The Financial Express


A tale of two global trade wars

| Updated: July 05, 2018 21:45:33

-Reuters file photo -Reuters file photo

US President Donald J. Trump did what has only been done once in the past century: spike tariffs against all the world's leading economies simultaneously, sparking a global trade war. The last time that happened was during 1930-1, when the Hawley-Smoot US legislation elevated tariffs by at least 60 per cent on more than 3,200 products against the rest of the world. The largest relatively free-trade player, the British Empire, immediately and massively retaliated through the Imperial Preferences (also known as the Ottawa Preferences after the city in Canada where it was launched). These spiked the proportion of the empire's British imports from 27 per cent to 39 per cent. Almost all other 'great' powers were too heavily protectionist to matter.

Canada, China, and the European Union (EU) seem to be playing the British Empire counterparts today. Their retaliation against Trump's actions threatens the G7 negotiating body, while inflicting collateral damage against India, Japan, and the like.

Both global trade war instances were triggered by technological developments: tractors and farm mechanisation in the 1930s, artificial intelligence (AI) and Internet of Things (IOTs) today. Whereas the former released farmers in developed countries whose urban migration fed unemployment and depressed the economy, the latter displacing manufacture-based workers, requires skills and knowledge-levels even graduates do not have. Ultimately, whereas the former led to the golden age of the manufacture economy, the latter is substituting manufacture for a hi-tech economy, in other words, shifting dramatically from physical to intellectual skills.

For less-developed countries, the 1930s depression hit them in their gut: agriculture. They retaliated by adopting import-substitution industrialisation (ISI). Latin countries led the way, eventually to blossom during the 1950s and 1960s. Until World War II, almost every country had a nationalistic economy, seeking both to prevent imports and also build external dependencies, as Adolf Hitler's Economic Minister, Hjalmar Schacht, did so effectively across East Europe. Colony-building countries also created their own blocs, as Britain was doing. Only the United States sought to break out of this through its reciprocity-based external trade cultivation, called the Reciprocal Trade Agreements Act, from 1934. It eventually culminated in the multilateral trading order, the General Agreement on Tariffs and Trade (GAAT) in lieu of the failed International Trade Organisation, during/immediately after World War II. Britain was evicted as a US competitor, not only on the trade front, but also on monetary front (economist Lord John Maynard Keynes, its representative at Bretton Woods, was reduced to second-fiddle by Harry Dexter White, an institution advocate US representative).

After the ISI model exhausted itself across Latin America during the 1970s, the US Baker & Brady plans from 1983, which bailed them out, opened their neo-liberal door. Ironically, Asian countries also shifted in that direction at roughly the same time, given how their export-led growth (ELG) had pushed them far enough that their protective walls became liabilities (as the 1997 Asian financial crisis illustrated, much like the Latin lost decade of the 1980s did for many countries there).

Japan towered among them alone at first. Its phenomenal post-World War II growth produced what is called a flying-geese (FG) growth pattern. As its innovative industry (say automobile or electronics) matured, new industries, such as semi-conductors, helped delegate these to a second line of geese (Singapore, South Korea, Taiwan), thence to a third line, with Indonesia, Malaysia, and Thailand, before a fourth summons Cambodia, Myanmar, and Vietnam before our very eyes today.

Note how post-ISI Latin and ELG Asian countries needed markets to succeed. The United States supplied this fairly freely, first against Cold War fears, then competition from the European Union and Japan, eventually China today. Except Japan, no country came close to even managing the abysmally low US tariff level during the 21st Century, of 1.68 per cent (Britain's is 1.98 per cent, China's 4.33 per cent, South Korea's 4.65 per cent, the European Union's 5.2 per cent and so forth: Japan's is 1.07 per cent, India's 6.22, Pakistan's 11.77 per cent, Bangladesh's 12.16, at the highest end).

This gets to the crux of why this second global trade war in a century: there was not enough reciprocation to post-World War II US concessions. Simultaneously, manufacturing industries were overtaken by service-sector or AI-driven industries, whose more transient and fickle nature creates more uncertainty (even though the gains could temporarily be too high to ignore): establishing software programs can be done up on a mountain or by the beach; but hardware facilities, such as an assembly-line, can only be done in or near metropolitans, preferably with lots of low-wage labour available and market accesses.

Whereas the United States eliminated an increasingly protectionist Great Britain after the 1930s from the global pedestal, it, too, faces a similar crunch today. Ironically, even as an AI leader, soaring US wage-levels have ultimately produced blue-blooded workers and unions (fattened by all sorts of benefits from unemployment to pension), while making its products uncompetitive globally.

If the 1930s depression and the preceding global trade wars marked the shift from Great Britain to the United States at the global helm, what might the 2008-11 Great Recession and subsequent global trade wars indicate?

Clearly, the European Union missed the economic leadership opportunity: too many industrialised countries demand as high labour supports as in the United States to be viable in the market (France, Italy and Spain, particularly); and this has translated into Trump-like populists, only earlier, across a wider spectrum, and deeper with its own malaise than in the United States. On top of that, the regional West European configuration invites nationalist reactions, such as Brexit demonstrated.

That leaves China, where low-wage production still reigns supreme, facilitating dirt-cheap exports, and racking up surpluses galore. With those surpluses, China's second-line response has been to build the world's infrastructures, even at an uneconomical price, while constructing rival trade/monetary institutions. Whereas the Great Silk Route revival illustrates the former, the Asian Infrastructure Investment Bank does likewise for the latter.

It is now only a question of time for the trade-war dust to settle. That will not happen easily. As the United States withdraws under enormous domestic election-related pressures, those retaliating against it should count their own liabilities first: Canada can raise tariffs, but without access to the US market or US investment, it could be in worse conditions since no alternative has yet evolved, and will take time to do so; the European Union is too domestically handicapped to search for leadership answers, as Angela Merkel and Emmanuel Macron are finding out every day; Japan carries a tall order of countering China, making Asian headways, and stabilising its own generation-long domestic economic woes; and India, beginning to sour against US defensive walls, cannot but hop on the China bandwagon.

If those marbles gravitate in the predicted directions, then until China takes the reins of world leadership from the United States, that dust will not just settle. We would do well to keep an eye on Xi Jinping's 'Made in China 2025' slogan for our next answers, and not what Trump or his US successors, or any Atlantic counterparts may do, in Washington, or for that matter Berlin, Brussels, or Ottawa.

Dr. Imtiaz A. Hussain is Professor & Head of the newly-built Department of Global Studies & Governance at Independent University, Bangladesh.

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