Australia’s Chance To Champion A Rules-based Economic Order

It’s hard to remember the last time an advanced economy embarked on a course of self-destructive behaviour as damaging as the United States has pursued in the month or so since Donald Trump returned to the White House. Brexit — an emblematic act of economic self-sabotage — pales in comparison.

The new protectionists describe tariffs as a way to ensure a manufacturing revival, or as a negotiating tool. By far the most honest description of the economics of a tariff, though, is a special tax on the most efficient source of supply for businesses and consumers. Put like that, the idea of ‘retaliation’ seems much less obvious than it does to politicians who want to impress voters with the image of strength against foreigners.

Trump’s imposition of punitive tariffs on Mexican and Canadian imports brought back dark memories of the beginning of the Great Depression, which became ‘Great’ partly because of a destructive spiral of protectionism that originated in Washington in a world economy that was splintered into imperial blocs.

Barely a day after the tariffs came into force, Trump ‘paused’ their application on US neighbours for now — likely in response to the clear evidence of their destructive potential for US growth, inflation and financial markets.

This is little reason for relief. Regardless of whether Trump’s tariffs on the United States’ neighbours ‘stick’, the President has sent a message to all of its partners that the word of the White House is worthless: it is prepared to ignore any trade agreement or treaty, and the US government will not necessarily honour contracts that have been entered into in good faith.

Herein lies the danger of the erraticism that marks Trump’s trade warfare. How can businesses have faith that if they invest in the United States the government will not destroy the value of that investment with wild, damaging trade policy changes at a moment’s notice?

Since the Second World War, the United States has enjoyed what monetary economists call ‘exorbitant privilege’: the ability to borrow cheaply from the rest of the world and run chronic trade deficits without ever risking a balance of payments crisis, secure in the knowledge that America’s ability to print the global reserve currency would allow the party to go on more or less indefinitely.

But there are signs that the institutional foundations of US economic dominance are starting to crack. That the US dollar has always been seen as a safe haven might have led you to think that the dollar would have appreciated after Trump’s tariff announcements, as it did when Trump made similar threats in his inaugural address. Instead, the dollar tanked.

It’s unlikely that this will mean any rapid collapse in America’s central role in the global financial system. But it does point to a serious challenge facing the country even after Trump’s term is over in four years. Trust takes a long time to build, and is quickly dissipated. This takes place at a time when — ironically thanks to Trump’s demolition of trans-Atlantic political trust — there will be a lot of Euro-denominated sovereign debt on the market as Europe rearms to meet the challenge of deterring Russia without reliable American security patronage.

The lesson for Australia? Whatever Trump is doing to the institutional foundations of the American economy, do the opposite. For countries that have been left out of the trade spats, now is the time to show the world that reliable institutions and stable markets can be found outside the United States.

For developed economies like Australia, this means tangibly demonstrating that Australia is committed to maintaining stable, economically sensible institutions. As Bryan Clark from the Australian Centre for International Trade and Investment argues in this week’s lead article, one way to signal that Australia is open for business in a time of growing trade protectionism would be to do away with tariffs for good.

Though Australia’s tariffs are admittedly very low already, as Clark points out, nuisance tariffs still have price effects that hurt low-income consumers the most. Removing all tariffs would also mean Australia could do away with the bureaucratic apparatus that administers them, slimming our government in a smart way. It would make life a little easier for Australian businesses engaged in international trade without sacrificing anything of value. And — perhaps most of all — it would be a clarion signal in support of openness and international trade by a country where those values have had bipartisan commitment, going back as far as Gough Whitlam’s unilateral and universal tariff cut of 25 per cent in 1973.

Australia can and should bring this opposition to the protectionist zeitgeist to its international economic diplomacy more broadly. We’re enmeshed in a regional economy that is the best place in the world to witness the reality that getting rich, and staying rich, involves countries embracing a place in the international division of labour based on comparative advantage and trade.

Some governments in Southeast Asia are prone to touting the potential benefits of a trade war for encouraging the inflow of foreign investment. In Australia, it hasn’t escaped the notice of many that there are potential gains for Australian exporters in China’s levying retaliatory tariffs on a range of US agricultural products.

Such thinking is to miss the wood for the trees. Whatever sectional economic benefits might be had in the short term from a trade war are outweighed by the long-term damage to economies from the weakening of the rules-based international trade and the weakening of confidence, certainty and growth that come from chaotic policymaking in Washington. Australia and its region have instruments of political and economic cooperation — from the CPTPP to the Regional Comprehensive Economic Partnership (RCEP) to the G20 — to safeguard rules-based trade in a world where some have forgotten the lessons of last century’s trade wars.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Law, Policy and Governance, The Australian National University.

#<p>The post Australia’s chance to champion a rules-based economic order first appeared on East Asia Forum.</p>