Sir Vince Cable: Trump’s threat to the world trade system

Blogs are the author’s own opinion and not necessarily representative of Misys or the World Trade Board.

Sir Vince Cable, Strategic Advisor to the World Trade Board, on why there has never been a more appropriate time to remake the case for international trade.

In my view, there are many ways in which the election of Donald Trump and his toxic brew of economic nationalism and ethnic division could create instability. But the explicit threat to overthrow the post-war system of multilateral trade rules, rejecting the consensus in favour of free trade and globalisation, is potentially one of the most disruptive.  And the appointment of a like-minded team of administration officials suggests that the threats are not empty.   The abandonment of the Trans Pacific Partnership, the launching of a renegotiation of NAFTA and proposals for penal tariffs on Mexican and Chinese imports , moreover, show serious intent.

The system is already fraying at the edges. Attempts by the World Trade Organisation to launch global negotiations on a new round of trade liberalisation ground to a halt several years ago in the face of opposition by the increasingly important emerging economies led by India and Brazil.  Bilateral negotiations have proliferated giving impetus to Trump’s preference for dealing with trading partners through US-centred power relationships rather than global rules; and adding greatly to complexity.  Since the 2008 financial crisis, trade has also lost some of its dynamism with trade growth lagging behind overall economic growth, reversing a well- established trend.  The reason for the trade slowdown is partly due to healthy adjustment-for example of China from exporting to domestic demand-but partly also to trade barriers.

Seventy years of experience has taught us that closer economic integration has great benefits in terms of growing living standards, much as theory would predict. The principles of trade are not unduly complicated. They rest on the benefits of specialisation and scale; and, of course, the rather basic point that access to the resources and markets of other countries is better achieved through peaceful exchange than violent conflict.  Experience of the latter in the first part of the 20th century helps to explain why Europe has led the way in economic integration since.

Attitudes were more ambiguous in developing economies where ‘free trade’ was associated with colonisation and dependency  but, in the last three to four decades, inward –looking development has given way to greater openness to trade and overseas development.  The most remarkable transformation has been in China which has emerged from nowhere to become the world’s largest exporter and whose embrace of the global economy explains much of its remarkable growth and improved living standards.

Trump’s protectionism is not wholly new. The US launched tariff war against its trade partners in the 1930’s in the depths of the Great Depression and there is a long history of economic nationalism going back to Alexander Hamilton over two centuries ago.  Successive recent administrations have struggled to get trade liberalisation measures through Congress, particularly past Democrats seeking to protect manufacturing industries.  The evidence suggests that technology rather than trade has wiped out manufacturing jobs but there is a festering wound onto which Trump has poured political salt.  There has also been concern over many years with the imbalance in trade between the USA and China in particular but also Japan and Germany.  Ironically, the accusations of ‘currency manipulation’ against China –deliberate devaluation to promote exports-which may once have been true no longer are.  But the frustrations over stagnant or declining real wages since the financial crisis have found a convenient scapegoat.

There is little doubt that full-scale trade warfare with China in particular would cause serious damage to both sides and have unintended consequences. A big tariff on imports from China would push up prices in the US and reduce real wages.  Since supply chains are so interconnected American companies with Chinese partners would be damaged.  China would also retaliate and perhaps target US farm (eg soya grown in the South). If the US policy is effective in curbing imports the dollar would, other things being equal, appreciate making US exports less competitive and imports more so. Diversion of goods to the EU could lead to the EU imposing its own trade measures escalating the conflict.  The Peterson estimates that over 4 million US jobs could be lost as a result of measures to ‘save jobs’.  The potential damage to China is potentially greater given the high dependence on labour intensive manufactures for export.  The same is true of Mexico and Mexico has a more fragile economy and political system than China.

Hopefully sense will prevail. Undoubtedly some trade measures will be taken but perhaps more selectively (as the Obama and earlier administrations have done).  The Republicans in Congress are traditionally free trading and will act as a brake.  It is also possible that China will form alliances with countries in the region which feel snubbed by the ditching of the TPP and threatened by talk of trade war; though China itself has deeply ingrained economic nationalist instincts and has been regressing under President Xi.

What is painfully clear is that the case for multilateral ‘free trade’ has been taken too much for granted. The Trump view of trade as a ‘zero sum gain’ and trade negotiation as a series of bilateral bargains has wide acceptance amongst his supporters and more widely. It was striking that the British government, which claims to be a strong advocate of the global, multilateral, framework for trade has been giving priority to a bilateral agreement with the US as part of its response to Brexit. Memories of inter-war conflict and chaos, economic as well as political, have atrophied.

So I believe that now is the time for an offensive against the backward-looking and damaging protectionist thinking emerging from the USA (and not only the USA); to remake the case for trade; to help those adversely affected by it; and to breathe fresh energy into the global and regional structures which support an open trading system.