Right Approach: Global South must reject US-style protectionism

•  ARVIND PANAGARIYA

UNITED STATES: For nearly 50 years after the end of World War II, the United States led the effort to liberalize global trade through the General Agreement on Tariffs and Trade (GATT). In 1994, the US rallied 123 countries to sign a multilateral treaty establishing the World Trade Organization, which subsumed GATT while expanding its scope to cover services trade and intellectual property.

Paradoxically, America’s current industrial policy poses an existential threat to the multilateral trading system it worked so hard to build. In Washington, there is now a bipartisan consensus that the WTO has failed to defend America’s vital economic interests and inadvertently created a formidable geopolitical rival by allowing China to take advantage of the system. This realization has led both Democratic and Republican administrations to take steps that have shaken the foundations of the institution the US helped found.

Since 2016, the US has refused to approve new judges to the WTO’s Dispute Settlement Body and blocked the reappointment of those whose terms have expired. By December 2019, the DSB was reduced to a single member, below the minimum of three required to adjudicate cases. Consequently, there is currently no effective mechanism to resolve trade disputes among WTO members, significantly increasing the likelihood that member countries will adopt policies that violate their legal obligations.

Unsurprisingly, the US itself is a serial violator. In 2018, as the DSB effectively stopped functioning, then-President Donald Trump imposed tariffs on imported washing machines and solar panels. Shortly thereafter, the Trump administration announced additional tariffs on aluminum, steel, and a wide range of Chinese goods.

Instead of lifting Trump’s tariffs, US President Joe Biden has erected additional trade barriers by adopting industrial policies that include $1 trillion in production subsidies for semiconductors, electric vehicles, and offshore wind power. Russian President Vladimir Putin’s invasion of Ukraine, which resulted in massive Western economic sanctions against Russia, has further complicated an already uncertain outlook for global trade. Moreover, Trump has vowed to impose a universal tariff of 10% on most imports should he return to the White House in 2025.

So far, these developments have not significantly slowed international trade. Global merchandise exports have rebounded impressively from the COVID-19 pandemic, climbing to $25 trillion in 2022 from $22 trillion in 2021 and $19.5 trillion in 2018. The economic impact of US tariffs and the retaliatory measures imposed by America’s trading partners has been relatively minor. While importers of steel, aluminum, and Chinese goods have suffered, US merchandise trade – even with China – has remained robust. Most importantly, the US economy has continued to grow rapidly, owing to its huge and highly competitive domestic market.

The same cannot be said of most developing countries. Barring a few exceptions, such as South Korea, Taiwan, and Singapore, the developing world embraced trade openness only after the WTO’s establishment. Consequently, domestic support for outward-oriented policies in those countries remains fragile.

Under these circumstances, America’s shift toward protectionism undermines open trade in two significant ways. First, it nurtures a protectionist mindset. When the US, the world’s leading proponent of trade liberalization, adopts protectionist measures, it signals to other countries that they might also gain from such an approach and could encourage them to revert to development strategies centered on import-substitution industrialization.

Second, leaders in developing countries often face political pressures to respond to US tariffs that are viewed as detrimental to their exports. India, for example, retaliated against Trump’s steel and aluminum tariffs by imposing its own tariffs on US imports. The fact that even a major economy like India lacks the market power to damage the US economy, or that the costs of such retaliatory tariffs will fall mostly on its citizens, appears to matter little.

Given that developing countries’ domestic markets are much smaller than that of the US, liberal trade policies play a larger role in driving their economic growth. The rapid growth of China, India, Bangladesh, and Vietnam since the WTO was established underscores the benefits of open trade – and how recent disruptions to the multilateral trading system could jeopardize many developing countries’ economic prospects.

While there are potential solutions to the fragmentation of global trade, geopolitical dynamics and the self-serving agendas of major powers present significant challenges. Nevertheless, in the face of a fracturing global economy, countries that manage to keep their markets open and forge free-trade agreements with as many partners as possible stand a better chance of weathering the current storm.