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Opinion

Cost of tech decoupling much higher than it appears

Reviving the multilateral trading system would be in everyone's interests

| China
Kunpeng 920 chipset is on display at Huawei's booth during an exhibition in Beijing in September 2020: More protectionism, less innovation, higher prices will be decoupling's inevitable results.   © Reuters

Craig Burchell is senior vice president of global trade affairs at Huawei Technologies.

As the World Economic Forum convenes online this week rather than in Davos, its participants will discuss how to move "beyond geopolitics." Trade wars, populist politics and COVID-19 have led countries to question their reliance on global supply chains and retreat into a defensive posture of self-sufficiency, choking off the cross-border trade that has long fueled global growth.

Restricting trade will worsen a global slowdown when the world can least afford it. But the global trading system is becoming more fragmented and regionalized, and some even advocate decoupling: splitting global supply chains to isolate China from the U.S. and its closest allies.

To find out just how costly a full decoupling of the world's major economies would be, the Economist Intelligence Unit simulated the impact of three different scenarios with a computational model called the Global Trade Analysis Project. Widely seen as the gold standard of macroeconomic modeling, GTAP collects data on imports, exports, trade flows, currencies and other factors, then gauges the impact of a shock to the global system -- such as the blow decoupling would inevitably deliver.

Under a worst-case scenario, the Five Eyes countries would levy 100% increases in tariff duties on all Chinese goods and services, while implementing a full embargo of all technology and national security-related sectors. Such actions would shrink global gross domestic product by $52.8 trillion in the coming decade, according to the GTAP model, equivalent to losing an economy the size of Japan every year, for the next 10 years.

A loss of that magnitude is hard to comprehend and may seem unlikely, given that global tariff rates have dipped to historic lows in the past decade. But the U.S. levied 100% tariffs on a variety of Japanese goods in 1987, and in 1995 instituted a 100% tariff on some luxury cars. In today's antiglobalist environment, it is not hard to imagine the U.S. doing the same, or worse, to a strategic rival such as China.

Newly arrived Japanese luxury cars against which U.S. imposed punitive trade sanctions at the port of Los Angeles, pictured in June 1995: It is not hard to imagine the U.S. doing the same to China.   © AP

Who would be hurt most under such a scenario? The GTAP model shows the Netherlands and Mexico would feel the pain, as would Poland and the United Arab Emirates. The biggest loser, Vietnam, would see its economic output slip 8.2% below the baseline forecast for 2021-30.

But the pain would trickle down to individuals as well. Using GDP as a rough proxy for household income, Australians would suffer the most, losing $8,636 per household each year between now and 2030. The average Chinese household would lose $6,632 per year and American families $2,008.

More protectionism, less innovation, higher prices and other unwanted outcomes will be decoupling's inevitable results. Preventing them requires that we revive the world's multilateral trading system.

The recently concluded Regional Comprehensive Economic Partnership is a good start. But regional trade pacts tend to create legal and administrative complexity, disproportionately hurting smaller companies that cannot afford lawyers to navigate the rules. A survey of 600 exporters by the Asian Development Bank found that, because of burdensome administrative costs and a lack of information, as few as 17% of businesses took advantage of the preferential trading terms offered by regional trade agreements.

By contrast, global multilateral agreements are more business-friendly. They aid companies by stripping away red tape and making it easier to participate.

Politically, free trade should be an easy sell: Most voters support the idea in principle, even if they say they often do not feel its benefits. To address that issue, governments must do a better job communicating how trade helps the average person -- and provide better support to those whose jobs are eliminated by trade.

Globalization's most disruptive force over the past two decades has been the rise of China. But as its economy matures, China should create less dislocation, while contributing to other countries' growth by buying more of their goods and services.

Trade protectionism is often seen as a quick fix, but there is little evidence that it brings back lost jobs. Moreover, it triggers a spiral of retaliation that leaves no one better off. Rather than heading further down this road, we should strengthen the rules-based trading system that has created prosperity for so many countries over the last 70 years and move forward on new rules for the era of digital trade, to create shared prosperity for future generations.

The new Biden administration has an opportunity to begin a more rational, fact-based approach to global trade. Seizing that opportunity will help society meet the most urgent needs of our time: controlling COVID and the climate crisis, while enabling an inclusive economic recovery.

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