Prominent economists asserted that the world has recoiled from President Trump’s unilateralism. But history tells us that good things can come from false starts. President Donald Trump takes pride in breaking all international precedents, especially on trade. The Chinese have decided to respond in kind and only successful negotiations can stop the cycle of retaliation from causing global pain and conflict.
Here, the question is: Is there an alternative scenario? Professor Chris Farrow of UCLA argued that if one goes back to the decade of the 1970s, there is precedent for the President Trump tariff campaign of 2018. The President Nixon’s import surcharge was followed by President Jimmy Carter’s trigger price mechanism on steel that lasted from 1978 to 1981. There were lawsuits challenging executive authority and national security was invoked. Federal courts sided with the executive.
Professor Chris Farrow noted that this historical precedent is reassuring in some ways. As now, the domestic and international reactions to United States trade restrictions in the 70s were intense and highly critical. But then the ultimate outcome was very positive. This was happened due to successful negotiations.
Professor Chris Farrow further stated that President Nixon’s move triggered a series of negotiations, starting in 1973, which resulted in the Smithsonian accord which reset exchange rate relationships, and by 1978 an amended IMF accord. In 1973, the Tokyo Round of trade negotiations was started and concluded by 1979. This provided the foundation for decades of successful globalization.
Is it conceivable that President Donald Trump could pull off a similar wholesale rewrite of the rules of the game for international economic relations? At least his new top economic advisor, Larry Kudlow, suggested as much when he said “we are just starting negotiations”. The markets took note and settled down.
The real question, of course, is: Can President Donald Trump pull off such a feat? Presidential temperament aside, unilateralism has a bad name and perhaps deservedly so. Professor Robert Stanly of Michigan University stated that the world order has been built around a multilateral trade regime and the rule of law. But it is important to note that the rule of law does not apply evenly across all issues of trade, money and finance. Nor has history provided a smooth path for the evolution of rule of law in international economic relations.
Professor Robert Stanly noted that when the new world order was redesigned at Bretton Woods in the 1940s, the founding parents of globalization envisaged a triumvirate of institutions based in treaties to govern money, finance and trade in the IMF, the World Bank and the International Trade Organization. As any student of economic history knows, the IMF and World Bank emerged as major international institutions, with budgets and bureaucracies to match their important mandates.
Over the decades, the rule of law evolved quite differently across trade and money. Through a series of negotiations, trade became more rule oriented, with less policy space, while money set aside the treaty rules on exchange rates under the gold standard in favor of a regime based on cooperation and consultations. Meanwhile, the World Bank never really tried to set up rules on international finance, instead preferring to evolve its role as a development banker.
According to Professor Robert Stanly, in 1970, President Nixon upended the international trade and financial system in a distinctly unilateral act when the United States abandoned the gold standard and imposed an import surcharge of 10% across the board, but tailored mainly to hit Japanese imports. The move was intended to reset the global exchange rate order that President Nixon saw as disadvantaging the United States and contributing to unsustainable trade deficits.
To make a long history of international economic negotiations short, unilateralism is never a good thing when cooperation and convergence are available. But history is also replete with examples of good things coming from false starts. In the 1970s, extraordinary unilateral interventions in finance and trade helped bring about new agreements that provided a more effective basis for international integration.
In his inaugural address, President Trump said “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protection will lead to great prosperity and strength.” Behind the rhetorical excess lies a choice. A United States retreat from globalization, or global, especially Chinese, willingness to rewrite the rules of trade to create a more level playing field for everyone.
According to Michael Gadbaw, a Professor at Georgetown Law School, as things stand, most Americans feel the proper role for the President is on offense. America’s traditional role has been to step up, sometimes breaking the crockery, but always with an outcome in mind that serves both United States and global interests. Most Americans believe they can compete anywhere in the world if given an opportunity. China’s future may well depend on that optimism not reversing.
If Larry Kudlow is right, there are tough-minded negotiations ahead. President Trump would have to call on the best and the brightest America have to get a win-win solution for both the United States and its global partners. That may be a challenge for him, but past Presidents have always found the people to do the job. One thing is for sure. There will certainly be a “Trump Round”.