“Rubbish”! Trump’s ominous response to IMF protectionism warnings
When the world’s finance ministers and central bankers met in Washington last week, from 21 to 23 April, for the annual Spring meeting of the World Bank and the International Monetary Fund (IMF), they had one troubling but unspoken issue on their minds. The elephant in the room was the new US government and its maverick attitude to economic liberalism, international cooperation and a rules-based multilateral system. These norms are, of course, the raison d’être of the two Bretton Woods institutions, and the World Trade Organisation (WTO).Yet, there are growing concerns that the US, which helped to establish these institutions, now poses a serious threat to their constitutive values.
President Trump, of course, campaigned in last year’s presidential race on a platform of economic nationalism and showed strong antipathy towards global rules and multilateral institutions, which he believed were not serving American interests or constrained its unilateral might. For instance, he threatened to withdraw the US from the WTO, and promised to cut the US contribution to development banks, including the World Bank, by $650m over the next three years. Now, in office, there are indications he would pursue policies that fundamentally diverge from the values of economic openness, global cooperation and multilateral rules that have long underpinned the world economy.
This was first evident in March, during the G20 finance ministers’ meeting in Germany, when the US Treasury Secretary, Steven Mnuchin, rejected a statement in the communiqué warning against “the perils of trade protectionism” and emphasising the importance of free trade and the rules-based multilateral system. As the Washington Post noted, “For many years, the US has been the country rallying other nations to the cause of free trade and common language in the communiques of G20 meetings”. But, alas, under President Trump, this is no longer so! Indeed, the Treasury Secretary put it bluntly when he said after the meeting, “I understand what the president’s desire is and his policies, and I negotiated them from here”, adding, “and we couldn’t be happier with the outcome”.
However, while the US “couldn’t be happier” with rejecting a language that supports free trade and multilateralism, its position risks spooking the world economic order, which has long been based on these norms, and puts the global economic institutions, which are the custodians of these values, in a quandary. For instance, what should the IMF, World Bank and WTO, which one writer described as “the triumvirate of multilateralism”, now do? Clearly, they cannot ignore the US, their major shareholder or financial contributor, and the world’s largest economy. At the same time, they can’t stop promoting the values of liberalism, global coordination and rules-orientation upon which they were founded and to which they owe their continued existence. Rightly, the institutions have stayed faithful to their core values, while seeking to address President Trump’s concerns. But, so far,this has cut no ice with the US!
Earlier this year, the IMF, World Bank and WTO published a joint report in which they strongly defended globalisation and free trade, but called for domestic policies to address the negative impacts of trade-related adjustments. The managing director of the IMF, Christine Largarde, then drew on this theme in her speech on 12 April, titled “Building a more resilient and inclusive economy”. She advocated that domestic economic policies should be based on supporting growth, international cooperation and global financial coordination. However, while welcoming the growing momentum in the world economy, she warned that there are “clear downside risks”, such as “the sword of protectionism hanging over global trade” and the fact that, in some advanced economies, there are “doubts about the very ‘architecture’ that has underpinned the world economy for more than seven decades”.
These were obviously veiled criticisms of the direction of US policies under President Trump, and the message was not lost on the US Commerce Secretary, Wilbur Ross, who responded with a sharp riposte. Ross said the veiled warnings of rising protectionism were directed at the Trump administration, and strongly defended the US position. The US, he said, was not protectionist because “we have trade deficits with “China, Europe and Japan”, all of which he argued practised protectionism. “And every time we do anything to defend ourselves, they call that protectionism”, he said, adding the chilling retort: “It’s rubbish”! As the Financial Times reported it, “Rose lashes out at Largarde over claims of protectionism”.It was, indeed, a scathing put-down!
Of course, with economic nationalism, emotions often run high. And, indeed, at face value, it’s difficult to ignore the US concerns. Here is a country that has $500bn trade deficit; $347bn with China, $69bn with Japan and $65bn with Germany. From the US’s point of view, having such large trade deficits is an indication that it is open to trade, while its trading partners, which enjoy trade surpluses, are protectionist. But is this necessarily true from an economic perspective? The answer is no. A country may have current account surpluses not because it is protectionist or trades unfairly, but because it has comparative advantages, through greater competitiveness and productivity, in certain tradable products. At the same time, as Martin Wolf recently argued in his FT column, “A trade deficit is not proof that a country is open to trade. It is proof that it is spending more than its income or investing more than it saves”.
Surely, excessive external imbalances are not good for the global economy, and must be tackled, especially where they arise from protectionist measures and distortive domestic policies that give countries unfair competitive advantages. But there is no evidence that the large US trade deficits are caused by protectionist measures in other countries. For instance, contrary to President Trump’s earlier view, which he has now changed, China has not, at least in recent years, been manipulating its currency to increase its exports. Furthermore, thanks to WTO rules, the incidence of protectionism in the advanced economies is low.
But when a country pursues economic nationalism, as the US now does, it blames its trade deficits on other nations rather than on its own domestic policies, and its response to such imbalance is usually trade protection instead of domestic reforms. However, as the IMF rightly pointed out, “restricting trade would be a self-inflicted wound”, disrupting supply chains and artificially inflating the prices of intermediate and consumer goods, thereby harming export potential and consumer welfare.
The Trump administration’s intolerance of trade openness, of course, also extends to multilateral rules. During the 2016 presidential campaign, Trump branded the WTO “a disaster” and, as noted earlier, threatened to cancel America’s WTO membership. Since he entered the White House in January, there have been reports that his administration might bypass the WTO dispute system. According to one report, President Trump’s officials raised in a draft paper “the idea of ignoring WTO rulings they did not like”. The WTO’s very effective dispute settlement mechanism exists to ensure that trade rules bind both the strong and the weak. Obviously, if the US starts ignoring WTO rulings, it could sound the death knell for the rules-based system that underpins the global economy.
Then, there is the issue of global financial coordination, where the Trump administration has threatened to withdraw from international negotiations on financial regulations and standards, and regards such international forums as the Financial Stability Board and the Basel Committee on Banking and Supervision with suspicion for not serving specific American interests, such as the deregulation of US banks.
Surely, these are difficult times for economic liberalism, global coordination and multilateral rules. The US, which has championed these norms for decades, is now retreating from them. Yet, these values are badly needed to strengthen the global economy and engender sustained economic growth and prosperity around the world. The US must stop rubbishing these values and start embracing them – again!
Olu Fasan