- Peter Morici
At the recent Asia-Pacific Economic Cooperation summit, Presidents Trump and Xi Jinping offered competing and disturbing visions of a new international economic order.
Mr. Trump abandoned America’s leadership for a multilateral trading system based on rules and shared responsibilities.
Mr. Xi cynically offered China to fill the void, but Pacific leaders see that for what it is. Twelve nations are negotiating a multilateral Trans-Pacific Partnership without America to counter China’s economic imperialism.
Modern economics demonstrates that nations can increase their wealth by opening up to trade and specializing in exports that use resources in greatest abundance within their borders — for example, inexpensive labor in China and scientists and engineers in the United States, Japan and Western Europe. This assumes trade is reasonably balanced, and works best when barriers are lowered among many trading partners.
After World War II, the U.S. and its allies founded the General Agreement on Tariffs and Trade, which became the World Trade Organization to promote economic interdependence, discourage conflict among historical adversaries and contain Russian and Chinese-led communism. With the Soviet Union’s collapse, western nations encouraged democratic and market-based reforms by granting former communist nations admission to this multilateral system.
America led efforts to first cut tariffs and later limit industrial policies — such as subsidies, domestic preferences in government procurement and intellectual property enforcement, and arbitrary product standards. All governments bend these rules, but China violates them most egregiously — for example, protecting its uncompetitive indigenous automobile industry.
Western nations granted less-developed and emerging countries latitude to keep much higher tariffs to jump-start industrialization — for example, China’s 25 percent tariff on cars as compared to the U.S. 2.5 percent levy. For many nations, such as China, Brazil and Mexico, those tariff preferences long ago outlived their justification.
The U.S. has amassed large trade deficits to help glue the system together. This has exacerbated the difficulties of moving workers in smaller communities out of traditional manufacturing and agriculture into more technologically intensive pursuits or decently paying service jobs; worsened unemployment, put downward pressure on wages and social well-being; and significantly contributed to the election of President Donald Trump.
For 2017, the United States is on track to export about $2.3 trillion — that generates economic benefits of about $250 billion because export industries are estimated to be 11 percent more productive than import-competing industries.
However, U.S. imports will top $3.1 trillion, and the resulting $540 billion deficit imposes costs that overwhelm the above-mentioned benefits. For example, lost research and development in technologically intensive industries, which would result from balanced trade, shaves as much as 2 percentage points off annual economic growth.
An economy growing at 3.5 or 4 percent would create all kinds of additional opportunities for Trump voters to obtain training in the private sector and find new employment.
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Trump has responded by throwing out the baby with the bathwater.
Though America has trade deficits with many nations and surpluses with others, China is really the focal point of the problem. It closes its markets to support industries it wants to develop, forces foreign companies to transfer technology or steals it outright, and grants huge subsidies to failing domestic industries and those it wishes to promote. It accounts for about 60 percent of the U.S. trade gap while oil accounts for much of the rest.
Instead of rallying American allies to confront China’s mercantilism through joint action, Mr. Trump has bullied Mexico, South Korea and Canada, pulled America out of the Trans-Pacific Partnership and derailed free trade talks with the EU.
Mexico, Canada, Japan and nine other Asian nations are moving to form a Trans-Pacific Partnership to counter China’s mercantilism and fill the leadership void left by Trump’s economic nationalism. That will leave America isolated.
Along with its other free-trade agreements, the partnership will permit factories in Mexico, Canada, Japan and the EU to export unencumbered by most trade barriers into much of Asia and Europe — an advantage U.S.-based industries will not enjoy. That will attract high-tech activities more logically domiciled here to North American, Japanese and European locations.
This is only one of the unintended consequences of Trump’s trade policy. Increasingly, America is viewed by thoughtful leaders and analysts around the globe as irrationally led and in decline.