US-China trade: protectionists should be careful what they wish for

The rising global clamour for protectionist policies ignores free trade’s success in alleviating extreme poverty and preventing violent conflict

David Dodwell

Published: 3:30am, 14 Feb 2022

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Sad to say, I believe we are watching the sun set on a four-decade era of steadily liberalised world trade and of unprecedented openness to multilateral cooperation. Amid rising international clamour for protection, my first thought is beware what you wish for.

It is surely a depressing paradox that the Covid-19 pandemic, which has illustrated the critical importance of intensive international cooperation, has provided what might prove to be a final nail in the coffin of self-interested multilateralism.

Instead of positively responding to the urgent imperative to work together to bring Covid-19 under control, we have seen disarray. Instead of cooperating to find an optimal response, governments have shut their borders, created a hodgepodge of different strategic responses and allowed millions to die unnecessarily.

Leaders are still ignoring the merits of working together and are instead debating how to be more “resilient” in future. This means pressing for subsidies to forge intrinsically protectionist policies to ensure domestic self-reliance.

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A quick browse of articles in the Post over the past weekend reveals the extent of this broad-based slippage towards protection. We see the Japanese government discussing subsidies of around US$3.4 billion to Taiwan’s TSMC and Sony for a new semiconductor production plant that will reduce its reliance on imported chips.

The European Commission is considering subsidies of €43 billion (US$50 billion) or more in the European Chips Act to encourage more production within the European Union. These initiatives come hot on the heels of the US government earmarking US$52 billion to build towards self-reliance in semiconductors.

We see Lou Jiwei, China’s former finance minister, calling for clarification of what measures amount to “market distortion” and what spending can be defined as an “industrial subsidy”. He points in particular at the recently passed America Competes Act, which makes up to US$300 billion available for domestic research and development.

I am reminded of US President Joe Biden’s “Buy America” speech last January. “When we spend taxpayer money, we should buy American products and support American jobs,” he said. “We can never again be in a position where we have to rely on a country that doesn’t share our interest in order to protect our people during a national emergency.”

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This protectionist language and intent is justified, according to Biden’s administration, by China’s “Made in China” industrial policy and the self-reliant motives behind the “dual circulation” strategy. As Deputy US Trade Representative Sarah Bianchi said last week, China’s state aid to domestic companies and its non-market economic policies and practices are “a serious threat to American economic interests”.

These protectionist developments remind me of Simon Evenett, of the University of St Gallen, who tracks the rise in protection in his annual Global Trade Alert. According to Evenett, there were 1,341 protectionist policy interventions in 2010, rising to 30,629 in 2020 and 40,620 last year.

There is no denying that subsidies constitute an uncontrolled, anticompetitive scourge worldwide, but China does not have a monopoly on this particular sin. It is depressing to watch the foundations being laid for new trade-distorting subsidies when so much work has been done in recent decades to reduce the harm they inflict.

The International Monetary Fund estimates global fossil fuel subsidies were US$5.9 trillion in 2020. Global farm subsidies were estimated at around US$536 billion that year, while annual global fisheries subsidies range from US$14 billion to US$54 billion per year. What chance is there of these subsidies being cut when protectionist sentiments have flared so virulently in so many countries worldwide?

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When former US president Donald Trump was swept from power at the end of 2020, there was a glimmer of hope not just that civility would return to international affairs but that his ill-judged and damaging trade wars would be wound down – in particular the one with China.

Those hopes have been largely dashed. Biden’s Democratic Party has traditionally had protectionist instincts, and Biden cannot risk being seen as “soft on China” ahead of November’s midterm elections in the US Congress and Senate.

Despite the impact of Trump’s phase one trade deal with China, which was supposed to end on January 1, Biden’s administration has stood fast on the need for China to fulfil its purchase commitments in full. Trade war tariffs introduced by Trump remain in place, with no prospect of relief to US consumers.

If the calculations of the Washington-based Peterson Institute for International Economics are correct, China bought none of the extra US$200 billion of US exports the deal demanded, and US exports remained US$13.6 billion short of its US imports in 2017.

China’s failure had less to do with its own intentions than the pandemic disruptions to global trade and international supply chains making this all but inevitable. Increasingly stringent national security measures that prevented some US companies from selling to China and prevented Chinese companies from placing orders with US exporters were also factors.

The official end to the phase one deal provided an opportunity to reset trade relations with China and launch multilateral initiatives targeted at reaching common understandings on market distortions and industrial subsidies. That opportunity was lost, and the slippage towards mutually harmful protectionism continues to accelerate.

Leaders around the world seem to have lost faith in the benefits that have arisen during the past half a century from the international commitment towards free trade. They are ignoring the hundreds of millions of people worldwide who have been brought out of extreme poverty and the value of open trade in diffusing the ever-present danger of armed conflicts.

The protectionism they now seem to prefer carries with it huge risks. They must beware what they wish for.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view