Jul 05, 2018 01:02 PM

Opinion: Globalization Faces Test as U.S., China Square Off

As the Friday deadline approaches, all eyes will be on the negotiating powers of the U.S. and China to see how widespread the tariffs will permeate. It’s important to point out that the driver of trade tensions — geopolitical friction — is not a new phenomenon and not confined just to the U.S. and China.

For more than three decades, globalization — the supreme demonstration of international give and take — has been the dominant philosophy. Now, as politicians across the world begin to gain populist mandates, the mood has shifted, and nations seem increasingly willing to put their own interests first, and hence this is where geopolitical frictions arise.

Speaking at the University of Hong Kong in April, International Monetary Fund Managing Director Christine Lagarde highlighted the risks of this approach. She noted how multilateral trade has “transformed our world over the past generation” but said this system of rules and shared responsibility “is now in danger of being torn apart,” adding: “This would be an inexcusable, collective policy failure.”

In the U.S., the actions of Donald Trump’s presidency are a case in point. In 2017, shortly after coming to power, Trump instructed the U.S. trade representative (USTR) to investigate Chinese violations of intellectual property. In March 2018, the USTR duly concluded China had indeed breached Section 301 of the U.S. Trade Act of 1974 by stealing or copying foreign companies’ technology. The administration’s response? To impose tariffs on $60 billion worth of imported Chinese goods while also limiting China’s ability to invest in the U.S. tech sector. China’s response was equally strident: retaliating by raising import duties on a $50 billion list of American goods, including soybeans, small aircraft, whiskey, electric vehicles and orange juice.

But it’s not just China in the crosshairs of Trump’s trade-policy blunderbuss. In June, the administration confirmed it will leverage higher tariffs on imports of aluminum and steel from some of its closest economic and military partners: the EU, Canada and Mexico — a move that was met by a howl of indignation by its partners in the G-7. For its part, Mexico opened a case against the U.S. at the World Trade Organization (WTO) while also vowing to implement its own reciprocal tariffs.

Trump’s trade offensive can be interpreted as part of a pattern of U.S. withdrawal from multilateral decision-making in favor of go-it-alone unilateralism. We saw it in the first few days of the presidency, when the U.S. stepped back from the Trans-Pacific Partnership, which sought to lower trade barriers between 12 countries in Asia, Australasia, and North and South America. Subsequently, the same approach has been in evidence in everything from climate change to preventing vacancies in the WTO from being filled. It’s a stretch to say this is the end of U.S. leadership of the postwar consensus, but it’s certainly an erosion. However, I believe we will see a negotiated outcome that will eventually traverse some middle ground and involve tariffs of about 25% on approximately $50 billion worth of “targeted” Chinese products. We estimate this to have a marginal 0.1% to 0.2% impact on China’s headline growth.

In April 1981 — at the height of U.S. paranoia about its trade deficit with manufacturing powerhouse Japan — the Reagan administration enacted measures to restrict imports of Japanese cars. The logic was simple: By insulating the U.S. auto industry from its more-efficient Asian peer, U.S. carmakers would have the space to reform working practices and to begin to match the Japanese on cost. Nothing of the sort happened. Domestic manufacturers simply took the opportunity to ramp up their prices without fear of losing business to less-expensive competitors. According to an analysis titled “The Costly Truth About Auto Import Quotas,” from The Heritage Foundation, a U.S. think tank, the entire episode ultimately ended up costing American consumers an additional $5 billion annually, and Japanese carmakers continued to make inroads into the U.S. market regardless.

The history of protectionism shows the law of unintended consequences. Even the most well-intentioned measures can be counterproductive.

Aninda Mitra is senior sovereign analyst at BNY Mellon Investment Management Singapore Pte. Ltd.

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