Why Trade Is in Trouble

The election of Donald Trump could “destroy the international trading system overnight,” said one panelist at a recent Chazen Institute–sponsored forum.

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Even when globalization was a far less contentious issue, international trade treaties were tough to negotiate. Now, in the wake of startling xenophobia on both sides of the Atlantic, even regional and bi-lateral agreements are in danger of dissolving.

That was the pessimistic take of experts who spoke at “Trade Issues Today,” a recent daylong conference co-sponsored by Columbia University’s Jerome A. Chazen Institute for Global Business, the School of International and Public Affairs, the Deepak and Neera Raj Center on Indian Economic Policies, and the Center on Global Economic Governance.

Few global topics are as fundamentally important in so many ways as greasing the wheels of international free trade, the panelists agreed. The benefits extend far beyond commerce to issues such as diplomatic relations between nations and which countries will set international paradigms for everything from labor laws and tariffs to product standards.

Here are three take-aways from the conference:

1. President Trump could unilaterally “destroy the international trading system overnight.”

That’s a direct quote from Ernesto Zedillo, who was President of Mexico from 1994 to 2000 and is currently director of the Yale Center for the Study of Globalization. “It’s almost frivolous to talk about multilateral trade deals without saying the biggest threat not just to global prosperity but to world peace” is looming, he said.

Although some participants also voiced qualms about Hillary Clinton, when it comes to trade most speakers were vocal in their horror over Donald Trump. In areas such as currency policy, “he’s all over the map” but has said he supports a return to the gold standard, “which is not feasible,” said Benn Steil, a senior fellow at the Council on Foreign Relations.

“Trump’s support isn’t just antitrade but [encompasses] broader xenophobia and things foreign,” said Caroline Freund, senior fellow at the Peterson Institute for International Economics. “We can talk about the comparative advantages of trade: things are cheaper, the pie is bigger. But we often forget the security benefits. Countries don’t fight with their trading partners.”

In fact, Zedillo suggested economists and other analysts of international trade “have been too quiet. If Guatemala elects a comedian [former TV star Jimmy Morales became president in January], that is not so consequential for the world.” But, depending on the outcome of the American election, he warned, “a lot of pain could be on the horizon.”

2. Pending treaties are a long shot.

Conference participants warned that the two precedent-setting agreements currently awaiting legislative approval (the Trans-Pacific Partnership, or TPP, and Transatlantic Trade and Investment Partnership, aka TTIP) are in grave jeopardy, especially if success doesn’t come this year.

Robert Lawrence, a professor of trade and investment at Harvard University, gave TPP a 20 percent to 25 percent chance of passing in the lame duck period after a new US president is elected but before she or he takes office. In a new administration, “trade won’t be a clear priority for President Clinton." And as far as President Trump goes, the outcome, “is too horrible to contemplate,” Lawrence said. “Clearly he will risk a devastating trade war.”

Prospects for passage of TTIP aren’t much better, although most opposition may come from Europe. “Europeans are more interested in regaining sovereignty, reclaiming democracy, and retaking control,” said Anu Bradford, a professor at Columbia Law School and a Chazen Senior Scholar. Noting that elections will be held in a number of European countries next year, Bradford suspects that support will likely slip away in many of the 20 of 28 EU governments that currently support TTIP passage.

3. Currency manipulation could lead to freewheeling foreign exchange wars.

When a government makes large purchases of foreign assets or sells big chunks of its own, the action tends to raise or lower its own currency. That can lead to undesirable consequences, such as making the price of a country's exports artificially low.

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, observed that the IMF has no currency enforcement tools and the WTO has never enforced what it considers violations. By many definitions, Japan has been trying to manipulate the yen for years, and South Korea is convinced its hefty foreign reserves largely insulated it from pressures that decimated economies around the world in 2008.

Gagnon proposed a useful tool could be an IMF- or WTO-enforced policy that lets countries buy and sell foreign assets only to bring their current accounts into balance. “Once reserves exceed 100 percent of foreign liabilities, they can’t buy more FX. Manipulation could be used only within a narrow range.”

He also said the United States should consider buying foreign assets to offset its overseas exposure. “If America had foreign reserves, we would make money when we have a deficit.”

Still, creation of a US foreign reserve stockpile appears unlikely. Although nearly all countries engage in this practice, American politicians would still have to explain to voters “why they are sending our assets overseas,” said Gagnon. Also, Congress would need to raise the debt ceiling, and that’s problematic.

Despite the doom and gloom, many panelists were heartened to see trade once again take precedence in discussions on national and global growth. Said Leif Pagrotsky, Consul General of Sweden: “For the first time, trade policy is discussed as general policy, not as a subject for experts.”

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