The false appeal of managed commerce

In 2018, President Donald Trump imposed tariffs on almost all aluminum and steel imported into the United States, whether from allies, like the EU, or competitors, like China. Taken aback, the EU retaliated by imposing tariffs on Harley-Davidson motorcycles, Kentucky bourbon, and other U.S. exports. A transatlantic divide had opened and Brussels officials rejected any possibility of fixing it with a “managed trade” agreement, in which governments agree to duty-free trade in certain goods up to a specified level, after which the customs duties come into force. Agreeing to such an agreement on metals could help some European exporters, but it would undermine the principles of free trade enshrined in the rules of the World Trade Organization.

In October, however, the EU backed down. Under a new managed trade agreement, the EU can export 4.4 million tonnes of steel, for example, to the US duty-free in 2022. Exports above this amount will be subject to tariffs at the same rate as under Trump. The EU accepted the deal in part because Canada and Mexico, which had once supported Europe on the issue, had already agreed to a similar deal and their steel exports to the United States had reverted to the US. pre-Trump levels. The EU was left alone.

It is not an isolated case either. The US has already started negotiating similar deals with Japan and the UK From a European perspective, the October deal is better than continuing as before: EU steel companies will be able to sell more and benefit from higher prices in the protected US market, although the amount they can export remains limited. And the United States will benefit from the EU’s end to its retaliatory tariffs on American products.

Restoring transatlantic goodwill also gives the United States and Europe political space to work together to craft new trade rules with China, which is causing turmoil in global steel markets. and aluminum. With an economic system dominated by state-owned enterprises, government subsidies and a distorting industrial policy, China has grown, in less than 20 years, from a relatively small player to more than half the world’s metals. Beijing has also proven to be an at times vindictive and unreliable trading partner, ready to use export restrictions as a tool of economic coercion when it holds market power.

In the mid-1990s, the regulated trade in textiles cost the US economy about $ 10 billion a year.

Under these circumstances, the temptation to resort to controlled trade is understandable, but it entails significant costs. The United States learned this lesson in the 20th century, when it helped popularize such arrangements to face competition from imports from Japan in the aftermath of World War II.

Containers are stacked on ships in the Port of Los Angeles in San Pedro, Calif., Nov. 24.


Photo:

Mario Tama / Getty Images

The first of these concerned cotton clothing, which Japan exported to the United States in such volume that the American garment industry and textile factories feared for their survival. In 1957, President Dwight D. Eisenhower convinced Japan to deliberately curb its exports, but that only led companies from South Korea, Hong Kong and Taiwan to rush into the breach. In the early 1960s, the Kennedy administration helped negotiate managed trade agreements that culminated in the Long Term Cotton Textiles Agreement.

To get around trade limits on cotton products, manufacturers have pushed products made from synthetic fabrics as well as wool. The trade response managed in 1974 was to expand the deal, making it the Multifiber Arrangement, or MFA, an incredibly complex web of import and export restrictions that had the effect of raising prices. consumption of almost all textiles. In the mid-1990s, a US government study found that the AMF program cost the US economy about $ 10 billion annually. Controlled trade in textiles will not finally be abolished until 2005.

Trade quotas require active management. Government bureaucrats, often working under rigid rules and with very little data, should level supply and demand. When a product can only be imported in limited quantities, for example, companies rush to fill the quota before their competitors can. Jennifer Hillman, a former government official responsible for administering America’s MFA program in the early 1990s, recalls receiving tearful calls from brides-to-be whose wedding dresses were stuck on the dock and from eight-year-old Little Leaguers whose baseball uniforms might not arrive in time for the season opener, in both cases because quotas were already full.

Cotton clothing was far from the only industry the United States was trying to manage to compete with Japanese imports. Japanese cars, smaller, cheaper and more fuel efficient than their American counterparts, threatened to dominate the American market in the 1970s, leaving Chrysler on the verge of bankruptcy. Congress threatened to impose quotas, and in 1981 the Reagan administration convinced Japan to agree to what became a series of voluntary auto export restrictions. To get around these restrictions, Toyota, Honda,

Nissan and others built assembly plants in the United States

Such experiences led to the 8 years of multilateral negotiations which culminated in the World Trade Organization.

They have also changed their product line: rather than filling their quota every year with economy models, Japanese automakers have added horsepower and other features and developed more lucrative luxury brands, such as Acura, Lexus and Infiniti, which competed even more directly with the Americans. -makes sedans.

Japanese semiconductors also entered the US market during this time, and in 1986 the Reagan administration convinced the Japanese chip industry to cut sales globally. When the Japanese side proved unable to follow through, the United States imposed tariffs. Eventually, Japan restricted its chip exports, but this made its products more expensive. This proved to be a boon for competition from Taiwan and South Korea, which went on to dominate much of the semiconductor market, pushing aside many US and Japanese manufacturers.

Experiences like these have led to the search for a better way to govern world trade. Beginning in 1986, the United States, Europe, Japan and dozens of other countries spent 8 years in multilateral trade negotiations, culminating in the founding of the World Trade Organization in 1995. Its agreements have helped phase out voluntary export restrictions – until now.

October’s managed trade deal may be reminiscent of earlier deals, but it also has an important distinction. The United States and Europe are not trying to convince China to limit its exports. Instead, having previously imposed tariffs on Beijing, both the US and the EU have at least implicitly agreed to buy less from China. Thus the trade managed today with quantitative limits is the transatlantic trade in steel and aluminum. The US and EU seek to create an environment, however artificial, in which their companies are always incentivized to compete, but not with China.

The recovery in controlled trade is unlikely to stop with steel and aluminum, as China’s economic system and its huge portfolio of export industries confront policymakers with the same dilemma on several fronts. But the experience of managed commerce in the 20th century suggests proceeding with caution. Today’s unintended consequences may not come in the form of new luxury brands or man-made fibers, but something completely different and perhaps even harder to dislodge.

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