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If re-elected, Donald Trump has promised a 10 per cent tariff on all goods coming into the United States — a tax on imports — and a 60 per cent tariff on Chinese goods.
That’s not quite the shock to the system of the US Smoot-Hawley tariffs of close to 20 per cent that exacerbated and prolonged the Great Depression in the 1930s, but it’s very close. What made things worse in the 1930s was the retaliation from much of the rest of the world, ratcheting up tariffs and restrictions on global trade.
The General Agreement on Tariffs and Trade, which later became the World Trade Organization (WTO), was created in the aftermath of the Second World War to avoid a repeat of this beggar-thy-neighbour protectionism that fed rivalry and conflict in the lead up to war.
To date, that system has avoided what is called a prisoner’s dilemma outcome — where every nation acts in its narrow self-interest to produce collectively worse outcomes for everybody. But the system is under threat and international trade rules are grossly outdated.
Basic international economics tells us that tit-for-tat retaliation compounds the damage from predatory trade measures, but governments are driven by nationalist instincts that give no prizes for looking weak. The Chinese government bought into Trump’s trade war in 2019, retaliating in kind even though staying out of it would have left the country better off despite the punishment of US tariffs.
Trump 2.0 is likely to deliver what he now promises on the trade front. As president the first time around, apart from withdrawing from the Trans-Pacific Partnership on day one of his presidency, Trump 1.0 took some time to launch his trade war and the sabotage of international institutions. Those who hung in there in the White House and cabinet to limit the damage in the first Trump administration won’t be there next year if Trump is re-elected.
From day one, we can be sure that Trump 2.0 will rock the international trading system to its foundations.
Trump is as much a symptom as a cause of the US withdrawal from global trade leadership. The Biden administration has done nothing to reverse the castration of the WTO dispute settlement mechanism when the US vetoed the appointment of Appellate Body judges in 2019, making the global trade rules unenforceable. Biden’s Trade Representative, Katherine Tai, trashed a WTO ruling against Trump’s tariffs on steel and aluminium in the name of national security. Late last year Tai withdrew the United States from key provisions in the WTO’s e-commerce agreement and the negotiation of multilateral rules for the digital economy, including in the Indo-Pacific Economic Framework (IPEF).
The domestic problems bedevilling the United States are deep and structural. A large proportion of the population has missed out on decades of gains from globalisation and innovation, even as the country became richer and richer. Trump will exacerbate the consequences of this American malaise for the international trading system. But irrespective of who is elected as the next US President in November, the United States will continue to play spoiler in the WTO for the foreseeable future. Trump will be less polite and more extreme but the American direction on trade is locked in.
The question is what the global community does about the United States playing rough and dirty with trade.
Defending the rules-based trading system will need collective action. Isolation, not imitation, of America’s protectionism is in the collective strategic interest of the rest of the world.
The WTO may be on the ropes, but the many bilateral and regional free trade agreements will not keep global trade open without the multilateral reference point. The alternative to the rule of law in international commerce is rule by might and retreat to closed markets to protect against the weaponisation of trade.
The rules need to be updated. There’s a chance to make some progress this week in Abu Dhabi when trade ministers meet for the 13th Ministerial Conference (MC13). But as Ken Heydon observes in this week’s lead article, there are ‘relatively modest expectations’ for MC13 after a rare success in MC12 in 2022.
We can expect ‘a deal providing transparency and predictability in electronic commerce’ and progress on a deal for investment facilitation for development. Facilitating investment for development is hardly controversial but with all 164 members having to agree to everything, one or two usually play politics to try to squeeze out more concessions.
Progress on transparency and predictability in e-commerce is welcome. The digital economy is growing at two and a half times that of the physical economy and trade in physical goods and services is now dependent on optimisation and innovation in data generated by digital flows. That’s before we factor in artificial intelligence, which is turbocharging the digital economy.
National and regulatory borders are even less relevant for AI than they are for the digital economy. Developments in AI anywhere affect those on the other side of the planet — that’s the nature of cyberspace. The negative spillovers and risks need to be managed while not cutting off the potential of the new technology, which can solve problems previously unimaginable. That will require cooperation.
MC13 will not solve the world’s trade problems but it can provide much needed momentum. Momentum in multilateral trade cooperation can help with the necessary domestic advocacy against entrenched protectionist sentiment, a strategy which Heydon reminds us has worked in the past and must not be passed up now.
East Asia has largely avoided the backlash against globalisation that has raged in Trump’s America and post-Brexit Britain. There are always going to be losers from trade and technological advancement, but forgetting about them or shielding them from international competition and change has never resulted in prosperity.
Despite the setbacks, the centre of global economic gravity continues to shift towards Asia. Asia got rich joining the rules-based system and becoming an exemplary system-taker. It’s now Asia’s time to step up as a system-maker.
Bolstering the trading system at MC13 is just the start in preparing for Trump 2.0.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.