GLOBAL (Commonwealth Union)_Earlier this month, the Economist published a highly discussed article warning about a dangerous shift in American trade policy. According to the writers of the essay, the United States has fought for decades to “tear down the subsidies harming American exporters and clogging global trade.” “Rather than seeking to persuade other countries to remove subsidies, the Biden administration’s entire focus is on establishing its own subsidy architecture, complete with the kinds of local-content requirements that American officials formerly railed against,” the article says.
“The economic thinking that drives much of this logic is flawed,” the piece continues, but the shifting US strategy is propelled by political momentum that makes even dubious logic difficult to reverse. Worse, it is changing a global framework that formerly prized open commerce and economic efficiency toward one that will be less efficient and more unfair, according to the article:
It is a remarkable shift for America’s allies, from Europe to Asia. A country that they had expected to be a pillar of an open-trade world is now taking a significant move toward protectionism. In turn, they must decide whether to fight money with money, increasing their subsidies to counter America’s.
If a global subsidy race occurs, the consequences could include a broken international trading system, greater consumer costs, more barriers to innovation, and new risks to political cooperation.
While much of the piece is insightful and informative, the Economist is incorrect in implying that we formerly lived in a global framework that prioritised open commerce and economic efficiency. Furthermore, its approach to trade-related issues, both in the US and overseas, appears to be based on a bureaucratic rather than a functional understanding of what constitutes a well-managed global trading regime.
This is the incorrect method. The world’s trade and capital systems have been among the most imbalanced, skewed, and protectionist in history. This is because of global trade imbalances, not the amount of deviations from WTO-proscribed behaviour.
Trade deficits have been among the highest ever recorded in the last fifty years. This is significant since big, persistent trade imbalances are uncommon and occur in only a few circumstances in an efficient, well-managed, and open trading system. If a global subsidy race occurs, the consequences could include a broken international trading system, greater consumer costs, more barriers to innovation, and new risks to political cooperation.
We would expect fast rising emerging countries with substantial domestic investment needs, for example, to run moderate trade deficits during their rapid-growth phases. This is because domestic savings are frequently insufficient to fund the investment needs typical of rapidly growing developing economies, in which case running moderate trade deficits (moderate only, because large capital inflows have historically proven to be highly disruptive) as a means of importing savings from abroad makes sense.
In order for them to import funds from outside, countries that export savings must exist. One such group would include mature, capital-intensive economies. Because returns on investment in established countries are expected to be lower than in fast rising developing countries, a low to moderate movement of money from the former to the latter would boost overall world productivity.
Countries with extremely small populations but huge volumes of exportable commodities are another group of countries that may naturally export savings (e.g., Arab OPEC nations). These countries may maintain prolonged surpluses, owing to their small populations, who are unable to absorb their export gains when commodity prices are particularly high.
However, because their savings surpluses are more likely to be invested in less risky advanced economies, where they may be recycled, the net surpluses required by advanced economies to pay the investment needs of developing economies are reduced.
