Donald Trump is consciously engaged, not so much in destroying, but in re-shaping the liberal free trade order.
Donald Trump is consciously engaged, not so much in destroying, but in re-shaping the liberal free trade order. Trump has decided that America cannot afford to be the generous provider of such global public goods as NATO and the world trading system (WTS). He thinks the US is losing out from paying for things which cost it money but with no returns. He is intent on redrawing the global map. He wants to reshape the multilateral trading system into a series of bilateral relationships with nations which run a trade surplus with the US. He has to be taken seriously. What will the world look like if Donald Trump succeeds in his aim?
The US abandoned the gold dollar link in 1971. Oil prices quadrupled in 1973. These two ‘shocks’ reshaped the global economy. Innovations such as COMSAT and the container ship had made it economical for manufacturing industries to be moved from the high wage developed countries to low wage economies of Asia. The industrialised economies moved up the value chain to high tech industries or to services, especially financial services. Silicon Valley helped in this process. The developing economies industrialised—Asian Tigers, China (India missed out on this transformation as it was following a Soviet autarchic strategy).They demanded access to the markets in the developed economies during the Uruguay Round. For migratory Western capital, which had made profits in Asia, this was attractive and the consumers in developed economies gained from lower prices of manufacturers. The US was one country which piled up huge trade deficits, while the world invested its savings in the US treasury bill market.
When the 2008 crash came, few thought it would become the Great Recession. But, after ten years, the fault lines previously hidden in the economic structure have become clear. They are having a political effect across many modern democracies. The hollowing out of the manufacturing sector has altered the geography of American prosperity. Population and prosperity moved to the two coasts, East and West, leaving the middle, previously thriving from 1945-1975, behind. The previously prosperous Mid-West has become the country one flies over, going from coast to coast.
The Trump plan
Donald Trump is the first radical right political leader to propose a rethinking of the liberal order, especially in trade. WTO encourages the idea of the world trading system as an interlocking of trading nations on an equal and symmetric basis with a uniform set of rules and restrictions on tariffs. Donald Trump’s view of the WTS is US centric. He looks at countries in terms of the size of the US trade deficit with them. China is thus the most important nation he has to tackle. Next, is the EU, then NAFTA. Instead of a universal set of rules applicable to all, he wants a bilateral agreement, separately, with each of the large trading partners to minimise the total trade deficit. He does not want to enter into multi-country, multi-product regional trading agreements such as the Trans-Pacific Partnership. Trump wants trades bilaterally. The shape of such a world would be dozens, if not hundreds, of bilateral treaties regulating trade relations between pairs of economies.
There is much alarm that what Trump wants to achieve will impose a huge cost on the trading countries and the world economy. The direct effect of tariffs is to raise the cost of goods as tariff wars escalate. There may also be a diminution in the volume of trade. The diminution of trade means that higher cost domestic products will be substituted for cheaper foreign ones. This will have a positive employment effect and a negative inflationary impact. This is for final products. Much greater anxiety attaches the trade in intermediate input products which are crucial to the geographically dispersed production systems which require just-in-time delivery. This production system has come into being only since the twin shocks of 1971 and 1973.
But, as always, where there is a constraint, there will be innovation. Given new technologies such as 3D printing and AI, it is not fanciful to imagine that firms could manufacture the parts at home which they now import. Trade would continue, but the product mix of trade would change once again to be in final products, as it used to be, rather than intermediate ones as at present. The beauty of capitalism is that it finds a solution to its problems. It goes around not in a circle, but, a spiral with each new stage at a higher technological level.
So, let us not fear the ‘après Davos’ world of Donald Trump. It is just another phase of capitalism which has lived past the stage of the 1995-2008 liberal trading order. There are a variety of bilateral relationships in trade which the US will pursue. It will no longer lead the world nor pay for global public goods. The rest can go about their trade and security as they please.
-The author is a prominent economist and Labour peer