On Thursday, February 27, WITA hosted a webinar to discuss President Trump’s plan for “reciprocal” trade: how such a plan might work; what it means for trade with America’s trading partners (large and small); and what it means for the multilateral trading system the U.S. helped create with the GATT and the WTO.

Featured Speakers:

Mark DiPlacido, Policy Advisor, American Compass

Professor Simon J. Evenett, Professor of Geopolitics & Strategy, IMD Business School

Professor Jennifer Hillman, Co-Director, Institute of International Economic Law, Georgetown University Law Center

John K. Veroneau, Senior Counsel, Covington

Moderator: David J. Ross, Partner, Chair of International Trade, Investment and Market Access Practice, WilmerHale

How do economists come to hold the views that they have? And how do intellectual “revolutions” occur that change the professional consensus about economic policy? Do such changes occur in response to contemporary events, the gathering of new evidence, or the emergence of new theories?

These questions have long been posed with respect to John Maynard Keynes and the development of macroeconomics in response to the Great Depression of the 1930s. The Depression transformed the views of economists about macroeconomic policy and also diminished the profession’s confidence in the desirability of free trade, particularly for developing countries. The collapse of world trade in the early 1930s led to a sharp deterioration in the terms of trade of commodity exporters. These countries, it was believed, could no longer rely on export growth to promote development. This “export pessimism” led to the idea that inward-oriented policies, aimed at building up domestic industries, would be a better way to foster economic growth and development. “As a young economist, I was a neoclassicist and fought against protection,” the Argentine economist Raúl Prebisch recalled. “But during the world Depression, throwing overboard a substantial part of my former beliefs, I was converted to protectionism.”

As a result, the leaders of the new field of development economics that emerged in the 1950s—including Prebisch, Gunnar Myrdal, W. Arthur Lewis, Albert Hirschman, Ragnar Nurkse, and Hans Singer, among others—were generally skeptical about unfettered trade. The static model of specialization and comparative advantage seemed to imply that producers of primary products would remain trapped exporting raw materials and never industrialize. Developing countries faced a chronic shortage of foreign exchange, which they needed to purchase capital goods that were essential for industry. Most experts believed that increasing foreign exchange earnings through exports was not possible (export pessimism) because foreign demand for commodities and raw materials was not growing rapidly and was not very price sensitive. Because foreign exchange earnings were constrained, governments needed to carefully regulate spending on imports. Quantitative restrictions on imports were viewed as the best way of dealing with balance-of-payments difficulties. These import substitution policies would encourage domestic production in replacement of expensive foreign manufactured goods, thereby saving valuable foreign exchange and promoting domestic industries. Alternative policies, such as a devaluation, would fail to stimulate exports (due to the price insensitivity of foreign demand) and simply raise the cost of imported capital goods and other essential imported products.

But just as the Keynesian Revolution of the 1930s was challenged by the Monetarist Counterrevolution in the 1960s, the trade and development consensus of the 1950s was challenged by a “neoclassical counterrevolution” in the 1980s. In both cases, changing circumstances and new evidence brought generally accepted views into question and forced economists to revise their previously held beliefs. In the case of Keynesian economics, it was the coexistence of rising inflation and higher unemployment; in the case of trade and development, it was the relative success of countries pursuing outward-oriented trade strategies in contrast to the apparent inefficiencies associated with an inward-oriented approach. Also in both cases, the counterrevolution originated in the 1960s and came into greater prominence in the 1970s and 1980s.

For more than two decades, China has worked to free itself from dependence on Western technology while making the West dependent on Chinese products. It protects priority industries and subsidizes them into becoming export juggernauts.

China engages in economic coercion. Its civil-military fusion strategy powers a significant buildup of its military, surveillance, and disruptive capabilities. Its aggressive territorial claims in the South and East China Seas, and its threats to Taiwan’s integrity, present real risks of military conflict. Beijing and Moscow’s declaration of a “no limits” strategic partnership, and China’s active support for Russia’s war on Ukraine, threaten US and European security, interests, and values. 

Although the transatlantic partners are closer in their assessments of the China challenge today than they were four years ago, they approach Beijing from different strategic positions, with different tools, and with different senses of urgency. They have allowed their own bilateral squabbles to get in the way of robust transatlantic efforts to address Chinese aggression. These simmering problems could boil over in 2025.

This series analyzes the impact of China’s rise on transatlantic ties and presents ideas about how to forge a constructive partnership to meet the China challenge. It is based on a yearlong series of CEPA-sponsored workshops of leading European and US experts that I chaired together with Lucinda Creighton under the Chatham House Rule.

The basic question we addressed is whether Donald Trump’s new administration and Europe’s new leaders believe their own bilateral disputes are more or less important than the need to adopt joint or complementary approaches to China. Does the Trump administration believe it can and should fight predatory Chinese economic practices on its own, or forge a broad coalition of countries that could impose far greater costs on China than individual efforts? Are Europeans willing and able to bridge their own considerable differences over both China and Trump’s America to help lead such a coalition? 

A joint approach to China should be guided by three Ds: deconflict, disentangle, and deny. The US and Europe should deconflict their own bilateral ties so they do not endanger transatlantic cooperation on China. They should disentangle their economies from uncomfortable dependence on China. And they should deny critical technologies, data, or goods to China that could advance Beijing’s military capabilities and revisionist goals.  

Simon Evenett was a featured speaker at WITA’s February 27 webinar analyzing the President’s plan on reciprocal trade. Watch the recording here.

When it comes to trade openness, the US Presidential election confirmed that America is turning inward. Trading partners should assess their exposure to the abrupt loss of goods market access to the United States. This briefing shows that, fortunately, few nations are simultaneously highly export-dependent, concentrate their exports on the US market, and experience stagnant or meagre export growth to third parties. Still, the nations at greatest risk are not confined to America’s neighbours.

The past 8 years have witnessed a reversal in American trade policy stance—away from fealty to multilateral trade rules and an embrace of openness towards a turn inward. Communication styles of the Biden and Trump teams differ but, broadly speaking, Biden continued many of Trump’s salient import restrictions.

American presidential elections are not known for advancing the cause of open trade and investment. This year was no exception. One candidate advocated 60% import tariffs on goods made in China and 10%-20% across-the-board duties on imports from everywhere else. His opponent labelled these proposals a “sales tax,” but that may have been driven more by the desire to deflect attention from the Biden Administration’s poor track record on inflation. During the campaign, the Biden Administration imposed sharp import tariff increases on electorally-sensitive products and discouraged the takeover of U.S. Steel by Nippon Steel (a foreign firm based in an ally, Japan). Observers were left in no doubt that both candidates would take whatever measures were needed to prop up the under-performing elements of the American manufacturing sector—a consequence of many “Rust belt” states being electoral “swing states.”