Avoiding a world trade war

The 28 per cent average tariff rate in the United States today, even with the 90 day pause, is significantly higher than the average rate of 19.8 per cent imposed during the Smoot-Hawley Tariff Act of 1930. The highest Smoot-Hawley tariff rate was 59.1 per cent, well below the 145 per cent US President Donald Trump has slapped on all Chinese imports. Today’s tariffs return the United States to its 1821 to 1900 average 29.7 per cent tariff rate.

What made the Smoot-Hawley tariffs so damaging, deepening and prolonging the 1930s depression and making it the Great Depression, was the retaliatory spiral it provoked. This, as Charles Kindleberger described it, led to the collapse of global trade from 1929–33, and gave rise to geopolitical tension that brought the World War II several years after.

Tariff contagion like that is what’s at risk today: we are on the precipice of a world trade war. Active and strategic economic diplomacy will be needed to avoid that.

The global response to Trump’s Liberation Day tariffs has thus far been, except for China, Canada and Europe, restraint. Europe has temporarily backed away from retaliation because of Trump’s 90 day tariff pause. But more uncertainty is on the way and other countries will be pressured into retaliating like the Chinese and Europeans, do damaging deals with the United States, or join the protectionist game.

The world is about to be rocked by huge flows of trade that are diverted from the United States as well as volatile hot money capital flows, big currency swings and macroeconomic shocks. As Chinese goods face a prohibitive 145 per cent tariff entering the United States, it is likely those products would be flowing other markets.

Chinese products hitting global markets will improve living standards and will relieve inflationary pressures in many countries. But those that compete directly with producing those goods will be tempted to ‘protect’ themselves from what they will see as the dumping of goods on international markets. Tariffs on imports will be the easiest tool for governments to reach for. They are contagious.

The United States has turned its back on the rules-based economic order of which it was the creator and which it underpinned in the post-war era.

But the rest of the world does not need to let Trump tear the whole system down.

The era of US leadership may be over but the rest of the world has an interest in preserving the global trade order and avoiding a ‘might-is-right’ world of economic disorder. The United States might be the world’s largest economy in market exchange rates and its largest consumer but it now only accounts for 11 per cent of global trade.

What is needed is collective action led by East Asia and Europe — where trade openness is an economic and political security imperative — not against the United States, but to retain the global public good of an open, rules-based economic system.

The response from Southeast Asia has so far been the benchmark.

Leaders of ASEAN’s most important economies — Indonesia’s President Prabowo Subianto, Malaysian Prime Minister Anwar Ibrahim, Philippines President Bongbong Marcos and Singaporean Prime Minister Lawrence Wong — have coordinated closely around a non-retaliatory response.

ASEAN Economic Ministers had already agreed in February to cooperate in the face of looming US tariffs and to avoid protectionist measures against surges of Chinese imports locked out of the US market. The ministers convened a special meeting after the US tariffs were announced and created a taskforce to monitor developments and coordinate collective responses.

An ASEAN Leaders’ Meeting has been called for early May. The risks for ASEAN are existential and ASEAN Leaders’ strategy at that point will be globally consequential.

Days before Trump’s Liberation Day tariffs were announced, China, Japan and South Korea’s trade ministers agreed to cooperate on trade and cited East Asia’s Regional Comprehensive Economic Partnership (RCEP), that ASEAN created and drives, as a platform from which to do so.

ASEAN could call for an ASEAN+3 Leaders’ Meeting with Northeast Asia like they did at the beginning of the Covid-19 pandemic. But RCEP with Australia and New Zealand would have a better chance of bolstering connections to other Europe and global initiatives. RCEP is the natural platform for projecting and protecting East Asia’s trade and economic interests.

Collective action to preserve the multilateral trading system should come as a priority despite countries negotiating their own deals with the United States. Japan was first in line with Trump himself joining the negotiators last week. The world will be watching closely for Japanese appeasement — moving to managed trade, having the US security blanket contingent on increased purchase and having to boost its defence spending. Bilateral deals with the White House cannot come at the expense of broader interests without triggering multilateral meltdown.

Will any deal struck with this White House, even if it is possible to strike one, be faithfully honoured given the United States has now effectively invalidated every free trade agreement it has ever signed?

The Indonesian delegation led by Economic Minister Airlangga Hartanto successfully met the United States Trade Representative and Secretary of Commerce, but still has no guarantee to receive favourable deal from the United States, even when Indonesia offered various concessions, including to increase imports from the country.

As part of reform process, Indonesia seems willing to remove costly local-content requirements and other protectionist measures. But granting US imports preferential access over other imports and granting US companies monopoly power in Indonesian markets will not only be economically damaging, it is seen domestically as political capitulation to a bully. Reforms need to be consistent with the bedrock principle of the multilateral trading system: most-favoured nation or equal treatment.

Southeast Asia’s multilateralist instincts and norms have resulted in the right kind of initial strategic, cooperative reaction. It’s the next step, in negotiating a multilateral course around Trump, that will be decisive to global outcomes.

This article was written by Shiro Armstrong and Yose Rizal Damuri, the Executive Director of Centre for Strategic and International Studies in Jakarta. This piece was published by the East Asia Forum and originally appeared in the Jakarta Post.