APEC 2016: what is the future of globalization?

VietNamNet Bridge - Hot issues in the APEC Summit 2016 are Brexit and the rise of populism in politics, especially in the US after Donald Trump was elected the new president, which appears to have added strength to the voices protesting globalization.

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Protectionism is about to "rise", trade and investment are "losing momentum" and gradually they are no longer a top strength of economic globalization. After the Brexit "shock" will there be a shock of globalization?

Mercantilism caused instability in the world for decades. Before the Industrial Revolution, the regulations restricting imports by tariffs and quotas in order to promote domestic productionreduced the strength of opponents and increased global influence. 

These measures actually created some short-term gains but they caused political tensions, territorial expansion and persistent and costly wars. The consequences of the new mercantilism of the US President-elect Donald Trump, especially for China, may not be so bad, but is also worrying. The measures that Trump mentioned in his presidential election campaign will bring about little help on jobs for the American working class, but it can cause incurable damage for the global economy.

During his election campaign, Trump strongly criticized Beijing. Speaking in Pennsylvania, he said that China's admission to the World Trade Organization (WTO) has claimed the most jobs in history. According to his view, the huge trade deficit amounted to US$ 365 billion with China is simply a result of dishonest business practices, pushing American manufacturers out of the market. 

However, this short-sighted analysis does not include the fact that the trade deficit also stems from the profligate spending habits of Americans, and not to mention the US dollar returning to the United States in the form of foreign investment. Trump stated very clearly on this issue: "We've been in a trade war, and are losing badly."

During the election campaign, Trump said that China has distorted currency and threatened to bring trade cases against China to the WTO, and to impose new tariffs on Chinese goods. 

Trump’s economic adviser, Peter Navarro, said it is necessary to impose a 45% tax rate on goods imported from China in order to compensate losses caused by Beijing for the US, from illegal export subsidies and a monetary distorting policy, to intellectual property theft and non-compliance with environmental regulations. 

Like an old-fashioned mercantilist expert, Trump said that curbing imports from China will help restore fair competition, thus helping recovery in the US manufacturing sector.

But that kind of thinking is like phishing. The total industrial output of the United States is at a historic high level, while employment in manufacturing is at historic low level. Like what happened to the agricultural sector more than a century ago, technological advances leads to production gains, and it was the cause of the "struggling death" of the “white-collar class” in the US. 

Globalization only exacerbates this fact. Moreover, in a world of global value chains, where the manufacturing process is chopped, split up all over the world, some imported goods from China, such as car accessories, steel, semiconductor and plastic ... in fact are intermediate goods or inputs for US exporters, ie they contribute to the value of the finished goods. 

Paradoxically, the high tax on imports from China would mean higher taxes levied on US exports, which will increase sales prices, causing loss of competitiveness of US business and, thus, reduce employment opportunities for US workers.

If Trump believes that his strategy is right, of course, he also knows that Beijing will not stand still. In January this year he said: "I will tax goods coming from China. Yes they will do the same with us." That confrontational view would cause a trade war. When Washington imposed tax rate of 35% on Chinese tires in 2009, Beijing responded with a tax levied on chicken products from the US.

But the tariff is only one of many measures that Beijing could take to make Washington nervous. The boycott of US businesses in China, or rejecting the key components in the global value chain, such as rare soil for use in electronics or installing intermediate parts of the Iphone, will cause big losses for American businesses.

For example, in 2010-2014, General Motors sold more cars to China than in the US market, and this profit led to higher profits for the shareholders of GM, higher revenue taxes to the federal government, and higher salaries for workers in the US. The above-mentioned retaliatory measures will cause 900,000 American jobs which depend directly on exports of goods and services to China to be on the verge of disappearing. China is a huge market, to the extent that the US cannot ignore for the excuse of reviving jobs.

If they are pushed to the corner, Beijing can also attack America financially. China is currently holding more than $1,200 billion of treasury bonds (accounting for 6% of the US public debt). This contributes to reducing pressure on US interest rates, allowing businesses and households to borrow more cheaply. If China suddenly stops buying this assets, or worse, to sell part of them, US interest rates will rise, stock prices will decline, and the US dollar will depreciate disastrously. This will put pressure on the incomes of the middle class in America, as well as consumers while harming the confidence of the business community and investors.

Tensions between China and the US will also badly affect the world economy. Even a small trade war would derail the current recovery of the world economy. And if the dispute between the two superpowers reach the level that can push either into serious recession, it can also drag down the entire planet.

With limited growth prospects, the intention to shift from imports to subsistence will emerge. Ultimately, protectionism would spread globally, and political tensions, resentment, even among close allies, will escalate. According to the International Monetary Fund (IMF), once  protectionism rises around the world, it will make a decline of 2% of global GDP in a long time.

These arguments may not be enough to convince Trump to step back. But once he walks into the Oval Office, most likely he will be forced to modify his strong promises that he released during the election campaign. Domestically, the US Congress is in charge of the national trade policy. The President can only apply a tax rate of up to 15% in 150 days. If he wants to add a little more, he will have to consult Congress.

In the context that both the US House and Senate are in the hands of the Republicans, Trump just needs to call for his party to promote his election ambitions. But the support of the Republican Party may be insufficient if the policies of Trump violate WTO rules (which are more likely to be so), such as the principle of Most Favored Nation (MFN) or the maximum tax limit that each country can apply. If the WTO concludes that the US violates trade rules, Washington will be asked to fix the errors or China will be allowed to apply retaliatory measures against US goods.

But to be fair, Trump also has something right. The process of China becoming a market economy is far from completion. The policy under interventionists is disturbing competition in many areas; the phenomenon of network reconnaissance against US companies is expanding; enforcement protection of intellectual property rights is not good; and the protection of workers and environment is almost non-existent. 

But the retaliation policy will hurt the global economy, and it will not help much to increase jobs for American workers. Instead of destroying US-led trade systems based on regulations, Trump should try to consolidate them.

With the help of the EU, which is also concerned about ambiguities in the Chinese economy, Trump should find constructive ways to negotiate better trade deals with China, and just use protectionism as a threat rather than an actual policy, to achieve a credible commitment from Beijing.

Globalization has pulled many economies closer together. More importantly, cooperation in trade and investment is not a game of "all or nothing", but all economies benefit. History has shown that mercantilism can only make people worse. Hopefully we will not be seeing it again.

Thao Linh

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