A Dangerous Slide to Deglobalization

I f there is one thing on which almost all economists can agree, it is that U.S.-led trade liberalization following the Second World War laid the foundation for the Western world’s remarkable post-war economic performance, a period of rapid economic growth that spread from there. If there is another thing on which there is widespread agreement, it is that the breakdown of the world-trade order in the early 1930s contributed to the dismal economic performance of that decade.

That is why we should regret the many signs that now are pointing to at least a partial unraveling of the post-war free-trade era. Such an unraveling could usher in another prolonged period of disappointing economic performance.

Start with the United States, the initiator and erstwhile leader of a free-world trade order. Instead of being the guarantor of that order, the U.S. now appears to be retreating from the idea of free trade.

The Trump presidency was characterized by an antipathy to trade, which it blamed for the hollowing out of the industrial heartland. Trump proudly labeled himself “Tariff Man.” In efforts to reduce the country’s trade deficit and support its manufacturing sector, the Trump administration showed contempt for the World Trade Organization and unilaterally imposed tariffs on its trade partners. Among other things, it increased tariffs on all foreign steel and aluminum imports and on around $360 billion in Chinese manufactured goods.

After chastising the Trump administration’s protectionist tendencies during the 2020 election campaign, President Biden seems to have gone down a similar path. He did not roll back the steep Trump tariffs, and in the lead-up to this November’s presidential election Biden has increased Chinese trade restrictions. In addition to a 100 percent tariff on Chinese electrical vehicles, Biden announced that the U.S. will triple tariffs on Chinese steel and aluminum and double tariffs on Chinese semiconductors and solar cells.

Not to be outdone, Trump is indicating that if he is elected again as president, he will increase tariffs on Chinese electrical vehicles to 200 percent and impose a 10 percent tariff on all U.S. imports. He is also chastising the Biden administration for having been too soft on China’s unfair trade practices. All of this seems to be inviting our trade partners to retaliate with tariffs of their own. That could lead us to the beggar-my-neighbor trade policies of the 1930s.

Further worsening matters are the unfair trade practices to which China resorts and the economic predicament in which it finds itself. In an effort to solidify its position as a global leader in a number of key high-tech industries, China regularly resorts to subsidies. At the same time, with the bursting of its property and credit-market bubble and with the souring of foreign investor confidence in its erratic economic management, China is trying to export its way out of its domestic industrial-overcapacity problem. Unsurprisingly this is being met by stern warnings of trade-policy retaliation by the U.S. and Europe.

Japan’s plummeting currency could be yet another source of increased trade friction. Stabilizing the yen would require the Bank of Japan to allow interest rates to rise from its current level near zero to a more normal level. However, with a public-debt-to-GDP ratio of about 250 percent, the Bank of Japan cannot let interest rates rise, for fear of putting Japan’s public finances on an even more unsustainable path than they already are.

If ever there was a need for U.S. leadership to preserve the economic benefits of globalization, it has to be now. To judge from the tone of this year’s presidential election, the prospects for such leadership do not look good.