The weekend before last, the G20 finance ministers met in Baden-Baden, Germany. In their statement at the end of the meeting, they broke a long-standing tradition and did not mention the importance of free trade for the global economy. The importance of fighting climate change was also omitted. Even though most of his policies are still unclear, the shadow of Donald Trump and his promise of a more protectionist agenda hung large over the meeting.
On trade, there have been few concrete measures besides withdrawing the US from the Trans-Pacific Partnership. There has been a mention of possible new tariffs on goods from China or from companies that have off-shored American jobs. A few weeks ago, the administration also drafted a paper which outlined the intention to ignore rulings by the World Trade Organisation if they were seen as being against the American interest.
The missing text on free trade at the G20 meeting is just the latest indication that the Trump administration aims to depart from what has been US policy for the past decades; to defend and champion free and rules-based trade. This drastic change of direction will have profound implications for the rest of the world, not least the EU. We already saw the shift in the global constellation at Davos, where all of a sudden the Chinese President Xi Jinping was the most outspoken advocate of free trade and open markets, though it has to be said that China still has to convert those words into action itself.
The US has always been a driving force behind trade liberalisation, international rules and open markets, the rationale being that this benefits modern, open and competitive markets as well as rising economies. Further, the WTO was not only meant to create new global opportunities, but also as a referee to make sure that everyone adhered to the commonly agreed set of rules. Although negotiations at the WTO have been tough, the organisation has led to growth and jobs across the globe and has facilitated fair trade, while avoiding protectionism and trade wars.
The ‘America first’ that Trump has advocated seems to hinge on the idea that on every issue, there can only be one winner and that this must be the US. This naïve, inward looking, zero-sum and mercantilist way of thinking does not reflect the way the world works, nor will it prove to be beneficial for the US. When it comes to trade for example, past experience and countless economic studies show that mutual market opening leads to a win-win for both parties. Protectionism may seem attractive and may help a specific sector in the short run, but in a world of global value chains and ever increasing interdependence, it will damage the rest of the economy in the long run.
There is more at stake than the American economy, however. With its withdrawal from TPP and its threats of ignoring the WTO, the administration also damages the interests of others, such as the EU, Japan, Australia, New-Zealand and Canada. If the world’s biggest economy ignores WTO rules, how are we supposed to make sure that others do not follow? Countries that have always had protectionist tendencies, will use the new US position as an excuse to do the same. For those economies that rely heavily on global rules-based trade, such as the EU, that is a serious threat.
In the face of a US protectionism, the EU must renew its push to forge closer ties and set global rules with other partners. The ratification by the European Parliament and the Member States of CETA, a trade agreement with Canada, was an important step in that direction. The European Commission is planning to start negotiations with Australia and New-Zealand and looks to close a deal with Japan. On Tuesday, at the EU-Japan Leader's meeting, both sides reiterated their commitment to free and fair trade. Japan, given its position in the world, needs strong allies and partners and the EU-Japan agreement will strengthen this partnership. While the US retreats from the global rules-based system, others who believe in it must step up to reinforce and protect it. If we choose the path of protectionism and unilateralism out of what is perceived as self-interest, we lose the ability to hold others to their promises and that, in the long term, will harm us much more.