US PRESIDENT Trump’s unilateral tariffs on steel and aluminium imports threaten to unleash a trade war with America’s friends and foes. The move may appease Trump’s ‘rust belt’ constituency but is unlikely to end America’s trade deficits or bring back manufacturing jobs.
Emerging from the Second World War as the dominant economic power, the US propagated the thesis that “nations can advance only by eliminating barriers to the free movement of goods and capital and by minimising the role of government in the economy”. This Washington Consensus became the driving force for globalisation.
However, history indicates a contrary conclusion: that industrial development has been achieved almost always behind the walls of state protection and intervention. Great powers became great because of active state promotion of industrialisation and production.
Pankaj Mishra’s article ‘The Rise of China and the Fall of the Free Trade Myth’ (New York Times Magazine, Feb 7, 2018) points out that China’s rise has happened with “state-led economic planning, industrial subsidies and little or no regard for the rules of ‘free trade’”.
The interests of the developing countries would be best served if they act collectively.
Mishra recalls that Britain prevented its colonies from competing while selling its own goods globally. Alexander Hamilton’s formula for protecting ’infant industries’ behind government-erected barriers made the US the fastest-growing economy in the 19th and early 20th centuries. Germany after the First World War, and Japan after the First and Second World War, emulated these protectionist principles in their rapid industrialisation.
Of the three institutions proposed by Lord Keynes for the reconstruction of the world economy after the Second World War, the IMF and the World Bank were created at Bretton Woods. The third, the International Trade Organisation, endorsed in the 1946 Havana Charter to promote “full employment” and “make finance the servant, not the master of human desires internationally”, was stillborn. The US Congress withdrew support because the protections provided to American corporations against ‘expropriation’ of investments were considered not strong enough.
Thereafter, the world trading system developed unequally. Europe’s revival was fostered by US aid and trade under the Marshall Plan. As US allies, Japan, followed by Korea and Taiwan, industrialised behind protective barriers and because of the ‘one-way’ access offered them to the US market, capital and technology. Other countries were asked to adhere to the ‘free-trade’ principles of the General Agreement on Tariffs and Trade (GATT).
The system was unfair at multiple levels. Agriculture was excluded from free-trade principles; the US and EU maintained their agricultural subsidies, while the developing countries were not allowed to do so. Textile trade was restricted by small import and export quotas. Tariffs on other goods were lowered uniformly despite the inherent economic disparity between the industrial and developing countries. The latter had almost no ability to oblige stronger ‘partners’ to observe the trade rules fairly.
After the collapse of the Soviet Union, Gatt was transformed into the World Trade Organisation (WTO) and the Washington Consensus was imposed with a vengeance. Besides goods, free-trade principles encompassed services, finance, intellectual property and industrial policy. Almost all the tools used by the industrial world to ‘climb the ladder’ of industrial development (tariffs, subsidies, domestic content requirements), were ‘kicked away’ under the WTO agreement.
During the late 1990s, a small group of developing countries, led by India, Pakistan, Egypt and Cuba, organised a concerted resistance to the Western juggernaut in the WTO. They blocked one-sided decisions at the WTO’s Singapore and Seattle ministerial meetings and were successful in inserting a modest ‘development agenda’ in the 2000 Doha Ministerial Declaration.
Since the Doha Conference, the nature and dynamics of global trade have changed dramatically. After its entry into the WTO, China, with lower wages, high efficiency and access to domestic and international capital, took advantage of the WTO’s ‘free-trade’ regime to beat the industrialised countries at their own game, emerging as the world’s manufacturing hub and accumulating huge trade surpluses and reserves. Simultaneously, due to their financial profligacy, the US and the European Union endured their worst financial and economic crisis since the 1929 Great Depression. The West’s Washington Consensus evaporated and was replaced by a protectionist crouch.
The law firm, Gowling WLG, has reported that the world’s top 60 economies adopted more than 7,000 protectionist trade measures between 2009-16, with the EU responsible for 5,657 and the US for 1,297. Losing the game in the WTO, the developed countries have moved to pursue plurilateral and bilateral ‘free-trade’ agreements.
The much-advertised 12-member Trans Pacific Partnership, apart from seeking to exclude China, sought to introduce new ‘standards’ favouring the industrialised countries: extended intellectual property protections, non-judicial investor-state dispute settlement, restrictions on state-owned enterprises. Although Trump ignorantly denounced the TPP, he may rejoin if the 11 ‘partners’, who have revived it, accommodate his demands, which appears likely.
Similarly, the trade tensions with US allies generated by Trump’s steel and aluminium tariffs are likely to be resolved through cosmetic concessions. The focus of future trade friction will be China. India and other developing countries which are seen to be ‘taking away’ US jobs may also feel some ‘heat’.
Pakistan is unlikely to figure in this trade turbulence. It is a puny trader, exporting $20 bill and importing $45 bill annually; as compared to the $375 bill and $380 bill which Mexico, a country of comparable size, exports and imports. Pakistan’s failure to produce and trade deserves a separate analysis.
The interests of the developing countries would be best served if they are able to act collectively. They could take advantage of Trump’s challenge to the global trading system and revive the proposal for an international trade organisation that is more efficient (in the application of capital and technology); more advanced (eg encompassing digital trade) and more equitable (embracing full employment and the SDGs). Today, the developing countries possess the collective economic and political power to construct a trading system that serves development.
As Deng Tsiao Ping remarked at the outset of China’s rise: “Development is the only truth. If we don’t develop, we will be bullied.”