The world is about to get a little smaller with the United States continuing its withdrawal from the global economy. President-elect Donald Trump has promised 10 to 20 per cent tariffs on all imports into the United States and 60 per cent tariffs on Chinese goods.
The United States has gone from enforcer to spoiler of the rules-based economic order as it deals with domestic challenges and threatens a return to its pre-World War 2 isolationism. The rest of the world has to avoid the United States dragging the global economy down with it.
Asia, Australia included, needs a plan now to avoid that outcome.
The US superpower still boasts the largest economy valued at market exchange rates, at 26.3 per cent of the global economy compared to the European Union and China at around 17 per cent each, but that is a smaller share than it has had for most of the past three-quarters of a century, including when it accounted for around 40 per cent of the global economy in the 1960s. In purchasing power terms, the United States today is 15 per cent of the global economy, behind China at 19 per cent.
China is likely to retaliate against Trump’s tariffs as it can’t afford to look weak. The European Union might also retaliate, especially if the US withdraws support for Ukraine. They both retaliated against Trump’s tariffs in his first term. There will be pressure all over the world to ‘protect’ domestic production from a flood of Chinese and other goods shut out of the US and looking for new markets.
There is a better solution than shooting yourself in both feet because the United States does so itself.
Trump thinks that tariffs ‘are the greatest thing ever invented’ but will be open to doing deals with countries to avoid them. Beware of these deals.
US tariffs on steel and aluminium and the threat of tariffs on Japanese cars led to costly ‘voluntary’ export restraints on Australian steel exports and pressured Japan into a trade deal with the United States in 2019. That seemed the politically and economically expedient choice for Canberra and Tokyo then.
The incremental choices of countries to do deals with Trump’s United States — managed trade deals and voluntary export restraints — may be diplomatically expedient but will weaken the rules that underpin global trade and are against their core long term interests. That would reinforce the trajectory of the global economy heading towards an economic nose dive of the kind it suffered in the 1930s.
It will be up to the middle powers like Australia and Japan — that cannot change the status quo unilaterally but are large enough to mobilise coalitions of countries for change — to keep the global economy open and save the furniture of the multilateral trading system.
Middle powers must convince China and the European Union that their best course of action is to avoid large-scale retaliation and go in the other direction, opening up their economies further. That will make them better off and make the global economy larger, even with restricted access to the US market.
China’s rise and its use of economic tools to pursue its economic and security interests may be seen as a threat by many countries but the reality is that it’s locked into the existing system that restrains its coercive influence. Unwinding economic independence with China is not only impossibly costly; it will turn China into the next Russia, only much more powerful.
China’s circumstance, as the world’s largest trading nation and a nation without any major formal allies, means that it is deeply dependent on the system that helps to manage its trade exposure for its own economic and political security. Collective economic and security interests lie in maintaining Chinese dependence on that system and the entrenchment of its multilateralist posture.
Many advanced industrial economies have introduced economic security policies that have focused on the immediate risks from the rise of China. The aim of those policies is to reduce high dependence on China in particular sectors and in the supply chains of critical minerals and rare earths. China’s attempted economic coercion against Australia and other countries shook confidence in having high trade shares with China and international trade exposure.
The economic coercion that China deployed against Australia in 2020 and Japan earlier was blunted by the multilateral trading system which, despite its weaknesses, allowed Australian exporters, for example, to find alternative markets and provide an exit ramp from the problem, with the last of Chinese trade restrictions lifted in October 2024. The open global trading system crucially ensures that there are alternative buyers and sellers.
The economic security policies of Australia, Japan and others, supported by large subsidies to industry, are about managing risks and securing a ‘high fence’ around a ‘small yard’. The point of the ‘small yard, high fence’ idea is to protect a small number of industries and technologies but to be very open outside of that fence. The whole yard will now be behind the fence in Trump’s America. The size of the yard risks growing for other countries too with national security interest mission creep mixed with naked protectionism.
The multilateral trading system is the biggest source of economic security for open trading nations. That includes Southeast Asia, which is more exposed than other countries with its high trade shares that are its source of prosperity and security.
Utilising platforms in ASEAN-centred institutions and connecting them to other efforts in Europe to promote collective action is where the strategic focus needs to be now, on trade, climate action and other global public goods, otherwise we risk a much smaller, poorer and less secure world.
This article first published in the East Asia Forum.
November 17, 2024 East Asia Forum
