Donald J. Trump, the unpredictable American leader, has rattled the stock markets of the world with his “trade wars” with China, the European Union, Mexico, Canada, Japan, South Korea, Russia and Iran. The wars with China, the “foe,” and with America’s traditional Western allies (EU, Canada and Mexico) have been reported widely by newspapers everywhere. Trump imposed a 25-percent tariff on $34 billion worth of Chinese exports, and followed this up with an announcement that higher tariffs shall also be imposed on $200 billion more Chinese goods. As to the EU, Canada and Mexico, the United States imposed a 25-percent tariff on steel, and 10 percent on aluminum.
Trump’s unilateral trade actions were angrily denounced by China and the US European partners. They chorused that America is ripping wide open the multilateral trade rules that the United States helped form through the establishment of the World Trade Organization (WTO). China has been countering the American tariff increases with its own tariff impositions on a number of American exports, primarily agricultural products.
These trade wars have elicited fears that they can plunge the world once again into a global recession, if not a full-blown depression. Worse, these trade wars may also generate serious political conflicts that are similar to the impact of the tariff wars that preceded World War II.
Apparently, Trump simply wants a quick solution to America’s gargantuan trade deficit. He wailed that China and America’s allies have made Uncle Sam their “piggy bank.” In 2017 the US trade deficit in goods with the world was $810 billion, or nearly a trillion dollars. Almost half of the deficit was with China—for a whooping total of $375 billion. During his campaign for the American Presidency, Trump accused China of raping America by using unfair trade practices such as currency manipulation and technology piracy.
The 2017 US trade deficits with its Western allies are also big—$151 billion with the European Community, $70 billion with Mexico and $17 billion with Canada. In the recent G-7 talks, Trump quarreled openly with America’s traditional partners.
Apparently, Trump enjoys the support of his constituency in the Rust Belt of America. His main argument for the imposition of these high tariffs is the lack of “reciprocity” in trade. Example: Canada’s tariffs on US dairy products are over 275 percent and 80 percent on US wine! Another example: Europe’s tariffs on US cars are more than 10 percent, and yet US tariffs for European cars are only 2 percent. The lopsided tariff-rate arrangements are the same with China, which has higher tariff schedules compared to America. Under the most-favored-nation rule of the WTO, the US cannot adjust its tariffs unilaterally just to offset the higher rates imposed by its trade partners.
But Trump just did that with his trade wars. After the breakdown of the G-7 trade talks, Trump even proudly released the following tweet:
“Fair trade is now to be called fool trade if it is not reciprocal. Not fair to the people of America! $800 billion trade deficit. Why should I, as president of the United State, allow countries to continue to make massive trade surpluses, as they have for decades, while our farmers, workers & taxpayers have such a big and unfair price to pay?” In a press interview, he thundered: “We’re like the piggy bank that everybody’s robbing—and that ends.”
At this point, it is difficult to speculate on how these trade wars will end or will be resolved. The experts are divided as to whether China and others will eventually capitulate to America’s pressures and seek a negotiated compromise. There are also those who worry that more sinister events like wars are looming on the horizon.
But for the Philippines, there are several lessons that can be learned from these trade wars.
First, globalization has not erased the fact that countries enter into trade agreements primarily to advance their respective national interests. As Ha-Joon Chang, who wrote the best-selling book Kicking Away the Ladder (2002), put it: capital has a “nationality.” And so are traded goods.
Incidentally, because of national interest, China and Vietnam became members of the WTO only after they have completed several years of negotiations for the adjustment of their tariff schedules line by line, meaning after they have negotiated for the individual tariffs for thousands of goods. In the case of the Philippines, tariff negotiations with the WTO were easily concluded because tariff commitments were made for whole sectors or subsectors, such as manufacturing. This explains why we do not have tariff peaks of over 100 percent or so like what Canada and other developed countries have.
Second, the US is able to adopt an aggressive unilateral position on trade, partly because it is not fully dependent on external trade. It has a large and well-developed domestic market. Although America is a large trading nation, its dependence on external trade is much less compared to the interstate trade among the 50 federated states.
Today, China is aping America by enhancing the development of China’s domestic market. Imagine the impact of intra-China trade involving a billion plus population.
Similarly, the Philippines, with a population of 110 million and an archipelago of 7,000 plus islands, can develop a vibrant domestic market. However, for this to happen, the economic planners should stop looking only at the export market or strategizing industrial development by simply participating in the so-called global value chains of the multinationals. There should be some balancing of the domestic and export markets, and increased promotion of productive linkages between these two markets.
Third, at the heart of the US-China trade conflict is the quarrel over China’s acquisition of technology. China today is positioning itself to become the world’s technology leader by 2030 or so. This is a dreadful scenario for some American leaders like Trump. Thus, Trump is questioning not only China’s trade tactics but also China’s alleged technology piracy.
But is this not what the US in its long “protectionist” period (from its break from England in the late 18th century up to the 1930s), did. Under the doctrine of Alexander Hamilton, George Washington and successors prodigiously worked for the development of American industry that would be able to compete with Europe. Only after World War II when its manufacturing had “matured” that America started lowering its tariffs and pushing for global trade agreements on tariffs through the formation of the General Agreement on Trade and Tariffs, which became WTO in 1995.
Now that the US is losing massively in the global trade war, it is returning to its protectionist past. It is even denouncing the very institutions it helped set up, such as the WTO and the North American Free Trade Agreement. “America First” is US national interest first.