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The upside of Trump’s trade trials - yes, upside

Is it possible that some good will come from US President Donald Trump’s trade war?

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Yes. Free trade was in trouble long before Donald Trump became president. Perhaps his assault on the global trading system will jolt western governments into repairing the world economy’s biggest growth engine.

"Perhaps his assault on the global trading system will jolt western governments into repairing the world economy’s biggest growth engine.” 

You could be excused for dating free trade’s political problems from the huge demonstrations against the World Trade Organisation’s 1999 Seattle ministerial conference and the beginning of the collapse of the Doha trade reform negotiations in 2002. In truth, free trade was losing power even before then.

While successive rounds of multilateral trade reform had seen the advanced economies cut their industrial tariffs from an average of 40 per cent to 4 per cent, cheating governments had expanded non-tariff barriers to the point where they affected almost half of world trade.

Some of these non-tariff barriers are blatant substitutes for tariffs, like anti-dumping duties used by advanced economies to protect their uneconomic steel producers.

However, many non-tariff barriers operate behind national borders where they are less visible. These include government purchasing policies, licensing and technical requirements and other regulations which effectively discriminate against foreign producers.

Nonsense

Helping to drive all of this has been a poisonous piece of 16th century economic nonsense which still infects the WTO’s trade negotiations: the mercantilist belief exports are good because they earn foreign income while imports are bad because they damage domestic producers.

By that logic the task of trade negotiators should be to win as much additional market access for their exporters as possible while giving away as little access to imports as possible. You hear echoes of it almost every time an Australian trade minister holds a press conference.

Yet the truth is almost the exact opposite of the modern mercantilism: the gains from trade come mostly from the access to a greater variety of better, cheaper imported goods and services.

We export so we can import - so we can specialise in doing what we do best and import the goods and services in which other countries have a comparative advantage. If we didn’t import, there would be no reason to devote scarce resources to producing goods and services for other countries.

Gary Banks, a former chairman of Australia’s Productivity Commission, explains it this way.

 “Contrary to mercantilist notions, the main benefits of trade for a country come not from maximising export income per se, but rather from the improvements in domestic productivity, resource allocation and consumption that import competition brings,” he says. 

“A country’s own barriers to trade generally have a more distorting effect on the allocation of its resources and on incentives to be productive and innovative than the trade barriers of other countries.”

Popularity problem

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Nobody said

President Trump promised winning the trade war would be easy. Yet it seems the president may have underestimated the Europeans and the impact of their surgical retaliation against his supporter base.

From the tone of his tweets, the president clearly was shocked when Harley Davidson announced the 25-percentage point increase in the European tariff on US motorcycles would force it to relocate production of EU-bound bikes to Asia. It said the European tariff increase would potentially cost it $US100 million a year.

The Europeans have let it be known they have other politically sensitive industries in their sights.

But, for Trump, the impact of retaliatory tariffs may be just the first of the unexpected consequences of increasing tariffs on foreign steel and aluminium.

US manufacturers warn the US tariffs could cost more jobs than they save because the higher cost of steel and aluminium will make US manufacturers uncompetitive.

They speak from experience: a 2003 study found the Bush administration’s 2002 temporary steel import duties cost 200,000 jobs in the US steel-consuming industries in the first year, which was more than the total employment in the US steel industry at that time.

The steel-consuming industries are now estimated to employ 6.5 million people compared with the steel industry’s 80,000 workers.

As the Trump administration’s tariff net widens, further US job losses may also occur because the affected imports include significant US content. 

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The economist Warwick McKibbin estimates 90 per cent of the gains to Australia from the reduction of trade barriers in the Asia Pacific countries would come from Australia cutting its own trade barriers.

Yet, mercantilism continues to infect the WTO and its trade negotiations because protected industries are allowed to dominate the negotiating strategies of their governments.

The Doha round was launched in 2001 with an ambitious agenda of agricultural trade reform to boost the growth prospects of developing countries. But it failed for want of popular and political support.

In the US and Europe, industry was under pressure from Asian imports; in Japan there was determined opposition to agricultural reform; and in the developing economies there was strong opposition to cutting tariffs and doubt about their capacity to benefit from the wests agricultural trade reform. Even in China, with its obvious interest in expanding global trade, there was no political will to accelerate its economic reform.

The Doha round effectively died in 2008 with the developed and developing countries both demanding more access for their exports without commensurate increase in imports.

Trump against the evidence

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Benign

Trump’s trade war might end with a relatively benign settlement in which Germany and China invest in US manufacturing jobs and increase their imports - Germany by growing its domestic demand faster and China by accelerating reforms to boost household spending.  But, even if it does, that will not resolve the deeper issues behind the collapse of the Doha round. The non-tariff barriers will continue to spread.

“In providing protection in these forms, governments have demonstrated that WTO rules can no longer ensure compliance with international agreements to reduce domestic barriers,” Bill Carmichael, a former head of Australia’s Industries Assistance Commission, writes.

Carmichael also points to the increased complexity of trade reform with the inclusion of most tradeable goods and services.

“In these new areas the forms of protection are complex and diverse,” he writes. “Many are in non-border forms and are seen, especially by those who oppose their removal, as belonging to domestic policy — beyond the reach of international rules and agreements.”

Nor is any settlement between the US and its trading partners likely to reverse the substitution of multilateral reform with inferior bilateral trade agreements, universally and misleadingly styled “free trade agreements”.

As has been shown to be the case with the Australian-US ‘free-trade’ agreement, when the mercantilist politicians and their trade negotiators are finished, these discriminatory agreements can end up doing more to distort trade than free it.

The Seattle demonstrations revealed a deep popular disenchantment with globalisation and free trade and their disruptive impact especially on less-skilled, unionised employment in the advanced economies.

Even if the US, China and Europe can strike a truce the domestic political battle for free trade will still have to be won.

No shortcuts

Unfortunately, there is no shortcut to victory. Australia’s Industries Assistance Commission (IAC) spent more than a decade exposing the economy-wide costs of this country’s import barriers before the Hawke government began demolishing the tariff wall.

But the logic of the commission’s expert analysis and independent, public advice ultimately prevailed.

Realising trade policy and international negotiations would continue to be driven by domestic politics, economists and business leaders urged the Doha participants and, later, the G20 countries to build on Australia’s experience.

Sadly, on neither occasion was the Australian government willing to take up the cause.

Nor, for that matter, has any Australian government shown interest in Carmichael’s suggestion for using the transparent processes of the Productivity Commission (a successor organisation to the IAC) to increase the government’s accountability and reduce the secrecy surrounding the negotiation of Australia’s bilateral trade agreements.

Perhaps President Trump’s trade war will change those attitudes. People were able to shut their eyes to the rising cost of non-tariff barriers but they can hardly ignore Trump’s protectionist rampage.    

Alan Mitchell is a former economics editor of the Australian Financial Review

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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