How Asia should respond to US protectionism

Over the last five decades or so, Asia’s economies have relied largelyon an export-oriented development model to support rapid economictransformation and growth. But with US President Donald Trump fulfillinghis promise to adopt a more protectionist approach to trade – an effortthat could spur retaliatory measures by other countries – that model iscoming under increasing stra.In the last year, Trump has withdrawn the US from the Trans-PacificPartnership (TPP), renegotiated its free-trade agreement with SouthKorea, and raised “safeguard” tariffs on imported washing machines andsolar panels from China and South Korea. Now, the White House hasannounced steep tariffs on steel and aluminium, supposedly to strengthennational security. And it is set to impose punitive tariffs on a rangeof Chinese goods over alleged intellectual-property theft.This is a startling reversal for the United States, which has served asthe world’s main champion of free trade since the 1930s. Of course, someof Trump’s predecessors adopted protectionist policies; but those aroseout of actual negotiations with trade partners. As Harvard’s DaniRodrik has put it, “Trump’s trade restrictions have more of aunilateral, in-your-face quality.”Trump’s actions are unlikely to do the industries in question, much lessthe overall US economy, much good. The steel tariff, for example, willhelp a small number of workers in the steel industry itself, whilehurting a much larger number of workers in downstream industries likeconstruction, oil and gas, and automobile manufacturing. Such measureshave no chance of reversing the decline of traditional manufacturingindustries in the US.Tariffs won’t do much for America’s trade balance, either. Trump and hisadvisers believe that international trade is a zero-sum game, and thusthat tariffs are a direct route to smaller trade deficits. But the realsource of US trade deficits is macroeconomic imbalances in the USeconomy, such as excessive household consumption and fiscal deficits –imbalances that tariffs will do very little to address.What Trump’s tariffs will do is raise the risk of a global trade war.According to the Chinese state mouthpiece, the Global Times, China ispreparing for just such an outcome. In response to increased traderestrictions, China could limit imports of aircraft or agriculturalproducts such as soybeans from the US.Even US allies have been bracing for a trade war. Before the EuropeanUnion won a last-minute reprieve from the steel and aluminium tariffs,it announced that it was considering retaliatory tariffs on Americangoods, including motorbikes, to which the US responded by threateningtariffs on European cars. Meanwhile, the EU and Asian steel-importingcountries, like India and Indonesia, are preparing to adopt safeguardmeasures to counter a potential surge of imported steel diverted fromthe US.When Trump claims that “trade wars are good, and easy to win,” he couldnot be more wrong. The truth was stated clearly by Chinese President XiJinping in January 2017: “No one will emerge as the winner in a tradewar.”A global trade war would undermine economic recovery, hurting businessesand consumers by encumbering global supply chains and raising pricesfor imported goods. The Asian economies with export-dependent growthmodels – such as Vietnam (where exports constitute 90% of GDP), Malaysia(71%), and South Korea (45%) – would be hit particularly hard.To mitigate the risks, Asia’s economies must take on a more proactiverole in preserving free trade. Working together, Asian economies coulduse forums like the G20 and the World Trade Organisation to improveglobal trade monitoring, reduce trade tension, and preventself-destructive beggar-thy-neighbour policies.To improve their chances of success, Asian economies should eliminateany protectionist measures in their own markets, and refrain fromdumping output from overcapacity on global markets at subsidised prices.China, which has faced sharp criticism from the US, the EU and Japanfor unfair trade practices – including export subsidies, currencymanipulation, intellectual-property theft, and forced technologytransfer – has a particular responsibility here.Asian economies should also work to promote trade liberalisation withintheir own region. The ten economies of the Association of SoutheastAsian Nations (Asean), together with six more countries (Australia,China, India, Japan, South Korea, and New Zealand), have already agreedto launch the Regional Comprehensive Economic Partnership. Thatagreement could generate momentum for further expansion and deepening ofintra-regional trade.Another deal with considerable potential is the Comprehensive andProgressive Agreement for TPP, the TPP’s successor, which emerged afterthe US withdrawal. Seven Asia-Pacific economies (Japan, Australia, NewZealand, Brunei, Malaysia, Singapore, and Vietnam) have already signedonto the pact, which accounts for a combined 13.5% of global GDP, andmore members are being sought. South Korea, Taiwan, Thailand, thePhilippines, and Sri Lanka are all viewed as potential additions. IfChina joined, or the US rejoined, the pact’s positive impact would bestrengthened considerably.Finally, Asian economies should strengthen their domestic growthengines, including consumption and investment, thereby reducing theirreliance on external markets. In particular, they should pursue policiesthat foster the creation of quality jobs and the transfer of morecorporate savings to households.At the same time, these countries should improve the investment climatefor domestic and foreign firms, by removing excessive regulations inproduct, labour, and financial markets. More investment inhigh-productivity service industries – such as healthcare, education,telecommunication, and financial services – would also help.The Trump administration seems set on pursuing a destructiveprotectionist path. But, rather than retaliate, Asian economies shoulduse the threat of broader US tariffs as an opportunity to revamp theirown development models, thereby boosting their own prosperity andresilience, not to mention their positions as constructive globalactors. – Project Syndicate* Lee Jong-Wha is professor of Economics and Director of the AsiaticResearch Institute at Korea University. His most recent book,co-authored with Harvard’s Robert J Barro, is Education Matters: GlobalGains from the 19th to the 21st Century.