Déjà Vu All Over Again on the Trade Front
Every time a trade battle breaks out, I get a frightful sense of déjà vu from an era I know only from history books. US trade action on steel evoked that sense of déjà vu.
The world enjoys largely free trade now, at the beginning of the 21st century, as it did at the beginning of the 20th century. But, in the opening decades of the 20th century, the first modern era of globalization came undone, as trade skirmishes turned into a full-scale trade war.
Those opening skirmishes of the early 20th century hardly seemed to threaten global trade. But barriers keep rising. Political leaders faced increasingly angry shouts from nationalists and ideologues who either hated other nations or hated business.
A few brave souls, like Winston Churchill, fought for free trade, but even he wavered at times. Cross border contacts were replaced by mutual hostility. Trade-enhanced prosperity was replaced by poverty, unemployment, and a growing desire to find scapegoats. Most historians believe the collapse of the first era of globalization contributed to the great horrors of the first half of the 20th century.
This is history we should avoid repeating. US trade barriers against steel imports creates a frightening omen. It could launch a worldwide trade war, with disturbing consequences for Canada and Mexico, though both nations are exempt from US tariffs.
The European Union and Japan have threatened retaliation against the United States. But thats hardly the end of the story. The EU and Japan, along with Canada and Mexico, fear a flood of steel dumping from poorer nations now denied open access to the US market.
Rich nations may build new barriers against poor nations, at least in the steel sector. That could cause considerable hardship in nations that have few resources to deal with hardship. That, in turn, endangers political stability.
Second round effects threaten as well. US and Canadian manufacturers will face increased competition from foreign firms, which have access to cheap international steel. Manufacturers and unions may demand new barriers to manufactured goods, sparking another round of action and reaction.
Beside this, Canadas dispute with the United States over softwood seems like small potatoes indeed. It leaves most of the world and much of Canada unaffected.
Nonetheless, it is another example of a US interest using political clout to open a trade dispute. Just as US steel producers argue foreign producers are subsidized, US lumber interests argue Canadian softwood lumber is subsidized, in this case through low stumpage charges.
Stumpage is what the government charges lumber companies to harvest on Crown land. US interests, perhaps with some justification, claim Canadian governments undercharge, in effect subsidizing lumber producers. Atlantic Canada has been exempt from most aspects of this action since the vast majority of forestland is in the region is privately owned.
But, Atlantic Canada could be sideswiped by the dispute. If Canada compromises with the United States by imposing a tariff on softwood exports, as seems likely, the tariff could apply to Atlantic lumber, though likely at a lower rate than BC lumber.
Still, the situation at the beginning of the 21st century is more favorable than the situation of 100 years ago, when no international body governed trade. Today, the World Trade Organization is empowered to adjudicate international trade disputes.
The WTO process is slow, costly, and its power is weak. But the WTO has headed off trade disputes in the past. Canada has appealed US softwood actions to the WTO and won. Meanwhile, Canada has agreed to respect a WTO ruling that federal loans to jet-maker Bombardier violated trade rules by subsidizing the Canadian company to the disadvantage of Brazils Embraer.
Such proceedings before an impartial panel may be just enough to enable the world to avoid the mistakes of the last century, by slowing the escalating march towards a new trade war.
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