2 weeks Ago
If a date had to be pinpointed, the post-Second World War international system came to an unmistakable end on April 2 -- the so-called "Liberation Day" -- when US President Donald Trump announced comprehensive "reciprocal" tariffs to a bewildered global audience. The blatantly protectionist move was equivalent to the United States' abrogation and abandonment of the rules-based international order that it ironically and instrumentally constructed and upheld over nearly eight decades. What comes now is a dangerous era of absolute advantage in global trade, investment, and finance, bent on unilateralism over multilateralism, competition over cooperation, nationalism over interdependence, and the singular quest to dominate and reshape the global pecking order under the rubric of making America "great again".
Friend or foe, no country was spared. A baseline 10% tax on imports into the US was imposed on all trading partners, regardless of whether they hold a surplus or deficit with the US. This is a time when it is worse to be a US ally than an adversary.
The US's adversaries, such as China with its $295 billion trade surplus, can be expected to be treated harshly. The Trump administration has levied an overall 145% against China. Although there is a 90-day reprieve on global tariffs announced one week after "Liberation Day", excluding the 10% baseline and a handful of sectors and products like semiconductors and smartphones, a significant portion of the tariffs on China remain.
Allies of the US, however, do not expect to be treated this way. Australia has a trade deficit in the US's favour, but it is still hit with the 10% baseline. The UK's steel exports are hit with a 25% tariff when entering the US market.
Singapore, an informal but functional ally with a $2.8 billion deficit, is also in for 10%. Thailand, a low-performing US ally, faces a 36% import tax owing to its $46 billion trade surplus.
Canada and Mexico are in a similar quandary with even larger value in tariff costs. The Trump tariffs have turned basic trade theory on its head. It has long been held that free trade based on comparative advantage is an absolutely good and desirable outcome.
When free trade and trade liberalisation came under attack for being "unfair", the orthodox wisdom adjusted to "freer trade" as a common public good. No self-respecting trade economist in the modern era would advocate protectionism, mercantilism, and economic nationalism by erecting walls and layers of tariffs and non-tariff barriers. The win-win proposition of international trade is that economies should make what they are inherently and naturally good at in view of their respective endowments in terms of land, capital, labour, technology, skillsets, accumulated experience, and entrepreneurial acumen.
Doing so leads to specialisation, economies of scale, and efficiency gains, ending up with products which can then be sold to other economies that can then sell other goods which they are similarly adept and efficient in producing. The net outcome is thus greater than if each economy were to make all the products it requires or those that it is not efficient at making. Such is the crux and cradle of the efficiency-driven law of "comparative advantage".
The classic textbook example is Portuguese wine and English cloth. Portugal should just make wine because of its conducive factor endowments, and England should churn out as much cloth as it can for the same reason. Both countries making both goods makes less sense and is less efficient than if they made what they were good at and traded with one another, thus consuming more of both goods.
But President Trump and his team have a different idea. They think that the US should make the "strategic" goods it needs in times of crisis and exigencies of "national security". They abhor interdependence among economies and the reliance on trade partners to make products for sale to the US.
Among key products that President Trump has personally mentioned are antibiotics and ships. The US needs to make these products to safeguard its national security. Resilience and security are thus more important than efficiency in this zero-sum mindset.
Buying these products from and relying on others to make them somehow renders the US more insecure. In Mr Trump's mercantilist worldview, the US needs to be able to look after itself by making the essential goods it requires on its own without dependence on others. Comparative advantage has thus been thrown out the window in favour of absolute advantage, an overarching objective of producing goods that may be more costly and less efficient just because the US does not want to import them from others.
Better yet, in this protectionist view, is to make and consume at home with enough left to sell to others abroad. This view is not completely devoid of logic. In theory, governments are said to constantly face trade-offs between "guns and butter", another old textbook example of the cost-benefit dilemma between national defence and social welfare.
The Trump way of seeing the world is that guns are absolutely better than butter. Having guns can easily lead to more butter by force, while it's not true the other way around. The problem with the US's rightward turn to protectionism and economic nationalism is that other countries can and will be tempted or forced to do the same to protect and ringfence their own economic interests.
China has already shown that it will not shy away from retaliatory tariffs against the US. Unlike the first Trump administration in 2017-21, China's export destinations are more diversified and less dependent on the US market. For example, the Asean economies are now China's biggest market.
Although this presents a conundrum for Asean in view of cheap Chinese goods flooding Southeast Asia, China is demonstrating that it is more prepared for Mr Trump's tariff fury. Other economies will now be incentivised to look after their own in a competition for export market share and protection of domestic markets. When comparative advantage is out and absolute advantage is in, everyone loses in the long term.
The international system thereby resorts to self-help, with every economy having to look after itself. Unless China shows that it can play a different kind of leadership role and fill in the vacuum left by the US, by not flooding world markets but helping to buy some of their goods, the geoeconomic warfare we are seeing will likely get worse. Thitinan Pongsudhirak, PhD, is professor at Chulalongkorn University's Faculty of Political Science and a senior fellow at its Institute of Security and International Studies in Bangkok.
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