The Fellowship of the G7—Minus One
Volume VII, Issue 6, June 2018
June 26, 2018Fans of The Lord of the Rings will recall the scene in which Frodo is incapacitated by the giant spider Shelob in the mountains of Mordor. Frodo’s faithful companion Sam reluctantly takes custody of the One Ring in order to carry forward the pair’s quest. Such is the task for the United States’ G7 and other allies if they want—as they should—to protect the global economic order from Donald Trump’s venomous policies and other hazards ahead.
June 2018 may well go down in history as a low point for the postwar economic order. It began on the first day of the month with implementation of U.S. tariffs on steel and aluminum imports from the European Union, Canada, and Mexico (similar restrictions on Japan, India, and others had taken effect earlier). On the same day, several of these trading partners announced retaliatory tariffs on a range of U.S. exports, from pork to bourbon. A week later saw the shocking spectacle of President Trump refusing to sign onto the G7’s traditional communiqué and seeming to go out of his way to humiliate other leaders in the process. Later in the month, the Trump administration announced plans to go ahead next month with 25 percent tariffs on an initial $34 billion worth of Chinese imports under the Section 301 case on forced technology transfer. Beijing responded immediately with tit-for-tat tariffs on U.S. soybeans, cars, and chemicals.
These actions—and the war of words surrounding them—are destructive on several levels. They are sure to raise costs for downstream businesses and consumers in industries as diverse as nails and whiskey. They will put at risk the strongest global growth since the 2008 financial crisis. They will damage a global economic order that, for all its flaws, still provides a framework of institutions, rules, and certainty that enables growth and rising prosperity around the world. And they will undermine resolve among U.S. allies to take on shared challenges, including ones the Trump administration has identified as priorities, such as pushing back against China’s “predatory” economic policies.
The European Union, Japan, Canada, and non-G7 allies like Australia and South Korea need to keep these downside risks front of mind as they contemplate responses to the U.S. retreat into protectionism. Frustration is understandable, but rather than acting out of passion, allies should take a step back, coolly assess the broader stakes, and move forward along a number of tracks that together will help bolster the global order—and, with luck, keep the United States within the guardrails.
First, U.S. allies should take pains to act within the rules themselves. Filing cases at the World Trade Organization (WTO), as the European Union, Mexico, and Canada have done, is fine; raising tariffs without WTO sanction is not. Japan, the only major U.S. ally not to have been offered even a chance to negotiate an exclusion from Trump’s steel tariffs, has shown admirable restraint in this regard: Tokyo has notified the WTO of its right to impose “rebalancing” measures but taken no other action to date.
Second, allies should clean up their own act. When it comes to protectionism, no one is without sin. Agriculture is a particular failing, whether the notorious EU Common Agricultural Policy; Canada’s dairy supply-management system, which can result in 200-plus percent tariffs on milk, butter, and cheese; or Japan’s tariffs of 777 percent on rice and 38 percent on beef. Trump is right to have a bee in his bonnet about these pervasive barriers, and others such as the European Union’s 10 percent tariff on imported cars (although the president would have more credibility if he were willing to acknowledge the restrictive U.S. sugar program and 25 percent tariff on trucks).
Allies could facilitate opening of their own markets through action on a third front: moving ahead with trade arrangements that don’t include the United States. Japan and Australia have led the way in completing a modified Trans-Pacific Partnership (TPP) deal among the 11 non-U.S. members of the group. The European Union and Japan are expected to sign a long-awaited economic partnership agreement on July 11. Canada and Australia are negotiating their own deals with the European Union. Japan and Canada have also been in talks for several years.
Completing these and other high-standard agreements is important to upholding and updating the rules of the global trading system, especially on “twenty-first century” issues like the digital economy and state-owned enterprises. China has a very different perspective on these issues, and it is important for allies to push their preferred approach (even where this may not align perfectly with U.S. interests, a risk highlighted as we went to press, when the European Union announced that it had agreed with China to discuss new global trade rules on technology, subsidies, and other priorities.) These deals will also light a competitive fire under the United States, as trade and investment are diverted elsewhere, and should hasten the day when Washington returns to the negotiating table.
Fourth, allies should use their bargaining power in existing institutions to strengthen international rules and norms. Together the European Union, Japan, Canada, Australia, and South Korea have a formidable voice in the International Monetary Fund (IMF), World Bank, and G20. They can and should use those positions to insist on better practices in areas like infrastructure finance, where China is pushing out its ambitious Belt & Road Initiative (BRI) without sufficient regard to social and environmental safeguards, open procurement, transparency, and debt sustainability.
Finally, allies should continue to speak out against U.S. protectionism, as finance ministers from the other G7 countries did when they issued their own statement earlier this month expressing “unanimous concern and disappointment” with Trump’s tariffs; or as Japan’s prime minister, Shinzo Abe, did in calling the national-security investigation of automobile imports “unacceptable.” Meanwhile, allies should continue reaching out to American audiences to urge a return to U.S. leadership in the global economy, as Australia’s ambassador in Washington, Joe Hockey, did in a speech earlier this year.
But allies cannot wait for the United States to come back to the table. This month has made clear that the Trump administration is not interested in multilateral economic leadership, at least for now. It may take several years—and much rebuilding at home—before Washington is ready to reengage along traditional lines. In the meantime, there is pressing work to do in upholding and updating the rules and norms of the global economy in the face of a serious challenge from new powers like China and Russia. Like Samwise Gamgee, U.S. allies need the courage and wisdom to pick up the ring and sword and plunge forward into the tunnel.
As mentioned, Japan barely issued a peep of protest when it was singled out among major U.S. allies for imposition of steel tariffs without recourse. Tokyo apparently calculated that steel represented less than 1 percent of the country’s exports; that customers in the United States would likely receive product-by-product exemptions; and that Tokyo had bigger fish to fry with Washington, like ensuring that Japan’s interests (short-range missiles and abductees) were protected in President Trump’s summit with North Korean leader Kim Jong-un.
The launch of a Section 232 national-security review of automobile imports in late May was another matter altogether. Autos are the “third rail” of Japan’s political economy, an industry that directly employs over 8 percent of the Japanese workforce, with disproportionate influence over policymaking in Tokyo. Shortly after the autos case was announced, Simon met with a senior official in Tokyo, who said in no uncertain terms, “We are a samurai nation and will defend our interests and our dignity.” Hopefully we aren’t headed for a real clash of swords…