Trade restrictions are turning into an instrument of political blackmail and bargaining. And business is increasingly becoming a bargaining chip in this game, writes billionaire Alexei Mordashov in his column for Forbes
Throughout its history, society has been naturally evolving from a “tribal” fragmentation to a single global world. The process of globalization began a long time ago: Alexander the Great probably took the first step on this way in the 4th century B.C. The emergence of empires, such as the Greek, Chinese, Roman, Mongolian, was each time an attempt to overcome distances and cultural differences, to create conditions for synergy between territories, to accumulate their experience and resources, and to make a qualitative leap forward. Nevertheless, it was not until the second half of the twentieth century, when international trade became “explosive,” that mankind really felt the advantages of a world without borders.
I do not really understand the arguments of critics of globalism that the problem of unfair income distribution and rising inequality is connected to this trend. We should not forget that international trade is one of the most important tools for improving human welfare and combating poverty. History has ample examples of this: for example, as a result of the boom in trade in China, the number of people living in extreme poverty has fallen from 64% to 17% in 20 years.
How does this work? The answer is simple: prosperity is the result of the exchange of ideas, goods, services, and finances. Any student who has taken a basic course in macroeconomics is familiar with a simple business game illustrating the benefits of international trade, in which players representing individual countries receive a different set of goods. By exchanging them with other “countries,” as a result of specialization, they spend fewer resources to meet their needs and make additional profits, and thus improve the welfare of their “citizens,” raising their standard of living.
Another increasingly unconvincing argument we hear is that globalization leads to job losses. But in reality, studies show that about 80 percent of job losses in modern economies are due to the introduction of new technologies and work organization schemes, not to unsuccessful competition with imported goods and services. On the contrary, competition at the international level forces producers to increase productivity, think about the quality of their goods and services, and reduce prices. As a result, the consumer wins-and his standard of living rises again. All these are simple truths, but they are increasingly ignored by world leaders.
It must be said that the problem of rising protectionism is far from new; one can only wonder at humanity’s ability to repeat its own mistakes. History is full of lessons of how trade wars were launched to protect national industries, but with opposite results. A classic example is the U.S. passing of the famous Smoot-Hawley tariff act at the beginning of the recession in June 1930. This act raised duties on imports of more than 20,000 items into the U.S. – virtually all goods that were imported into America – from about 40 percent to 60 percent. The drafters of the law hoped that they could protect American manufacturers in this difficult time of financial crisis. But the effect was just the opposite. Other countries, especially the European powers, began to impose their duties in response. For several years, imports of foreign goods to the U.S. fell by 66%, but exports to other countries also fell by 61%. Many economists believe that it was the adoption of such protectionist measures that exacerbated and prolonged the economic recession in the U.S. and the world and turned it into the Great Depression.
Unfortunately, the world has not learned this lesson from history. We are once again on the brink of a trade war, and possibly a new recession. Recently more than a thousand world-class economists wrote a warning letter to Donald Trump that his protectionist policies could lead the U.S. into another Great Depression.
History repeats itself, but at the same time the world is changing every year, which only exacerbates the risks from trade restrictions.
First of all, the natural process of globalization has gone a long way and supply chains are now global. A very vivid example of this was told to me by a Volkswagen executive. After the earthquake in Japan in 2011 and the accident at the Fukushima nuclear power plant, Volkswagen factories ran out of microchips to make car transmissions for a couple of weeks. There was a real risk of the German auto giant’s production lines being shut down, since the Japanese chip maker supplies almost all of the world’s auto companies. In the global world, any breakdown in the supply chain is fraught with serious consequences.
Second, we are dealing with a clash of powers on an unprecedented scale and with possible consequences. The last time the U.S. was involved in a serious trade war was in the 1980s, when Ronald Reagan used protectionist methods to try to stop imports from Japan, primarily cars. Let’s leave aside the fact that the plan did not work, Japan devalued the yen and continued to supply its products to the U.S. despite the duties. What matters is something else: Today’s trade conflict between America and China is fundamentally different. At the time, Japan’s economy was much smaller than that of the United States. In addition, Japan was a strategic and military partner of the U.S., so both countries were interested in finding a compromise. America had never before faced a rival like China in terms of economic size, industrial capacity, and global ambition.
No one knows how far the conflict between these countries could go. Markets look with great concern at the potential deepening of the conflict and its transfer to the financial plane – devaluation of the yuan, sale of U.S. government debt, etc. cannot be ruled out. Ultimately, a new global trade war could result in long-term growth losses for the global economy.
Another disturbing trend: the new trade restrictions have no economic rationale or even a reasonable justification. The steel industry, suffering from overcapacity, is generally accustomed to local bursts of protectionism at low points in the cycle – there is not enough market for everyone, and countries start protecting their producers. This is reckless, but understandable. But recently the U.S. restricted imports of steel and aluminum from many countries around the world under the pretext of protecting national interests, using a provision of a local law known as “Article 232. When the European Union asked the WTO to intervene, America made it clear that such an investigation was not within the jurisdiction of the WTO, since the tariffs were allegedly imposed for U.S. security reasons. I believe this is a very dangerous precedent of “playing without rules,” undermining the authority of the World Trade Organization and trade rules in general. In exploring the possibility of imposing new duties and quotas, Donald Trump is invoking a forgotten and little used law that gives U.S. presidents the power to block imports that the head of state believes undermine U.S. security. That law, “Section 232” of the Trade Expansion Act of 1962, has been used only twice in history, most recently in 1981.
Trade restrictions are becoming an instrument of political blackmail and bargaining. And business is increasingly becoming a bargaining chip in this game. The sanctions regime against Russia and Iran, which damages not only companies from these countries, but also their partners around the world, is another political form of protectionist measures. Also economically unfounded and, importantly, unpredictable, forcing the entire global business world to freeze in tense anticipation.
What can the business community do to stop this dangerous trend? Probably only what I am doing right now – together with my business colleagues and all people who care about the problem, talk louder and more persuasively about it, warn political leaders about the possible risks, and try to unite in the fight for a free global trade regime. The world must understand that global growth and prosperity are impossible without the development of all regions of the planet. Otherwise, history will punish us again and again.