The current trade policy of the current U.S. administration is inflating U.S. costs and driving away longstanding trading partners while not changing the fundamental economics of trade or the Chinese government’s protectionist approach to intellectual property. Trade wars increase the cost of production in the US, which disincentivizes American companies like Harley Davidson from manufacturing locally. They put next-generation energy companies like SunPower at risk by increasing the cost of their components. And they drive strategically important trade partners like Germany to form fresh new relationships with Asian partners instead of America. Rather than wage trade wars, the United States should build ‘platform infrastructure’ for knowledge-based high-tech solutions in clean energy, machine learning, intelligent transportation, medical solutions, education, and aerospace.
Wharton Econometrics figures that a trade war will cost world GDP 0.9% by 2027, but if the multilateral trading and commercial institutions such as the EU were to dissolve completely, possibly eventually taking the euro with them, the impact will be far more damaging. An implosion of trade agreements across the globe would cost the US 2.7% of GDP and the world 1.7% of GDP. As the US pulls out of more and more multilateral political institutions such as the Paris Accord, the U.N. Human Rights Council, and possibly NATO, the probability of a US withdrawal from the World Trade Organization (WTO) is rising. A severe isolationism scenario involving a total collapse of the world trading system would cause a 3.8% contraction in global GDP in the medium term, according to analysis presented in my book Trump, Trade, and the End of Globalization.
The United States should take the lead in redefining a new world trade system. Leadership will assure it of a long-term advantage, as it had for several generations after it took the lead in designing a new world financial and trading system after World War II, starting with the trading system that became the General Agreement on Tariffs and Trade (GATT), which was eventually folded into the World Trade Organization (WTO), and the monetary system that was agreed at Bretton Woods.
Instead of fighting over steel, aluminum and soybeans, and tearing down multilateral institutions, the United States could advance a new model centered on countries’ comparative advantages instead of “free trade for all” (traditionally defined as zero tariffs and zero subsidies across the board). A codified set of boundaries could allow, within limits, knowledge-centric companies to protect their intellectual property within their country’s national borders, industrial companies to receive subsidies, and agricultural producers to receive export exemptions, up to capped, reported, and audited levels.
For example, Baidu (China) would be allowed to mandate Chinese intellectual property in its apps within China, and Google would be allowed to erect non-tariff barriers to foreign competitors within the American market, as long as both countries agreed to transparent reporting and auditing, and the WTO quantified and policed the advantage to a maximum of 10% of the value-added. The EU’s subsidies to Airbus could be legitimate, in principle, but capped at 10% of value-added and audited, and the United States could subsidize Boeing to the same extent. Agricultural producers could receive exemption from tariffs from importing countries (up to 10% of value added), as some do today under Generalized Systems of Preferences (GSP). Companies in Thailand, India, and Brazil, for example, receive tariff exemption from wealthier countries (namely the US and the EU), which benefit from the system by accessing cheaper food products than they could produce themselves.
Antagonistic or isolationist approaches trade approaches are already prompting the Trans Pacific Partnership (TPP), from which the United States withdrew, to move ahead aggressively and fruitfully, without the US. China and the EU are forming new trade alliances together, without the United States.
World War I taught us that isolationism is politically and economically dangerous. In contrast, the leadership taken after World War II, which was defined by the establishment of today’s world trade order, led to over 50 years of growth. Today is different, so let’s adjust, but let’s not go backward.
David Steven Jacoby is the author of Trump Trade, and the End of Globalization (Praeger / ABC-CLIO 2018), The High Cost of Low Prices: A Roadmap to Sustainable Prosperity (Business Expert Press, 2017), and From Bogota to Beijing: Development and Life After Globalization (Lexington Press, 2018).
The views represented above are the author’s alone and do not represent the opinions or positions of Boston Strategies International.