Trump's Reckless Threat to World Trade
Presumably at the insistence of the U.S. administration, the latest statement from the Group of 20 big economies conspicuously dropped the standard promise to "avoid all forms of protectionism." It's worth pausing to understand why that promise was ever worth making, and honoring.
The reason is surely not that governments always keep their word. For years they've been backsliding on their ritual commitment to keep markets open -- and partly for that reason, the prospects for world trade were already looking poor. But those prospects will be so much worse if governments, led by the U.S., now come to regard protection as a policy to be openly embraced.
In the recovery from the recent global recession, the volume of world trade has grown more slowly than it should. During the past four years, especially, the slowdown has been pronounced. Disentangling the causes isn't easy. Weak investment demand due to the unusual severity of the slump is one factor. But trade policy is another. Since 2012, protectionism has been quietly ratcheting up.
As always, traditional measures such as state aid, export incentives and public procurement are being used to protect domestic producers. In addition, governments everywhere have been using new local-content requirements to discriminate against foreign competitors. According to one analysis, the U.S. has led this post-2008 trend, even with an avowedly pro-trade administration in charge.
It's a cliché of trade policy that you need to keep moving to stand still, and the experience of the past few years proves the point. Without big new agreements such as the Trans-Pacific Partnership -- strongly championed by former President Barack Obama, but rejected by Congress -- international competition gets nibbled away. Instead of this mildly debilitating process of attrition, President Donald Trump now contemplates a frontal assault on liberal trade.
Although the basic case for free trade has gone out of academic fashion lately, it remains as strong and simple as ever. Competition is the wellspring of prosperity -- and liberal trade promotes competition. Forcing producers to innovate, specialize and compete makes economies more efficient. Inhibit that process, and in the end, in the aggregate, people are worse off.
"In the aggregate" does matter: Trade involves winners and losers -- as do, by the way, technological progress and purely domestic competition. In all cases, the wisest remedy is to support the workers who suffer the costs of this dislocation, especially with help for retraining and relocation. The faster an economy grows, the more easily resources for such programs can be found. The alternative is a vicious circle of diminished competition, subpar growth and stagnant living standards.
Changes in rhetoric are one thing, changes in policy quite another -- but if deeds follow words, the world is in trouble. If Trump leads governments toward a new era of outright protectionism, he will do untold damage both to the U.S. and to the wider global economy.
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