As the Trump administration forges ahead with its “America First” tariff policies, advanced economies, China, and countries in the Global South are each responding in their own ways, while claiming to uphold free trade. In this environment, what might the chances be for a free trade alliance between these players?
The tariff policies introduced by the Trump administration have triggered trade turmoil around the world. Tariffs are making it more difficult to import goods into the U.S., leading to temporary restrictions and likely increasing inflationary pressure. At the same time, other countries suddenly have a surplus of products and production capacity meant for U.S. exports, leading to overproduction and rising deflationary pressure. This effect is the same, whether it be in an advanced economy or in rapidly industrializing countries like China. If the high tariffs remain in place and the U.S. does succeed in import substitution by producing previously imported goods domestically while also implementing tax cuts and deregulation, then its economy could gradually recover. Likewise, if other countries can find new export partners for the goods previously destined for the U.S. or can absorb the extra capacity through domestic demand, their own current turmoil may begin to ease. Still, as global resource allocation becomes increasingly inefficient, overall growth in the global economy will be constrained.
Even if the current turmoil caused by the Trump tariff policies persist, the world economy will eventually stabilize. However, global supply chains will be forever changed. A certain amount of output will of course continue to be exported to the U.S., but at the same time other countries are likely to look to form their own trading blocs. This could well lead to a decoupling between the U.S. and newly formed free trade zones. However, the U.S. will not be able to achieve complete import substitution domestically for all products, making it difficult for countries like Mexico and Canada to fully sever supply chains with the U.S. As such, a zero-sum division is unlikely, and instead, a more general structural realignment may occur.
For other advanced economies, one major issue lies with the potential participants in these free trade zones. Will they be established solely among themselves, or will they include China and the so-called Global South to create a broader framework? It is certainly possible that a substantial free trade coalition could emerge in opposition to the U.S. and its increasingly protectionist stance. China is attempting to put itself forward as the flagbearer of a free trade zone. From the perspective of advanced economies, however, there are numerous hurdles to forming such a broad coalition that includes China.
First, China itself tends to take a protectionist approach to managing imports and exports. Even if this approach was intended to counter the U.S., China will find it difficult to either lead or join a free trade zone unless it abolishes the high tariffs and import-export restrictions it imposes on other countries within a potential free trade zone.
Second, while this may be a result of attempts to manage domestic production, China will likely need to limit domestic overproduction. An excess supply of Chinese products entering the global market will have the effect of driving down global prices.
Economic coercion, which China often employs in relation to rare earth materials and other resources is another challenge. China may also argue that this is a response to the economic pressure from the U.S. and other Western countries. But if it hopes to form a broad free trade coalition, it will need to abandon economic coercion as a tactic, at least as it relates to fellow members of the free trade zone.
China in the meantime is likely to have a number of demands of its own for advanced economies. What is needed now is a framework in which these challenges can be addressed, as well as a venue to discuss preserving and advancing free trade, even in the absence of the U.S. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will likely play a significant role here.
In the first half of the 20th century, the rise of economic blocs worldwide contributed to the outbreak of the world wars. Now, as the U.S. employs a policy of high tariffs, it is critical that the world heed the lessons of a century ago and avoid making the same mistakes.