Resisting the Specter of Smoot-Hawley

Volume VII, Issue 3, March 2018

London, April 2009: Leaders representing 85 percent of the world economy met for their second summit amid collapsing global growth and trade and starkly declared, “We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men, and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.” The communiqué issued by Group of 20 (G20) leaders went on to list a range of urgent responses to the crisis, including this: “Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras.”

As they convene on March 19–20 in Buenos Aires, G20 finance ministers and central bank governors should try to rekindle the sense of crisis that animated the first three leaders’ summits in Washington, London, and Pittsburgh in 2008–2009. Despite the strongest global economy in nearly a decade, the specter of protectionism hovers over the Argentine gathering, threatening growth and the foundations of global economic cooperation. And this time, the United States cannot be counted on to lead the world out of crisis; on the contrary, policy in Washington poses one of the greatest risks to the global economic outlook.

President Donald Trump has finally made good on his longstanding promise to protect certain U.S. manufacturers from foreign competition. His March 1 decision to impose broad 25 percent tariffs on steel imports and 10 percent on imports of aluminum was surprising only in its timing and off-the-cuff nature. Many countries, among them close U.S. allies, have threatened retaliation, with the European Union drawing up a $3.5 billion list of targeted American products from blue jeans to bourbon. The Trump administration is also reportedly preparing a large package of sanctions against China under the separate Section 301 case on forced technology transfer and intellectual property theft. Beijing is almost certain to retaliate. Suddenly the risk of a global “trade war” has gone from alarmist hyperbole to real prospect.

Everyone has a role to play in heading off these risks. This starts with China, which over the past five years has backed away from market-oriented reforms, increased protection of its domestic markets from competition, subsidized favored industries to the point of creating massive overcapacity, and enabled forced technology transfer and theft of foreign intellectual property. Beijing needs to recognize that Trump’s protectionist trade policies do not stem just from rising populism in the United States; there has been a sea change in elite sentiment in the United States about our relationship with China in the era of Communist Party leader and president Xi Jinping. In addition to Beijing’s tightening controls at home and assertive behavior abroad, this shift in sentiment is due in large part to disappointed expectations for reform and opening following China’s accession to the World Trade Organization (WTO) in 2001 and the so-called Third Plenum reforms of 2013. Beijing will no longer be able to manage trade frictions through token buying missions or empty promises; a visible return to the path of reform and opening is needed now.

Meanwhile, with the “globalists” in the White House in retreat, those that stand to lose from protectionism in the United States cannot be silent. In a positive sign, important stakeholders have started to mobilize; the U.S. Chamber of Commerce, for example, issued a statement early this month highlighting the risk of a trade war and calling on the president to refrain from imposing the steel and aluminum tariffs. National security and trade experts have warned of the economic and political costs of damaging alliances and encouraging others to use national security as a cover for protectionism. Others affected—from downstream users of restricted products to consumer groups—should also speak out.

U.S. allies have the most complicated line to walk. On one hand, they cannot simply accept U.S. actions that harm their economic interests or the global rules-based order. On the other hand, they do not want to push the world closer to a full-blown trade war by getting into a cycle of tit-for-tat retaliation. Their most prudent move would be to work together to convince the United States, China, and other participants in the global economy that an open, rules-based system is the best shot we have at mutual prosperity.

A few countries already stand out in terms of recognizing the present moment and working to develop a constructive response. Japan, for instance, broke character and assumed leadership for the Trans-Pacific Partnership (TPP), driving its transformation following U.S. withdrawal into the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (the tongue-twisting CPTPP). The CPTPP agreement was signed by its 11 members in Santiago, Chile, on March 8. In so doing, this group, representing over one-eighth of the global economy, has planted a firm stake in the ground on the rules that will govern trade and investment in critical areas such as the digital economy and state-owned enterprises.

Another example of Tokyo’s plucky new economic diplomacy occurred on the margins of a WTO ministerial in Buenos Aires last December. Japanese trade minister Hiroshige Seko persuaded his somewhat-reluctant counterparts from the United States and European Union, Robert Lighthizer and Cecilia Malmström, to issue a trilateral statement committing to work together to counter overcapacity, forced technology transfer, and other market-distorting practices—with China the unstated but obvious target. Despite the distraction of the proposed U.S. steel and aluminum tariffs, the three ministers released a more detailed statement on the same topics when they met early this month in Brussels.

The next step is for the three economic giants to take this cooperative work to tackle distortionary trade practices into the G7, hosted by Canada this year. The G7 has found new life since Russia was thrown out in 2014, restoring the forum to a gathering of advanced industrial democracies with shared values and interests, if not always identical policy perspectives. But growing concern in all G7 capitals about China’s mercantilist policies offers a chance to develop a concerted response—and for others in the group to implore Washington not to do damage to their interests or the rules-based order by provoking a trade war.

The G20 is a more diverse and challenging group but also has a responsibility to prevent a slide into global protectionism. Argentina, supported in the so-called troika by last year’s host Germany and next year’s Japan, should try to rekindle the sense of crisis that helped stem protectionist pressures in the 2008–2009 summits. That starts with this month’s finance ministers’ gathering. Troika countries and others need to insist that the United States and China sign onto strong language in the communiqué rejecting protectionism and committing to addressing overcapacity and other underlying causes of today’s trade friction.

International cooperation is far more difficult without the United States in its traditional leadership role. But in the face of what could soon be another real crisis prompted by an escalating cycle of destructive protectionism, it is critical that others—whether in Buenos Aires, Brussels, or Tokyo—step up to fill the void.

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Matthew P. Goodman

Matthew P. Goodman

Former Senior Vice President for Economics
Stephanie Segal

Stephanie Segal

Former Senior Fellow, Economics Program