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Old Saturday, November 26, 2016
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Default Liberalisation vs protectionism

Liberalisation vs protectionism


By Hussain H Zaidi


Having brought a cold sweat to the world at large by his electoral triumph, president-elect Donald Trump has announced that he will pull the US out of the Trans Pacific Partnership (TPP) trade treaty on his first day in office. The announcement may have caused jitters across the globe. But it has not come out of the blue: reviewing, and possibly quitting, the trade deals to which Washington is a party was one of Trump’s pre-poll pledges.

The TPP trade treaty, one of the bulkiest of its kind, was struck in 2016 by twelve economies of the Pacific Rim – namely the US, Japan, Malaysia, Australia, New Zealand, Canada, Mexico, Brunei, Chile Singapore, Peru, and Vietnam. The TPP thus includes some of the leading economies and trading nations of the world, which cumulatively account for 40 percent of the global economic output and 33 percent of global trade.

Two notable exclusions, it is well evident, were China – which is second only to the US in terms of both economic size and trade volume – and South Korea. Seoul, a strategic partner of Washington, was invited but did not join; Beijing was never asked to be part of the treaty.

Like other plurilateral or regional economic arrangements, the TPP has both trade and non-trade objectives. The treaty aims at putting in place a free trade area (FTA) among the members by eliminating or slashing import duties on thousands of products as well as doing away with non-tariff barriers to trade. The text also provides for effective protection of intellectual property rights (IPRs) and also entitles investors to sue foreign governments for infringement of their rights.

The major powers want to cast the world in their own image. As a rule, therefore, the trade agreements to which either the US or the European Union (EU) is a party contain clauses on human rights, ‘good governance’ and labour and environmental standards. The TPP agreement also puts binding commitments on the signatories in these areas and thus it represents yet another attempt to use trade to project Western values and standards worldwide.

Being US-centric, the TPP may also be seen as an attempt by Washington to coax Pacific Rim countries into shedding their dependence on China and instead look to the US as the principal trade and investment partner. This, in turn, may contribute to isolating China and shoring up US presence in the region. In this context, President Obama is reported to have said: “If we don’t pass this agreement – if America doesn’t write those rules – then countries like China will.”

The TPP trade agreement will enter into force after ratification by all the signatories. In the event this does not come about by February 2018, ratification by at least six signatories will be sufficient to bring the deal into effect. These six countries, however, must account for 85 percent of the total GDP of the twelve countries. It was thus always clear that if both the US and Japan do not ratify the agreement, the TPP will die.

Every trade policy and pact represents a trade-off among competing ends. There are winners as well as losers. In the US, the TPP and other trade treaties have triggered immense opposition from workers employed in import competing and labour intensive industries. Another factor is the country’s massive trade deficit, which has gone up from $782 billion in 2011 to $803 billion in 2015. US world exports increased from $1481 billion to $1503 billion over the last five years. At the same time, US global imports have increased from $2263 billion in 2011 to $2306 billion in 2015. Nearly a half of the US’s trade deficit ($386 billion to be precise) is accounted for by China.

According to elementary economics, an economy running trade deficit is a net borrower – the creditor being the country which has trade surplus. In case of the US, public debt as percentage of the gross domestic product (GDP) has gone up from 76 in 2008 to 104 in 2015. Nearly half of the total national debt, the country owes to foreigners, with China having the lion’s share, followed by Japan. In such a scenario, it is logical to point the finger at the trade policy.

This, of course, does not mean that Americans have not derived any benefits from their trade agreements or even that, on balance, the nation has been a loser. But there are definitely thousands who have been hit hard by such pacts. It was to these people that Trump appealed while successfully running for the White House.

The trade policy choices made by the US, by virtue of the sheer size of its economy, are likely to be trend setting. Over the years, Washington has been by and large wedded to trade liberalisation and has been a party to several bilateral and regional economic integration initiatives. Even when it protected some segments of the domestic industry, the textiles for instance, the US government never gave up its neo-liberal narrative.

Trump, however, seems to be turning the current narrative on its head. Both before and after winning the electoral race he has made no bones about his distrust of trade liberalisation and its impact – real as well as perceived – on the American economy and society. Hence, his statements, which he has been making off and on, that instead of going for new agreements, he will review the existing ones with a view to opting out of them if necessary. It is decades since the US has been in such a protective mode.

With the world’s foremost economy and the bastion of economic liberalism in such a mode, protectionism as a matter of trade and industrial policy is likely to gain currency in other parts of the globe. Protectionism will also cast its shadow on the Doha Round of multilateral trade negotiations. Already the round, which was launched in 2001 and supposed to conclude by 2004, is heading nowhere.

Trump’s views about the TPP and other such treaties signal a departure of the US from its erstwhile strategy of using trade as an instrument of advancing its political interests and imposing its cultural values on alien nations. Such a shift, if it actually comes about, will be not less than strategic in significance.

Many believe that Beijing will step in to fill the vacuum created by Washington’s strategic shift. China’s remarkable economic growth owes much to the stellar performance of its exporting sector. Over the past three decades, the country has used its successes in the economic sphere to shore up its political clout.

With the US on the retreat on the front of economic diplomacy, China is likely to grow more aggressive. That said, China has never been ideologically that much committed to trade and political liberalisation as the US. So the rules of the game will be different in a China-centric international economic order.

The writer is a graduate from a Western European university.
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