Trump and his economic aides are wrong with their ‘managed trade’ because forced diversion of commerce is neither free nor fair
- ‘Managed trade’ is neither free nor fair, because it causes commerce to be diverted from the channels into which it naturally wants to flow
- At the recent World Bank-IMF spring meeting in Washington DC, the prospect of China’s preferential treatment of US firms was raised as a point of concern
While they push for free and fair global commerce, they seem to think that they can manage trade to suit themselves.
If China agrees under duress to buy more US goods, then it will buy fewer goods from elsewhere. If Japan and Europe should agree to do likewise to secure tariff-free access to the US market then the trade diversion effect will become even greater and more damaging.
Such fears were signalled at the recent spring meetings in Washington DC of the International Monetary Fund (IMF) and the World Bank. Increased Chinese purchases of US products could come at the expense of other countries that are doing business with China, warned the IMF’s Asia-Pacific director Rhee Changyong.
The former Asian Development Bank chief economist voiced concern that China might give US firms preferential access that could undercut other countries and provoke “broader concerns” about the future of free trade. He withheld his final judgment until the details of the US-China agreement are known.
Rhee is not alone in harbouring such fears. Many other economists have concerns about “managed trade” although expressing them before Trump and his protectionist zealots is about as effective as spitting in the wind. It seems the world will have to learn its lesson the hard way again.
Trade is like the wind, which “bloweth where it listeth,” to quote the Bible. Trade thrives when left to itself and evolves in ways that may not correspond with immediate national interests and borders. In the long run it enriches the global economy, which allows everyone to benefit ultimately.
That is why global trade has grown to its size today. Global exports in 2017 – the latest year in which World Trade Organisation data is available – rose to US$17.4 trillion, nearly a quarter of global economic output. Until Trump’s trade wars disrupted the momentum, global commerce had been growing at a faster pace than worldwide economic output.
“In today’s global economic system, countries exchange not only final products, but also intermediate inputs,” the economists Esteban Ortiz-Ospina, Diana Beltekian and Max Roser wrote in a research paper. “This creates an intricate network of economic interactions that cover the whole world.”
This network is now at risk from Team Trump’s clumsy attempts to manage trade. Supply chains cannot be manipulated simply in the interests of achieving bilateral trade balances. If the name of the game is trade diversion, rather than trade expansion, it becomes a game no one can win.
For a while Trump and his minions may appear to get their way as trade partners are bludgeoned into accepting deals to stave off tariffs.
But as trade expansion thereafter begins to contract, bringing global growth along with it, the futility of such crude approaches will become clear. By the time it does, the job of getting trade and growth back on track will have become much harder because negative trends create their own downward momentum.
It is much easier to reform trade while it is expanding, as it is with correcting a ship’s course while it still has wind in its sails.
The pre-Trump trade system was far from perfect, but reform is already underway within the WTO. Instead of supporting that process (a difficult one given the complexity of modern merchandise and services trade) the Trump administration prefers to go its own way.
If the WTO did not already exist, along with its trade disputes settlement system and numerous other mechanisms for avoiding or easing trade tensions, it would need to be invented. But the WTO does exist, and it seems the US is about the only nation on earth that ignores its value.
“Rising trade tensions could put the recovery in global trade at risk, with inevitable consequences for the wider economy which could reach far beyond those countries that are directly involved,” said the WTO’s director general Roberto Azevedo.
We all know who to thank, or blame, for that, don’t we?
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs