EAF editors
Two weeks into Trump 2.0 and North America has for now narrowly avoided what the Wall Street Journal editorial board called ‘the dumbest trade war in history’. But the Trump White House’s tariff mania still threatens contagion to the rest of the world.
Trump’s 25 per cent tariffs on Canadian and Mexican imports would
have dealt a devastating blow to those economies. The retaliation that
was promised from both would have only made matters worse. For now they
are eating into the 30-day stay on executing the trade war.
The 10 per cent tariffs on all Chinese imports into the United States
went ahead, and the EU is bracing for US tariffs with a retaliation
plan reportedly in preparation.
It’s going to be a long four years.
Political leaders can’t afford to look weak in the face of Trump’s
economic coercion — let’s call it what it is — and will feel forced to
retaliate if they find themselves on the receiving end of it.
As Shiro Armstrong and Tom Westland argue in this week’s lead article,
‘a cycle of retaliation and contagion, which will certainly not stop
with Canada or Europe, would propel the world towards a 1930s style
prisoner’s dilemma epic fail’. They remind us that what made the 1930
Smoot-Hawley tariffs from the United States so damaging to the global
economy ‘was not so much their level but the catastrophic cycle of
retaliation that followed’.
When a country opens its economy up to international trade, it’s that
country that benefits the most. Every economics student learns this in
their first year, but every politician needs to be reminded of it
regularly. Difficult as the politics may be, the reverse is also true:
the country that is hurt the most from closing down international trade
is the country that puts up the barriers.
Retaliatory tariffs may be politically expedient but they are an instrument of self-harm.
Countries sign up to global trade rules to limit their ability to
introduce protectionist measures that sabotage their true national
interests in the name of whatever political pressure they come under at
home.
The GATT–WTO-based trading system discourages discriminatory
practices, promotes transparency and predictability, and discourages
governments from enacting protectionist measures. Trump is exporting
punitive discriminatory policies, might-is-right ideology,
unpredictability, uncertainty and prosperity-destroying protectionism.
The rest of the world should not buy in.
The best revenge, as they say, is living well. The United States may
have become the biggest threat to the postwar economic order that it
once led, but the rest of the world doesn’t need to let that order fall
apart. Protecting the system that underpins global development,
prosperity and security is the top priority.
The world can take a lesson from Australia’s rules-first response
to China’s efforts at trade coercion, which weren’t swayed by pressures
for retaliation that would have only led to more economic damage.
Resorting to bilateral disputes directed through the WTO, as Australia
did with China’s trade bans, isn’t an option for dealing with Washington
now. But the broad strategy for national leaders looking to stand up to
Trump’s bullying should be to offer an alternative vision of global
order that appeals more to their constituents than a carbon copy of
Trump’s dark, nationalistic, dog-eats-dog one.
Just as dangerous as the economic impact of a general tariff war is
the risk that leaders worldwide accept Trump’s false premises as they
respond to his actions.
Armstrong and Westland call for ‘collective action led by Asia
and Europe — where trade openness is an economic and political security
imperative — not against the United States, but for the global public
good of an open, rules-based economic system’. The established trade
system is far from perfect, but the alternative is disorder and economic
and political insecurity.
When the United States stopped the global trade umpire, the WTO
Appellate Board, from enforcing rules, a group of countries including
all of the European Union, China, Canada and Australia created the
Multi-Party Interim Appeal Arbitration Agreement (MPIA) that replicates
the WTO dispute settlement function. That group now comprises close to a
third of the WTO membership. That’s the sort of collective action
that’s now needed.
The best revenge may well be living well, but that’s not mutually
exclusive from revenge being a dish served cold, to borrow one too many
clichés.
One form of retaliation that would improve welfare, Armstrong and
Westland suggest, is reviewing and loosening the intellectual property
protections that countries have had to sign up to for US market access.
There are real questions about whether IP should be in trade agreements at all.
US market access is being revoked and now would be an appropriate time
to review the huge flow of fees and royalties to US firms with rules
stacked in their favour.
‘Few would argue against protecting intellectual property rights as a
general principle’, Armstrong and Westland explain, but ‘the United
States has gone overboard, favouring the interests of pharmaceutical
giants and tech companies at the expense of global consumers’. New
standards could be negotiated with minimal acceptable IP protections,
introducing fair use or public good exceptions, which the United States
has but many others don’t.
Some of this would hit the tech ‘broligarchs’
backing Trump and would help AI development elsewhere. That is a public
good. Unlike goods and services trade, there is no guarantee that
monopoly privileges for IP are mutually beneficial. The rest of the
world shouldn’t have to pay for deals of the past if the United States
undermines them.
The world now needs to protect the furniture of the global economic
order from the United States, the system’s previous leader and enforcer.
In doing so, it can avoid paying US companies for medicines, tech and
copyright at rates beyond anything reasonable to incentivise R&D and
innovation. This would have the added bonus of spurring innovation,
health and protecting prosperity elsewhere.
The EAF Editorial Board is located in the Crawford School of
Public Policy, College of Law, Policy and Governance, The Australian
National University.
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