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Trump has a point about ‘rules-based’ trade

Rajkamal Rao | Updated on June 15, 2018

As the global economy is imperfect, tariffs abound, subsidies continue to be huge, and WTO rulings don’t have teeth

When President Trump refused to sign the customary communiqué of the G-7, the group of seven wealthy economies, the global elite erupted saying that the “rules-based international order”, the very foundation of the global economy since World War II, is now at risk.

But for over 30 years, Trump has been consistent in complaining that this order has been unfavourable to the US and needs fixing. In 1987, when most world leaders of today were not known beyond their local communities, the wealthy businessman took out full page ads in US newspapers with the headline, “There’s nothing wrong with America’s Foreign Defence Policy that a little backbone cannot cure.”

Talking to Oprah Winfrey in a 1988 interview, he said, “..and yet we let Japan come in and dump everything in our markets. [What we have] is not free trade. If you ever want to go to Japan and try to sell something, forget about it. It’s almost impossible.”

He continued pressing this very message throughout the presidential campaign.

As president, he is showing the world the backbone that he has consistently said America has lacked and is proposing to “drain the swamp.”

That the “rules-based international order” is a mess is no question. Tariffs abound everywhere. Canada’s tariffs on American dairy products are 270 per cent, to protect dairy farmers of Quebec. Meanwhile, America imposes a 170 per cent tax on unshelled groundnuts, to protect groundnut farmers.

Every country generally levies different tariff rates on the same product it imports depending upon whom it is trading with. The World Trade Organisation, established in 1995 and headquartered in Geneva, has a staff of 600 people just to push pen and paper to these complex deals between nations. If there is a dispute, the settlement process involves a huge bureaucracy and detailed procedures — case-specific panels, dispute-settlement bodies, appellate bodies, arbitrators and advisory experts.

In 2013, it took the WTO nearly 20 months to resolve a dispute and issue a ruling. But WTO rulings do not have any teeth. A country can choose to ignore a ruling that it does not like because there are no direct penalties associated with non-compliance.

Subsidy burden

Tariffs are easier to deal with because most cases are relatively straightforward. But what about subsidies? These can so tilt the balance of trade that it may be meaningless to even try to resolve disputes. Take the example of the three major West Asian airlines — Emirates, Qatar and Etihad. These governments have invested billions of dollars on airports and infrastructure but the carriers do not pay any taxes. They receive billions of dollars in interest-free loans to buy aircraft, a subsidy that carriers nowhere in the world get.

US carriers have estimated these subsidies at $50 billion over ten years. The labour laws are so much in favour of the employers — no strikes, no work stoppages — that world airlines are at a distinct disadvantage when they compete with them. So where is the WTO?

But the US is not fault-free either. Boeing has a robust business building military planes. When it uses R&D that was paid for by the US government in the development of a commercial Boeing 777, doesn’t that count as a subsidy? Of course it does.

The basic premise of the “rules-based international order” has been that when everyone is at fault, no one is at fault. In a perfect world, the global economy would work when nations trade away their competitive advantage. Turkey sells spices and carpets to Japan and Japan sells machine tools to Turkey. Over time, trade would balance out.

But the global economy has been imperfect. The US has consistently been running a trade deficit of over $800 billion annually largely possible because of the stature of the US dollar as the world’s reserve currency. So America freely borrows from the world to buy more than it can sell.

So what has Trump done? He withdrew the US from the Trans Pacific Partnership, the Paris climate accord and the Iran nuclear deal. It was Trump’s way of pecking away at the “rules-based international order” one bite at a time. Each time, the world cried foul and said the US would pay a severe price. Except that the US economy is so robust that unemployment has now dipped to levels not seen in 20 years. The stock market is booming and the dollar is very strong.

Trump is also right in saying that the US bears a disproportionate burden to support the defence of its allies, with wealthy nations not paying their fair share. This has helped deepen a US budget deficit that is already close to $1 trillion annually.

There’s no question that Trump is brash, rude and un-presidential when he picks these fights. But just because the messenger is inarticulate does not mean that there is no merit in the message.

The writer is Managing Director, Rao Advisors LLC, Texas.

Published on June 15, 2018

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