Sunday, June 23, 2024

What Biden’s New China Tariffs Mean for World Trade

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It is now well-known that Beijing has distorted certain markets in part by introducing massive subsidies. For example, China now produces electric vehicles that are widely seen as cheaper and better than anything the West can currently manufacture. On Tuesday, the Biden administration reacted to this reality by quadrupling U.S. tariffs on Chinese electric vehicles to a scarcely believable 100 percent. The move is hardly partisan. On hearing the news about the tariffs, U.S. President Joe Biden’s rival, former President Donald Trump, told reporters he would have wanted more taxes on more products. “China is eating our lunch right now,” Trump said. 

If the United States—as the founder and longtime promoter of the global system of free trade—is resorting to protectionism, what does it mean for the future of globalization? As concepts like “friend-shoring” become more popular, will poorer countries miss out on the benefits of free trade? I put these questions and more to World Trade Organization Director-General Ngozi Okonjo-Iweala on FP Live. Subscribers can watch the full discussion on the video box atop this page, or download the FP Live podcast. What follows below is a condensed and lightly edited transcript. 

Ravi Agrawal: This week, the Biden administration announced an expansion of tariffs on Chinese electric vehicles, raising them to 100 percent. As the head of the World Trade Organization, how do you view this? Isn’t it blatant protectionism?

Ngozi Okonjo-Iweala: Ravi, at the WTO we are worried about increasing protectionism in the world because we think that might have an impact on fragmenting trade. And this is something we certainly do not want to see. Some estimates we’ve made of trade fragmenting into two geopolitical blocs, for example, show that in the longer term, there would be a 5 percent loss in real global GDP. That’s very significant. And the losses would be bigger for developing countries. So this is something we would not like to see.

That being said, remember that the WTO is a member-driven organization and the way we work depends a lot on how members take action. So if one member takes measures that another member feels are harmful, it’s up to that second member to use the various remedies that are available to WTO members.

I’m proud that we provide fora here at the WTO where members can bring their trade concerns. Many people don’t know that it’s not just the dispute settlement panel. We have committees where specific concerns can be brought by any member feeling that another member’s measures are harmful.

RA: Isn’t this exactly what some people criticize the WTO for? In an ideal world, if the United States had problems with Chinese practices, it would go to the WTO for resolution. But critics say that WTO cases take too long to resolve. And then the appellate body is defunct.

NOI: People look at WTO and think only of the appellate body. But the dispute settlement understanding of the WTO does have other avenues for resolving disputes. And yes, the U.S. could come to and utilize any one of these. Actually, the U.S. is one of the heaviest users of the dispute settlement system of the WTO. We don’t have control over how a member chooses to respond. But the member that feels harmed by these measures is free to ask the WTO to take up those issues.

It is true that there have been complaints that the dispute settlement panel and the appellate body system take too long to come up with judgments on the issues that are brought to it. And that is why we are right now in the midst of reforming the system to make it more responsive, quicker. Some of those criticisms are true. And members are working to reform it. And we at the secretariat support this. Ministers have said that we should finish reforming the system by the end of this year.

RA: But Bloomberg described the recently concluded ministerial conference as “chaotic,” “contentious,” “dominated by disorder and confusion.” How worried are you about the WTO’s ability to enact these reforms?

NOI: Well, let me first beg to disagree with Bloomberg. Of course, the newspaper is free to describe any process the way they want. But you can talk to members of the WTO and get their opinion. It is true that we didn’t get all the results we wanted, but there were very important results for developing countries.

We had two new members join the WTO. If it is all that chaotic and not that desired, why do we have members wanting to join? We now have two new members and 22 waiting in the queue, with many of them working really hard. So you’ve got to ask yourself, what is the value of the WTO that makes these countries take five, six, seven years reforming their economies just to join? It is because the WTO gives value. Without it, I think the world will be—let me now use the word “chaotic”—it would be in a chaotic state because world trade would not be governed by any rules.

We shouldn’t take the WTO and its rules for granted. I can tell you, 75 percent of world trade takes place on a “most favored nation basis.” That is the basis that the WTO accords its members. And that’s what makes trade stable, predictable, and fair.

RA: If a country breaks trade rules, whether it’s China or the United States, who enforces rules today?

NOI: So the WTO is the guardian of a lot of agreements that govern world trade and keep it, as I said, stable, open, and predictable. And the way it works is this: A member of the WTO that feels another member has broken trade rules comes to the WTO and makes the case that, “Look, these actions have harmed us and we want to take action at the WTO.”

The WTO dispute settlement system is still working; there are nine cases before it right now. It’s just that the second level, the appellate body, is not working at the moment. That’s why we are seeking to reform, to take account of all the complaints about the way it works. But the dispute settlement system still works.

RA: I want to get to some of the bigger-picture questions we wanted to discuss today. With the global financial crisis and then the pandemic, there have been big shocks to how countries think about trade. Why do you think countries are beginning to talk more about near-shoring and securing their supply chains? Does it constitute deglobalization?

NOI: Talks of deglobalization may be overstated. The disruptions and vulnerabilities we saw during the pandemic, in particular with global supply chains, led a lot of countries and members to feel that “we are vulnerable, and maybe we shouldn’t be dependent.”

But we should be careful how we diagnose the problem. Many people talk about interdependence as the problem. We think the problem is overdependence. If you look at what really happened, you see that yes, we are overdependent on certain sectors and certain geographies in some supply chains. And that is something that should be worked on. And we should diversify and de-concentrate those supply chains.

What do I mean by that? It is not right that during the pandemic, 80 percent of vaccines and pharmaceuticals were exported by 10 countries in the world. When people were dying, it meant that there were countries waiting to get this. So is that something you want to look at, to see if you can diversify and de-concentrate those supply chains and produce more in other parts of the world? I would say absolutely, yes. That’s an issue. Semiconductors: 95 percent produced in one place. Perhaps the world should look at de-concentrating, on diversifying that. Critical minerals processing, in one country, 90 percent, in China. Is that something we should look at? Yes. Maybe we want to de-concentrate.

So we should be careful about the analysis that we come to. Let’s not be overdependent. But we can be interdependent. And interdependence through trade has brought the world a lot of good. And it’s still doing good. Let’s remember, it’s lifted 1.5 billion people out of poverty. It has benefited both developed and developing countries. And throughout all these crises, I would say that trade has been largely resilient. So let’s bear that in mind.

RA: A lot of these protectionist ideas today come from the richest countries; they’re the ones that can enact industrial policies. How much of deglobalization is a backlash to “the rise of the rest,” a struggle against the way power will be less concentrated in the West in the future?

NOI: It is true that globalization has been largely beneficial. But there were poor regions of rich countries and poor people who were left behind. And there were also poor countries who did not benefit as much from globalization as they should. Now, does that mean that now we say, let’s throw this away? No, we don’t do away with globalization because of reasons that may be geopolitical. We should re-imagine globalization so that it can benefit poor people in rich countries who didn’t benefit, poor countries who were left at the margins of global trade.

We want the world to go into what we call re-globalization. So instead of talking of de-globalization, let’s talk of re-globalization. Let us see the opportunity in this issue of supply chain resilience by using this as a means of diversifying and deconcentrating supply chains to those places that didn’t benefit, to those countries that were left on the margins, to those regions that did not benefit from the first wave of globalization. And there’s a big opportunity.

If we feel that critical minerals are too concentrated, why don’t we develop those value chains now in some of the countries that have these resources, not just go there to extract and export but develop the entire value chain? That way we create jobs in those countries, we create value in those countries. We bring them into the center of global trade. So the world can now benefit from another type of globalization, and it can help us with inclusion. So we are killing two birds with one stone. We are building resilience and we’re being inclusive.

RA: It is broadly bipartisan in the United States to direct foreign policy and domestic policy through a prism of competition with China. And in that general mood of protectionism, of thinking about everything through a national security lens, through a protectionist lens. And then other countries and regions also begin to follow that and practice their own industrial policies. Doesn’t that then break what you’re describing as an attempt to re-globalize?

NOI: What I talked about as re-globalization is already happening. We just need to leave businesses alone to make that decision to diversify. They are going to Morocco, to Bangladesh, to Costa Rica, to many other countries. So it is happening in spite of what you say is big-power politics between China and the United States.

And yes, we are concerned about that. We would not want the world to fragment into two trading blocs, one with the U.S. and one with China, because that will be a big loss to the world. When we do these studies of such a break, it shows everyone would lose. The U.S. would lose. China would lose. And developing countries would lose more if we broke into two geopolitical blocs along those lines. So we are very concerned.

We are watching now and hoping that we will not see a further deterioration in the relationship. The measures announced, we looked at them. The EVs are only 2 percent of the U.S. market. All the things that tariffs were slapped on totaled about 7 percent of U.S.-China trade in 2023. So if things are kept narrow sectorally and not broadened, then we might be able to move along. But yes, we are certainly concerned, like you are, that we don’t want to see a further escalation of these kinds of measures between the two big powers in the world, the two big economies.

RA: As bigger countries focus more and more on industrial policy and protectionism, what happens to smaller countries? If you’re a country like Sri Lanka, what protections are there to help them partake, to not be left behind in a world in which the big players are playing a different game?

NOI: This is why it matters that the big players are playing a different game, and why we need to point out the negative spillover effects on smaller players. Indeed, smaller countries like Sri Lanka and many others who do not have the fiscal space to subsidize to the extent that bigger countries can will be on the losing end because they won’t be able to compete. And this is why this is of great concern.

Even if we pursue industrial policy purely with subsidies, it also rebounds. Within those countries that are given the subsidies, they do not necessarily gain in the longer term. I mean, their industries might become less competitive, for instance, and so the subsidy game is a very expensive one. We don’t want a subsidy race to the bottom.

Now, not all subsidies are bad. There are areas where you can indeed use subsidies sensibly to support research and development, to go green, for instance. It is how you use the subsidies that may result in negative spillovers on countries that don’t have the same resources. And we really do want to avoid that.

RA: As you’re sitting at the WTO, how much do you blame the United States for where we are? The United States built and has often talked about the importance of a rules-based international order. But it’s becoming increasingly clear that the United States itself often abuses global trade laws that it has preached for many decades. And because of that, other countries are also incentivized to do so. And then the whole system just looks rigged or broken. Is that a fair assessment?

NOI: Well, we haven’t yet seen a lot of countries who don’t play by the rules. Let me just start with that statement. It’s also up to the countries to whom trade matters so much to make clear that the multilateral trading system is valuable to them and they don’t want to see it broken. Of course, I want the U.S., as the founder of the system, and all those other countries that were there at the beginning of the rules-based system to stay constant to it, to support it and not undermine it, to find a way to resolve issues that may arise within it. And I still think that that is doable.

But that being said, I think it’s also incumbent on other countries who are part of this system to stand up and be counted. To say, “Look, we need this system. We need to support the multilateral trading system.” There are middle powers for whom the multilateral rules and the rules-based system are so important. When your trade-to-GDP ratio is over 100 percent. There are many countries with very high trade-to-GDP ratios, even outside. Korea: 95, 97 percent. Germany: 100 percent. U.K.: 70 percent. So there are other significant big countries for whom trade matters. I think all countries that have trade as very central to their well-being and job creation in their economies need to come together and to support the rules-based system.

The majority of WTO members—and I’m very grateful to them for that—do support the system, are trying to maintain the rules-based system and come to a situation where the two largest economies in the world will be able to dialogue with each other and not fragment the system.

RA: Trump previously warned that he’d pull the United States out of the WTO if it doesn’t “shape up.” He recently said that he will pass a Trump Reciprocal Trade Act were he to get reelected, which would basically mirror tariffs any country imposes on America. As Americans think about who should be their next president, what would you say to the U.S. electorate about America’s role in the global trading system?

NOI: It’s not my place to comment on elections in any one country. It’s up to Americans to vote for who they want to be president.

What I can comment on to Americans is that the multilateral trading system has delivered for the country and is still delivering for the United States. It’s helped the U.S. There are some estimates that over the decades since the GATT [General Agreement on Tariffs and Trade] came into being until 2023, the U.S. has gained about $2.6 trillion through trade into its economy. That is huge. These are estimates by the Peterson Institute, the World Bank, and others. So I think we need to remember that on a per-capita basis, U.S. households have gained from trade. It’s often blamed for job losses. And yes, there are some losses in the manufacturing sector, but if we look at the turnover of jobs—about 50 million a year in the U.S.—trade only accounts for about 0.6 percent of this. And trade creates jobs in other areas, like services, which no one ever talks about. We have fixated on manufacturing and goods, but services drive much of the economy in the U.S. as well. I would say to people in the U.S. that on balance, trade has been beneficial, and can still be beneficial. It is not perfect, but we can certainly deal with the issues where trade is not delivering in the way they think it should. So: not to throw the baby out with the bathwater.

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