Opinion: The world has reached a crossroads in trade policy | Business| Economy and finance news from a German perspective | DW | 15.08.2019
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Opinion: The world has reached a crossroads in trade policy

It's not too late for US trading partners to decide which path to take: one based on retaliation leading to trade destruction, or a path where tariffs are reduced. The window to decide is closing, says Dennis Snower.

The United States' trading partners are at a crossroads. The US trade war with China transitioned to a threateningly precarious stage after the US Treasury Department labeled China a "currency manipulator" in a tit-for-tat response to Beijing's weakening currency. The currency fell past 7 yuan to the dollar for the first time since 2008.

Beijing allowed the renminbi to weaken in what was likely a strategic response to restore its trade advantage and negate the effects of US President Donald Trump's next round of tariffs: an additional 10% on $300 billion (€269 billion) worth of Chinese goods, effective next month. If implemented, nearly all US imports from China will be levied with tariffs. Currently, the US levies 25% tariffs on $250 billion worth of Chinese products.

If the US continues down this path of trade destruction, it spells trouble for the global economy and the future of international trade. Engaging in ad hoc, quid-pro-quo trade retaliations where tariffs are further increased and currencies devalued is just the beginning.

Global repercussions

With further escalations, China could dump US Treasuries, force down prices, destabilize the US financial system and weaponize "its position as the US government's largest foreign creditor." Despite China selling $20.5 billion worth of US government bonds in March, the most sold in over two years, the country remains the largest foreign holder of US Treasuries, owning some $1.12 trillion. In a world governed by reciprocity, there will be global repercussions.

Economist Dennis Snower

Economist Dennis Snower

Since 2018, when Trump set out to reduce the US trade deficit with China, the two nations have been engaged in tit-for-tat trade retaliations, negatively reciprocating each other in what very quickly became an escalating trade war. The trade war itself being a dangerous misconception based on the outcome of a zero-sum narrative, whereby one country's gain from international trade is another country's loss.

America's trading partners need not go down this path. Another strategic path is available to them, that is to forego a game of one-upmanship and instead meet US tariff hikes with a reduction of tariff and non-tariff barriers. This would divert trade away from the US and toward other countries, and should be done through bilateral, plurilateral and multilateral trade agreements that are broadly consistent with World Trade Organization (WTO) rules. Global value chains would adjust as necessary.

Guided by the Group of 20 (G20), the International Monetary Fund (IMF) and the WTO, this path of trade creation requires cooperation to maximize not only material well-being by engaging in rules-based trade but also the social-well-being of its respective citizens. The revitalization of a coherent system stands to promote trade rather than obstruct it, with the overall aim of each country making itself better off.

Collaboration required

This path of trade creation does not require a sense of altruism or concern beyond a nation's own vested interests. Trade, after all, is not an end in and of itself, but rather an instrument to promote human well-being within flourishing societies.

However, it does require collaboration with multinational institutions, especially the G20, which accounts for 80% of global GDP, three-quarters of global trade and two-thirds of the world's population, and includes both economic heavyweights, the US and China, unlike the G7 and other regional groups, for example.

This trade war is reverberating globally, and the US, caught in the grips of reciprocity, is taking us down a dangerous path. America's trading partners can still reverse course — for now. But if we continue too far down the path of trade destruction, turning back ceases to be an option.

This is the moment to reconsider. Even if the US cannot see it, the world can.

Dennis J. Snower is founder and president of the Global Solutions Initiative, professor of economics at the Hertie School of Governance, senior research fellow at the Blavatnik School of Government, nonresident fellow of Brookings Institution and visiting professor at University College London and Birkbeck College. He was president of the Kiel Institute for the World Economy and is research fellow at the Center for Economic Policy Research (London), at IZA (Institute for the Future of Work, Bonn), and CESifo (Munich).

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