It has been puzzling to see many prominent economists decry the tariffs of former US president Donald Trump’s administration as welfare-reducing protectionism, while approving the administration of US president Joe Biden’s even more drastic steps to reshore, friend-shore, and decouple from China. In a March 2018 Chicago Booth poll of economists, 100 percent of respondents opposed new US tariffs; but then a largely overlapping set of respondents were skeptical of global supply chains when asked in January last year. Only two respondents (with me being one of them) disagreed that a reliance on foreign inputs had made US industries vulnerable to disruptions.
One exception to this broader pattern is Dani Rodrik, who argued in a recent commentary that the ramifications of geopolitics are much more severe than renewed protectionism. He makes an important point; still, one must remember that protectionism was a major catalyst for today’s escalating geopolitical tensions.
The Trump tariffs both reversed a long-term trend toward trade liberalization and imposed real costs on the US economy by raising prices for US consumers and for US firms that use imported intermediate inputs from China. Yet Trump’s policies had little impact on global trade overall. While trade between the US and China declined, as expected, many other countries’ exports — both to the US and to the rest of the world — increased. Trade flows were reallocated, not reduced.
The belief in the benefits of international trade took a hit, however, as more people came to regard it as a zero-sum game. The Trump administration pushed the narrative that many of the US’ longstanding economic problems were due to trade with China. Inequality in the US had risen sharply, and younger generations were not doing as well as their parents. As if that was not bad enough, Chinese children did seem to be doing better than their parents. Surely, there had to be a connection between the two. If China was doing so well, the US must be falling behind.
Initially, many criticized this narrative as populist pandering. Yet it gradually gained traction, and when COVID-19 struck, arguments in favor of protectionism and against China went mainstream. Suddenly, everyone agreed that the pandemic-related supply chain problems were a result of international trade. Never mind that many of the bottlenecks originated domestically and had nothing to do with global supply chains; or that without imported masks from China, shortages of personal protective equipment would have been worse; or that, despite COVID-19 being the biggest global shock since World War II, the world economy proved quite resilient. The narrative was shifting toward blaming international trade, and particularly trade with China, for every problem in the modern economy.
Then came Russia’s full-scale invasion of Ukraine — the final straw. Though the aggressor was Russia, not China, it was now all too easy to imagine what would happen to the global economy if China invaded Taiwan. Concerns about geopolitical risks and national security came to the fore, lending momentum to calls not for just protectionism, but for a broader economic decoupling from China.
Again, it is easy to blame the Russian invasion for ushering in a new cold war. Yet would we be where we are without the resurgent protectionism and calls for supply chain resilience in recent years? By undermining the belief in international cooperation and pushing the narrative of trade as a zero-sum game, those policies and strategic objectives created some of the preconditions for today’s economic warfare.
Whereas trade was presented as a zero-sum game in 2015-16, when Trump was elected, now national welfare is being framed in these terms. The issue is no longer just about tariffs and trade. Those are relevant only to the extent that they can be used to stop China from developing its technological capabilities. The primary concerns now are “de-risking” and national security, rather than the US’s desire to maintain economic dominance.
Such justifications are however problematic. Consider de-risking. It sounds prudent, but is it really about China? Global production of the most advanced semiconductors is concentrated within a single Taiwanese company (Taiwan Semiconductor Manufacturing Co), which certainly does imply a high risk of disruption should the company suffer some shock. Yet such a shock need not come from a Chinese invasion. The root problem is not China, but high market concentration. The same kind of risk would still be salient if the company were based in the US.
While worrying about optimal diversification and de-risking makes sense, casting everything in geopolitical terms does not. When Trump recently vowed to impose massive new tariffs if re-elected, the international community rushed to condemn such policies. Yet tariffs matter less now, because the damage has already been done.
We live in a new era. As I noted in a previous commentary, drawing on work by economic historians, there are eerie parallels between the period leading up to World War II and recent developments in US trade and foreign policy. Protectionism is a problem, not just because of its impact on trade, but also because of its impact on international relations and geopolitics.
Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American economic Review, is professor of Economics at Yale University.
Copyright: Project Syndicate
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