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A new trade war offers no easy way back for old global order

Bloomberg
Bloomberg • 8 min read
A new trade war offers no easy way back for old global order
Photo: Samuel Isaac Chua
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The world’s three dominant economies are entering a combative phase that threatens to deepen fractures and challenges decades of free-market orthodoxy as the US uses trade weapons borrowed from China’s playbook, leaving Europe with big decisions to make.

Then-President Donald Trump fired the first shots with tariffs on China seven years ago, and then Joe Biden ushered America into the new industrial policy age. Stage three, punctuated by Biden’s latest round of duties on Chinese imports, builds on the first two: using tariffs to defend US interests, with subsidies now at the core of policy and without fear of retaliation.

The US$31 trillion arena of international commerce has withstood a series of shocks in recent years, including the US-China trade war. This time, the linchpin is the European Union — caught between preserving its self-styled role as defender of multilateral rules and fearing the loss of millions of jobs and tens of billions in investment while the US and China wield market-distorting subsidies and tariffs.

“Trump let the protectionist genie out of the bottle,” said Simon Evenett, founder of the St. Gallen Endowment for Prosperity Through Trade, a group based in Switzerland that tracks trade policies. “No one dared to put it back in.”

After the US tariff announcement last week, China signalled it’s ready to unleash duties as high as 25% on imported American and European autos — a retaliation threat aimed at both sides of the Atlantic. 

That’s because Brussels is nearing the end of an electric-vehicle subsidy investigation that is likely to lead to defensive measures against China’s auto exports. The bloc’s levies are expected to be significantly lower than the US’s and based on a different approach within World Trade Organization rules and procedures.

See also: World Bank raises global growth forecast on strong US expansion

The US, China and the EU Are Dominant in Global Trade | Combined, the three account for 42% of all exports and imports

Washington’s latest salvo against Chinese EVs, semiconductors, batteries, critical minerals and other products comes as US officials ask other nations to join its fight against Chinese industrial policy that they say is flooding the world with cheap goods — a charge China pushes back on.

See also: Euro weakens as jitters over France grow

Treasury Secretary Janet Yellen reiterated the pleas in a speech this week. “China’s industrial policy may seem remote as we sit here in this room, but if we do not respond strategically and in a united way, the viability of businesses in both our countries and around the world could be at risk,” she told an audience in Frankfurt.

The impact of the new US tariffs on China’s US$18.5 trillion economy will likely be modest, according to Bloomberg Economics. But bigger risks lie in a wider battle targeting Chinese innovation and Trump’s proposed 60% tariff on all imports from the US’s third-biggest trading partner.  

Such economic costs might be worth paying. At least that’s among the messages accompanying Biden’s tariffs — that domestic concerns about national security and China’s threats to it may override what conventional wisdom once considered to be in the interest of the international economic good.

“More significant is the signalling effect to the rest of the world that no matter who occupies the White House, the overall policy direction of America First and a partial decoupling with China will continue,” said Yeo Han-koo, a former South Korean trade minister.

Trade tensions are lurking as Group of Seven finance ministers, central bankers and top economic officials meet in the Italian lakeside resort of Stresa on Friday. OECD chief Mathias Cormann worried about the extent of any fallout.

“What we should be doing is improving the way globalization is working and delivering,” he told Bloomberg Television. “But we have to be very careful not to throw the baby out with the bathwater.”

In Europe, there are concerns that economically driven actions that go beyond restrictions for military purposes could hurt the continent’s competitiveness.

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While bilateral trade disputes among the US, China and Europe have been simmering for years, Biden’s decision to maintain some Trump-era steel tariffs on the EU and his more recent US$18 billion tariff volley at China shattered any lingering hope for a return to consensus and fairness.

Export Exposure
The resulting trade fragmentation will be more damaging for nations such as China, South Korea or Japan, whose economies depend more on international trade than the US or many countries in the EU.

While it fueled protectionist sentiment, the pandemic actually made China more dependent on exports as a driver of growth. When Hong Kong is included, China is the source of about 20% of all global exports, double the US’s share, according to WTO figures. 

Such reliance helps explain why China plays an active role in the WTO-centered system and claims to play by the rules. It’s also why Beijing has been trying to build out a series of trade deals with both its neighbours and countries further afield, such as Serbia and Hungary.

But the imbalance between China’s GDP and its manufacturing output lies at the heart of US and European concerns about the consequences that Beijing’s current path could have for the global economy.

The Rising Tide of Trade Protectionism | Number of new policies considered to be trade-restrictive hit a record in 2023

The growing protectionist fervour faces few voices of restraint now that US politicians of both parties have convinced much of the electorate that higher tariffs and government aid are tools to save American jobs. 

“Key priorities for trade policy in this administration have been to enhance supply chain resiliency, to shift the emphasis onto benefits for workers, and protect and rebuild the manufacturing base at home,” said Mark Wu, a trade law professor at Harvard who was senior adviser to the US Trade Representative in 2021.

Without American leadership at the WTO or other forums aimed at trade liberalization, it’s hard for some economists to see where the race to the bottom stops.

Awash in Subsidies
Almost 70% of global exports worth US$14.1 trillion compete with subsidized rivals, up from about 50% a decade ago, according to Evenett’s research group at the Global Trade Alert, which tracks market-distorting policies.

With tariffs and subsidies flying, much will depend on how severe any retaliation gets. 

American farmers are among the most vulnerable if Chinese importers send their orders elsewhere, according to Christine McDaniel, an expert on international trade at the Mercatus Center and a former trade economist at the White House.

She sees the rules of the road for world trade changing in ways that rewind the clock.

“We are stepping away from a WTO world and essentially going back to a GATT world where tariffs and subsidies were rampant, but countries tried to make international trade easier, at least with some of their partners,” she said, referring to the system of rules before the WTO was established in the mid-1990s.

Subsidies Have Flooded the Global Trading System | Share of all exports competing with subsidized rivals has reached 70%

The risks of a breakdown of multilateralism may be the highest for the EU. The bloc’s postwar economic model was built for a rules-based system that encouraged open markets and competition. For decades, the US was a natural ally leading developing nations along the same path.

Now officials in Brussels still espousing adherence to WTO rules are starting to feel isolated. 

Two European officials said it’s their view that the US has abandoned the principles of trade rules and procedures in favor of an approach based mostly on economic security — protecting newly emerging technology at home and reinforcing domestic supply chains. That approach essentially tries to cut China out, the officials said.

To be sure, the EU has become more assertive and has recently taken actions that would have been unthinkable a few years ago. 

It is close to finishing a nearly yearlong investigation trying to quantify Beijing’s subsidies for domestic EV producers that will likely lead to tariffs. The EU is also probing China’s procurement of medical devices.

EU’s New Tools
The EU also is rolling out a narrow economic-security strategy of its own, which seeks to harmonize controls of technologies that could be used for military purposes, screen sensitive investments and mitigate supply-chain risks. 

“China’s surge in EV exports, along with its rapid build-up of car-carrying ships, have served as a wake-up call for Europeans,” according to Harvard’s Wu.

Some officials argue that the EU’s approach toward Beijing is naïve, while others say it has little choice other than to defend the rules-based order because it can’t match the size of US and Chinese investments and subsidies.

Calls for a radical rethink are getting louder across the 27-nation bloc. Mario Draghi, the former president of the European Central Bank who is working on a report how to boost Europe’s competitiveness, has called for shielding its industry to avoid falling further behind the race for new technologies.

“We trusted the global level playing field and the rules-based international order, expecting that others would do the same,” Draghi said in a speech earlier this year that pointed to both Chinese and US protectionism. “Other regions are no longer playing by the rules and are actively devising policies to enhance their competitive position.”

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