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A trade war has started, and it will profit no one: Paul Heise

Posted 1/30/18

Trade policy is front and center in world politics but that won’t stop a trade war.

The World Economic Forum met recently in Davos, Switzerland. The United States has just invoked the WTO …

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A trade war has started, and it will profit no one: Paul Heise

Posted

Trade policy is front and center in world politics but that won’t stop a trade war.

The World Economic Forum met recently in Davos, Switzerland. The United States has just invoked the WTO escape clause to impose punitive tariffs on China and Korea and possibly an official move to protectionism. And NAFTA is holding renegotiation meetings in Montreal that could restructure world trade. These are institutional structures that could avoid a war or conduct one.

Let’s be clear. The trade war has started already. U.S. trade policy originally was based on three principles — most favored nation (treatment afforded to one partner must be extended to all partner), reciprocity (a benefit accorded must be matched) and nondiscrimination (everybody is treated the same).

The idea of a side deal that affords privileges to one group and not to another, CAFTA and NAFTA, violates those principles. These principles were embedded in the GATT and that avoided trade wars for almost 50 years. There has been serious escalation even though no one is willing to call mutual retaliation a war. Trade war brings to mind the Tariff Act of 1930, the infamous Smoot-Hawley Tariff Act, and that scares everyone.

The United States was until 1934 a high-tariff country that protected its infant industries from foreign competition. Economists even today admit that this is a legitimate trade policy regime. After World War II, innovative changes in transport costs made the United States the major player in international agricultural markets.

Then those who wanted the advantages of trade but to avoid conflicts came up with the idea of the GATT, the WTO and a plethora of regional and bilateral free trade agreements.

Since then there has been the GATT, the WTO, the Doha Development Round, a series of free trade agreements (FTAs), trade and investment framework agreements (TIFAs) Bilateral Investment Treaties (BITs). The GATT began as a series of reciprocal tariff reduction exercises. It went on to nontariff barriers and finally investment and multinational corporation activities. There were minor skirmishes with mutually undesirable outcomes but no major wars

The developing country signatories to these agreements felt they had a right to privileged treatment until they could catch up in industrialization. This catchup included the full panoply of trade protection that had become highly developed and very effective. The United States extended these privileges wider (the EU), and longer (Mexico) than was really necessary. Just as China is projecting infrastructure spending of $1 trillion per year for the next 10 years, it is at the same time managing the value of its currency, subsidizing its exports and controlling its digital trade.

President Donald Trump is right in his position on trade agreements. The swamp dwellers have turned control of trade over to corporate interests. The choice of remedies that USTR has applied to washing machines and solar panels makes the case.

The World Economic Forum in Davos is exactly what turns Trump on. He gets to shine and tweet with the rich and famous celebrities who rejected him when he was a mere property developer.

Trump shows he is thoroughly enjoying the exercise in power that presidents have in the field of international trade and investment. That doesn’t mean he is going to start a trade war.

It is more likely that the busyness in the trade area is a deliberate distraction from “the Russia thing” and whether the president will sit down for an interview with special counsel Robert Mueller.

Paul A. Heise, of Mount Gretna, is a professor emeritus of economics at Lebanon Valley College and a former economist for the federal government.