Defending the Multilateral System
June 11, 2018
President Trump’s recent actions on trade, particularly the imposition of steel and aluminum tariffs on Canada, Mexico, and the European Union, and the announcement of a deadline for imposing the threatened tariffs on China, have not only aroused strong opposition from the victims, but they have also renewed fears that he is undermining the entire trading system. The president is probably not too concerned about that—he does not seem to have much interest in or affection for institutions and rules—but his minions seem sufficiently concerned about it to take to the airwaves to defend him.
The essence of their defense is that the United States is the true defender of free trade because it is no longer tolerating other countries’ abuse of the system. The World Trade Organization and other organizations are derided as all talk and no action, while the United States is held up as the paragon of virtue fighting vigorously against others’ protectionism. This argument is not persuading anybody, because it is so patently wrong. It is the United States that has imposed tariffs using a national security argument that is at best debatable. It is the United States that is threatening to do the same thing on automobiles where the argument is laughable. It is the United States threatening to act unilaterally against China outside of the normal rules-based system. Other countries are responding in kind, and we face the possibility of a downward spiral of retaliation, but there should be no question about where it all began.
But is there any merit at all to the administration’s argument? Of course, but that misses the point. In the world of trade, we are all sinners, and simply pointing out each other’s sins does not move the ball forward. The important issue is that the cost of our actions is much greater than the benefit. There are two ways to look at that cost.
One is short term. Tariff increases raise prices, cost consumers money, and make our products more expensive and less competitive because the imported parts cost more. The Peterson Institute, for example, recently estimated that the president’s proposed automobile tariffs would cost the United States 195,000 jobs, not counting the inevitable retaliation against us that would further harm our exporters and cost them market share. Other analysts came to a similar conclusion with respect to the steel and aluminum tariffs. While some end up better off because of the protection gained, the larger number lose.
The more important cost, however, is the long-term weakening of the institutions and rules that are the foundation of the modern trading system. The United States was the main architect of the Bretton Woods system that was designed as World War II was ending, and it has been its most stalwart defender ever since. Our leaders did that because they believed in a rules-based system, believed that it promoted growth for everybody who participated, and believed that it would help prevent future wars. And they put their money where their mouths were by being willing to take some hits in order to maintain the system for everybody.
Those hits, in the form of trade concessions that cause political pushback domestically, have gradually become more expensive as the world has integrated economically and more vigorous competitors like China have emerged, resulting in rising political opposition to trade liberalization here and in other developed countries. At the same time, those emerging economies, particularly China and India, have not been willing to take on a larger share of the burden of maintaining the system.
That means the system is already hurting and not solely because of us. So, some finger pointing is appropriate, but singling out our closest friends and allies in the G7 misses the target, and doing it by stretching the rules beyond the breaking point does enormous damage to the system. The president may think this is a winning strategy for our country, but we end up losers like everybody else. When we treat the rules as suggestions that can be ignored, then others will follow our lead to our detriment.
That is the practical consequence of the erosion of discipline. The philosophical consequence of our policy is that it is really a rejection of the idea of global goods or global commons—things that transcend borders and that we all benefit from. The most obvious example is climate change, which affects all of us and which no single country can fix by itself. The trading system is similar. It affects all of us, but it must be sustained by the actions of all, or at least most, not just a few. The idea of Bretton Woods was to bind the world together in a network of rules and institutions that would prevent war and depression from happening again. That has worked for 74 years. Unraveling it, as we seem to be in the process of doing, will take us back to the days of every country for itself without regard for the others. Sen. Ben Sasse (R-NE) recently referred to the president’s trade policies as “Make America 1929 Again.” He may have been too modest in his vision; we are in the process of pushing the world back there.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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