Most obviously, China is not an American ally, which will make a meaningful compromise more difficult to reach. More importantly, Japan’s financial crisis in the early 1990s and ensuing economic stagnation meant the challenge it posed to American economic primacy never really played out. Although China’s economy faces some short-term risks, it is unlikely to fade into the background so easily.

 

Photo: via Flickr user A.Davey

You may also be interested in...