By Philip Pilkington
A truck passes by China Shipping containers at the Port of Los Angeles, after new tariffs on Chinese imports was imposed by President Trump, in Long Beach, California on September 1, 2019. MARK RALSTON / AFP/GETTY IMAGES
The upcoming U.S. presidential election looks set to be one of the most consequential in recent memory. Both sides view it as an existential struggle for the heart of America. One aspect of this struggle is the Trump campaign's signaling that it will move toward aggressive trade protectionism, with Donald Trump referring to himself as the "tariff man." But while America struggles to define itself at home, the world is changing in ways that are more dramatic than anything we have seen since the end of the Cold War or perhaps even since the end of the Second World War.
When the first Trump administration began in 2016, America began to reconsider the free trade policies it has pursued since the collapse of the Berlin Wall. At the same time, the United States is imposing a range of sanctions on the Chinese economy in the hope of maintaining its technological advantage. In response, the Chinese are accelerating the rate of their own technological development, a crowning achievement of which was the release of the Huawei Mate 60 smartphone, which contained the first-ever domestically produced Chinese processor, the Kirin 9000.
These trends are deeply interrelated. The changes we are seeing in the world order, the turn toward protectionism in the United States, and the trade wars between America and China all trace their roots back to the mismanagement of global trade since the 1990s. Between 1980 and the mid-1990s, trade imbalances in the world economy hovered around 1 percent of world GDP. By the mid-2000s, due to an aggressive round of globalization, they had roughly doubled and have remained at at elevated level since.
These trade imbalances explain everything from the rapid rise of China to the hollowing out of American manufacturing. They are real problems, and the Trump campaign is right to highlight them. The question, however, is whether increased tariffs and protectionism are the best way to deal with these imbalances.
Here the Trump campaign's platform suffers from two major problems.
The first is that it overestimates what protectionism can accomplish. The clue is in the name—it aims to "protect" domestic industries. Tariffs may well help protect domestic industries, but some in American policy circles seem convinced that imposing tariffs will also lead to a spontaneous regrowth of industries lost to globalization. Many such industries are highly complex and require skills, know-how, transport infrastructure, and other inputs that take years—maybe even decades—to nurture and develop. If the American government imposes tariffs on key sectors and American businesses have a hard time substituting the goods targeted by the tariffs, the result will simply be a sharp uptick in the price of the goods.
This leads us to the second problem. The Trump campaign has signaled a desire to aggressively cut taxes, especially income taxes. Such cuts would drastically boost the spending power of the average American consumer. Yet if, at the same time, the government is restricting access to cheap foreign goods with higher tariffs, too much money will be chasing too few goods. This is a recipe for inflation—perhaps very high inflation. If Trump gets elected it will be partly due to the cost-of-living crisis experienced by Americans in the Biden era; if a second Trump administration engages in its own inflationary policies, its support will evaporate quickly.
There is an alternative, however. This week the Hungarian Institute of International Affairs has published a comprehensive report arguing for a different approach to America's—and by extension, the world's—economic problems. Rather than return to the tariff policies that met with minimal success in the 1930s, we advocate dusting off an innovative policy idea that was floated at the 1944 Bretton Woods Conference that created the post-war monetary and economic system. This proposal is known as the "bancor."
The bancor is a plan for an international clearing system that imposes rules on world trade. These rules are aimed at preventing countries from running trade imbalances while at the same time avoiding curtailing free trade. They would prevent imbalances in two broad ways. First, countries that run persistent trade surpluses—as China is currently doing—are charged interest on their earnings. This interest is transferred to countries that are running trade deficits to help them develop their infrastructure and industry. Secondly, countries that run trade imbalances past a certain magnitude are forced to revalue their currency to eliminate the trade imbalance.
In 1944, the United States rejected the bancor plan because it ran large trade surpluses—today the benefit for America is obvious: managed free trade is the best shot the country has at rebalancing its economy and recovering its domestic industry. But what about China, which, like the United States in 1944, is benefiting from an unmanaged system? We argue in the report that it is strongly in China's interest to avoid an ongoing trade war with the United States. Signing onto the bancor proposal would impose short-term penalties on China, but in the long run the balanced world system it would create would allow both China and the United States to prosper.
Adopting the bancor would also greatly cool global tensions. The bancor does not, of course, offer solutions to, say, the Taiwan question. But it would massively lower the geopolitical temperature and promote world peace—something desperately needed in these tumultuous and dangerous times. More than that, it would produce a positive vision for the world economy that has been lacking since policymakers rightly started paying attention to the excesses of the globalization period. An incoming Trump administration could make the bancor the keystone in an entirely new, constructive geopolitical strategy that aims at peace and prosperity and an end to the dangerous global turmoil of the past four years.
Philip Pilkington is a macroeconomist with nearly a decade of experience working in investment markets, he is the author of the book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory.
The views expressed in this article are the writer's own.
Source: Newsweek
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