President Obama finds free trade comes at a high cost after G-20 trip proves messy.
Well, that was messy.
The meeting of the Group of 20, the leaders of the world’s major economies, earlier this month defied even its pre-loaded low expectations.
Germany and China lectured the United States about its profligacy, even as they want Americans to consume more of their products. President Obama was embarrassed by the failure to complete a trade deal with South Korea.
He also seemed sandbagged by the Federal Reserve’s move to help the lagging U.S. economy by expanding the money supply through “quantitative easing.”
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The United States wanted to address currency manipulation to improve a country’s competitive position, especially by China. Obama ended up being attacked for seeming to engage in the same game as the Fed weakened the dollar.
Kati Suominen, of the German Marshall Fund of the United States, used the term “economic cold war” as one possible outcome of the philosophical divergence and trade and debt imbalances among the world’s major players. I wonder if it’s already gone beyond that. Are we in an undeclared trade war?
When I put this question to Mark Vitner, senior economist at Wells Fargo, he said, “I think we already have one of sorts.”
Consider: Mexico has imposed 20 percent tariffs on American apples to retaliate against the United States for failing to allow Mexican truckers to deliver throughout this country, as was promised by the North American Free Trade Agreement. This is costing Washington apple growers an estimated $44 million this year.
It’s permissible under the rules — the idea being that the dispute will be resolved without either nation retreating into more destructive protectionism. Yet it shows this state’s vulnerability as a major exporter.
What Vitner and others I spoke with are more concerned about are: currency manipulation, trade and debt imbalances, the decoupling of a recovering Asia from struggling America and Europe, and, especially, China, which is to become the world’s second-largest economy this year.
Into a world dominated by America’s liberal, free-market economic philosophy comes Beijing with something very different. State capitalism. Neo-mercantilism. Protectionism.
Whatever you call it, China’s approach to growth and trade are very different. Combine it with America’s codependent debt-and-trade relationship with China, and the result has distorted the global economic system.
Keeping its currency, the renminbi, artificially low to aid in exports is only one area where China goes its own way. It provides large export subsidies, games its government procurement rules to favor domestic suppliers, uses its dominance of rare-earth minerals to threaten trading partners.
The list is long, but Beijing uses many gadgets in the protectionist toolbox.
The “problems can be traced to China’s pursuit of industrial policies that rely on excessive, trade-distorting government intervention intended to promote or protect China’s domestic industries,” according to the U.S. Trade Representatives report to Congress last year.
With real unemployment near 17 percent, regions such as the Midwest would consider the Chinese policy listed above as wise.
Americans are mad, and so-called free trade, as well as corporate offshoring of jobs for cheap labor, is a big target.
Countering it is risky. U.S. tariffs would put American sales at risk, including airplanes from Boeing, the nation’s largest exporter.
China is Washington state’s largest trading partner. American corporations with operations in China would oppose any retaliation, and citizens might not like paying more at Walmart if Washington, D.C., and Beijing started a tit-for-tat tariff escalation.
Short of that, unfair trading cases are notoriously difficult to bring or see through the World Trade Organization (WTO).
There’s the doomsday scenario, where tensions become so serious that Beijing dumps dollars and calls in American debt. Yet this nuclear option has a wide kill zone.
China needs a vibrant U.S. economy for its exports. And, as its pique at the G-20 indicates, it depends on a healthy dollar.
Even without this unlikely outcome, other developing nations are copying Chinese tactics. The global trading system is unraveling. And even if the WTO doesn’t implode, existing rules allow developing nations wide latitude on tariffs.
For example, Columbia, which lacks a free-trade agreement with the United States, applies a 20 percent tariff to American French fries. But it could go as high as 70 percent if Bogotá were to choose to retaliate against American trade moves.
The same latitude applies to Brazil, India and numerous others.
So Boeing isn’t the only Washington exporter that stands to lose in this risky new world order.
You may reach Jon Talton at email@example.com