How should Asian policy-makers respond to the disruption that will flow from U.S. President-elect Donald Trump's wrong-headed international trade agenda? Trade growth and globalization have been the drivers of Asia's post-World War II miracle. Now this engine of growth is going to be thrown into reverse by one of the major players. How serious is this, and what should those on the receiving end of new policies do? The short answer is: "Keep calm and carry on."
The well-regarded Peterson Institute for International Economics in Washington did not mince words in assessing the Trump threat to international trade: "Trump's stated trade policies would be horribly destructive," it noted in an analysis ahead of the Nov. 8 presidential election. But these policies -- 35% tariffs on Mexico and 45% on China -- would be "horribly destructive" only if they trigger retaliatory action by other countries, with a self-reinforcing downward spiral of escalating protection. This is the image we carry of the American Smoot-Hawley tariff measures in 1930, which are blamed for triggering a downward spiral that shrank global trade by 66% between 1929 and 1934.
For this unhappy outcome to again become reality, other countries would have to respond to the initial tariff hike with reciprocal increases. Suppose, instead, that Beijing did nothing in response to either a 45% tariff increase directed specifically at China, or (as seems to be the current manifestation of Trump's protectionism), a general import tariff of 10%?
First, to look at this from Trump's viewpoint -- as an American businessman competing with foreigners who are now subject to a tax. This has to be good for business, surely? With tariffs boosting the cost of America's imports, domestic production becomes more competitive, output rises and the trade deficit falls.
But the proper perspective for an economic policymaker is at the macro-level, with the entire economy responding to establish a new equilibrium. The exchange rate, prices and interest rates all go up. Imports become dearer, so consumers have less to spend on other items. Foreigners, with less income, spend less on American exports, which are also less competitive because of the higher dollar exchange rate.
When all the complex interactions of a modern economy with a floating exchange rate are worked through, the answer is that the new protection has made America a bit less productive, but any impact on the trade balance or growth is trivial.
Thus the critical thing is to avoid a global shift toward autarchy: countries do not get rich by turning toward self-sufficiency. The relevant analogy is that trade protection is like putting rocks into your harbors: it does not help countries that do it, and the best response for trading partners is not to follow such a foolish example.
The huge gains already made in integrating the global economy cannot be easily unwound. Trump will find that many American companies are horrified by the damage his protectionist policies would do to their business model because they are already deeply integrated in global supply chains. Time will demonstrate the foolishness of the Trump trade agenda.
But a strong counter-reaction could set off something akin to the collapse of world trade in the 1930s. The period between the two world wars demonstrates that it is possible to shrink globalization, and profoundly damage economies, if policies are sufficiently perverse. With the disaster of the Great Depression in mind, it should be possible to avoid a repetition, provided Trump's foolishness is allowed to run its course without triggering tit-for-tat responses.
Trump's febrile tweets on trade should go unanswered by foreign governments. Foreigners can safely leave it to U.S. commentators to articulate the faults in his trade agenda. The policy paper put out before the election by Trump's key trade advisors, Peter Navarro and Wilbur Ross, has been condemned by leading U.S. academics as "shoddy" and "a complete mess." Even if the new administration takes action to put these misguided plans into action, a quiet expression of regret would be the appropriate response -- more in sorrow than in anger.
But what about the specifics of China's alleged trade infringements -- subsidies to state-owned enterprises, a "manipulated" exchange rate, dumping of products where China has gross over-capacity, a huge trade surplus, and capital controls? Most of these issues have, in fact, disappeared or been ameliorated over time. China's trade surplus is now modest. Its export-oriented growth model ran out of steam a decade ago.
On the perennial issue of currency manipulation, whatever China's earlier sins, the exchange rate is no longer manipulated to achieve unfair international competitiveness. Even Fred Bergsten of the Peterson Institute -- a tireless critic of China's exchange rate policy -- has accepted this. In fact, if China let its exchange rate float (as outside commentators have urged), the resulting depreciation would enhance its international competitiveness, without any grounds for suggesting manipulation.
Some of the complaints about China might encourage useful domestic reforms: Many Chinese policy makers would agree in principle with the idea of reducing SOE subsidies over time. They can get on with this sensitive task without even thinking of Trump. On dumping of surplus goods, a remedy consistent with World Trade Organization rules has been underway for some time. Under President Barack Obama, America had already undertaken substantial measures in response to perceived dumping by China, and these remedies can continue without bringing down the whole edifice of WTO-sanctioned trade.
One additional element of Trump's strategy is already on display: ad hoc deals in which American manufacturers (such as Carrier and Ford) agree to keep some production in America in exchange for tax advantages or the goodwill of the new president. Like tariffs, these measures have little effect on the macro-economy as a whole, and the crony-capitalism aspects (helping one company or industry at the expense of others) will weigh America down with needless inefficiency.
But there is no need for trade partners to respond to America's misguided efforts to damage its own productivity. Larry Summers, a former U.S. Treasury secretary, describes the Carrier deal as "more a mugging than a bribe." Masterly inaction on the part of trade partners seems the right response.
But what about the loss of the Trans-Pacific Partnership under Trump's pledge to withdraw the U.S. from this painstakingly negotiated trade agreement? For some countries (notably Vietnam) the loss of potential new markets in America is significant (although, as with all preferential trade arrangements, this opportunity for Vietnam was at the expense of export opportunities for countries that might be more efficient suppliers than Vietnam). In any case this is an economy which is doing just fine without the extra access to the U.S. Much of the rest of Asia (Indonesia, Thailand, India and so on) was in any case unconvinced of the net benefits of the TPP, and so remains unaffected by its demise.
The TPP might well have been a catalyst for domestic reform, with Japan as prime exemplar. Again, the first-best policy response is clear: these are reforms that countries can implement without the TPP. Japan is tentatively showing the way by passing the TPP legislation even without the prospect of America adding substance to the treaty. This opportunity for efficiency gains still exists, whatever Trump does.
Before we shed too many tears over the TPP, we should observe the reality that it was mainly about putting in place global rules which would favor U.S. industry: Expanded intellectual property protection was largely to the advantage of the U.S., the largest owner of intellectual property; international dispute settlement rules would have helped to protect America's huge foreign investment portfolio; and measures on labor and the environment would have ensured that pollution-plagued and low-labor cost countries would not have the competitive advantage of a weak regulatory environment.
The main loser from the demise of the TPP is America. It was Bernie Sanders, a contender for the Democratic presidential nomination in 2016, who gave the clearest description of the TPP, calling it a "disastrous trade agreement designed to protect the interests of the largest multi-national corporations at the expense of workers, consumers, the environment and the foundations of American democracy."
Here, then, is the basic flaw of the Trump protectionist approach, which in the short term will constrain its implementation and in the longer term provoke a rethink. One rare point on which nearly all economists agree is that trade benefits all the countries that participate. America is opting-out of this benefit. Within countries, there are winners and losers, and there is a strong case for compensating the latter. But that is a matter of domestic policy, separable from the undoubted benefits of globalization.
The very real problems that swung the battleground states in Trump's favor in last year's election will remain impervious to his protectionism -- the decline of manufacturing is largely a reflection of technology (robots and computers) rather than imports. To the extent that manufacturing can remain viable in America, it will be because high-technology replaces labor, and this will not help those whose skills and temperament suit an earlier era of assembly-line industry. Nothing will bring back jobs in Kentucky's underground coal mines. For both manufacturing and coal it was technology, not trade, that did the damage.
Within a time period that might correspond to Trump's term in office, the futility of his protectionism will become apparent; it will either be quietly abandoned or it will leave him unelectable. It is not as if he has stumbled on a new truth in economics -- that trade autarchy is better than openness. His populist version of protectionism may have won some votes but over the longer-term the wrong-headedness of these policies will become apparent.
For Asian policy-makers, the response is clear. Asserting faith in the benefits of further globalization might be useful, but the best course is action to seize the opportunity for closer integration. There is still much work to be done to tighten integration through smoothing administrative frictions and developing common standards. The Regional Comprehensive Economic Partnership - which excludes the U.S. -- provides the framework, and with the TPP out of the way, this can be given greater attention.
The aim should be steady progress in identifying and removing bottlenecks and inhibitions to trade at the operational level, rather than reviving the high-level "platinum-standard" principles of the defunct TPP. The best response to Trump's protectionism is to demonstrate clearly that his agenda is misguided and that globalization offers a superior policy path.
Stephen Grenville is a nonresident fellow at the Lowy Institute for International Policy in Sydney and a former deputy governor of the Reserve Bank of Australia.