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A trade tariff conundrum

Comment
By Johann Weick

Following a recent meeting in the White House, US President Donald Trump and European Commission president Jean-Claude Juncker seem to be working in unison on trade barriers.

The zero-tariff and non-tariff barriers idea on industrial goods, other than cars, to resolve the US-EU tariff issue is a wake-up call for other governments to address ill-effects of globalisation.

Finding a balance between pros and cons of economic forces moving rapidly in a configuration not seen before is no easy task, though.

Multilateral trade based upon mutually agreed rules began and further evolved in the wake of the Second World War.

Trade and economic development moved ahead without downturns for several decades, but the 1973 oil shock ushered in an unprecedented and largely unanticipated recession, precipitating a sharp decline in cross-border trade exchanges, stagnating industrial production and an accompanying rise in unemployment and inflation.

No sooner had the world economy recovered, a second 1979 oil shock sent it reeling again.

The US and an economically-integrating Europe saw previously unrivalled sectors challenged.

Steadily gaining in high-tech manufacturing, low-cost labour countries in Southeast Asia took over and became leading nations in manufacturing and exporting textiles, shipbuilding and audio and video equipment.

Adverse economic conditions coupled with increased foreign competition led advanced nations to create the World Trade Organisation (WTO).

As a result, it became possible, for example, that British engineers could supervise Bengali bricklayers using US-made cement with Chinese-manufactured concrete reinforcing rods on construction sites in the GCC on behalf of local real estate developers.

Countries should concentrate on what they do best, trading the results of their specialised production skills with one another via importation and exportation.

But the model designed to create an inclusive, open level playing field is not always adhered to.

A raw materials producing country can encourage its own domestic downstream processing industries, via a dual pricing system.

The Gulf’s hydrocarbon deposits, for example, mean they are able to sell oil to their own aluminium smelters, national airlines and petrochemical industries at prices significantly lower than exported product.

Reconciling industrial policies with liberal trade rules therefore becomes more difficult.

WTO membership means opening markets to foreign competition and investment, breaking up trade-restrictive domestic monopolies and eliminating measures bestowing domestic industries an unfair advantage over foreign competitors.

But at what point is a domestic company mature enough to face sustainable foreign competition without government assistance or border protection?

Rules usually have exceptions. National security is one of them, but for which industries and how long?

Countries with narrow economic bases, depleting natural resources subject to price drops and reduced national income appear to have less room to diversify their economies.

The WTO allows some flexibility in, for example, the imposition of price increasing duties on exportable goods prone to either scarcity on the home market or price volatility on the export market.

Nonetheless, trading partners might face pressure to stop practices designed to guarantee fast-growing local populations employment and domestic industries feedstock.

When the GCC and EU engaged in negotiations for a still-elusive free trade agreement (FTA), the EU began to focus on the way GCC states applied concepts of local sponsorship, dual energy pricing and export duties.

Responding to decline of US industrial sectors, Trump instituted import tariffs based on a WTO loophole provision, which permits actions considered necessary for the protection of national security.

Governments make choices that influence the structure of their own or other economies, some designed to preserve political or economic power.

A government, however, needs to anticipate risks of the direction it chooses and avoid becoming too dependent on other countries.

An interconnected and interdependent global political economy with a high, yet insufficiently checked, openness makes nations vulnerable to economic and political forces beyond their control.

While populist rhetoric like “make America great again” may offer short-term gain, it will not rectify the economic root causes that have challenged domestic US industries.

Johann Weick is a trade policy analyst