Trade talks will always be better than a trade war

Any kind of talking about trade — unilateral, plurilateral or multilateral under the auspices of the WTO — is better than none (pic: Bloomberg)

IN RECENT years, Democrats and Republicans have come to agree that open markets are bad for America. Successive administrations have raised import barriers and withheld support for pro-trade norms, agreements and institutions. This is a grave mistake, as will become clearer with time. Until the new consensus gives way, the challenge will be to limit the damage. The best way to do that? Keep talking.

The biggest threat from tariffs and other restrictions isn’t short-run damage from higher costs and misallocated investments, real as those are. Such first-round costs are usually manageable. The greater risk is a cycle of retaliation and counterretaliation. Outright trade wars cause enormous damage, and not just in narrow economic terms. As commerce craters, alliances fray and rivalries grow fiercer.

In trade, as in other matters, negotiation beats escalation. Any kind of talking about trade — unilateral, plurilateral or multi-lateral under the auspices of the World Trade Organisation (WTO) — is better than none. Given the prevailing mood, jawboning won’t keep markets as open as they should be, but it makes escalation much less likely.

In May, the Biden administration raised tariffs on Chinese-made electric vehicles (EVs) to 100%, more or less banning them from the US market. The announcement vaguely mentioned China’s “unfair trade

practices” but sought no remedies. On the contrary, it proclaimed the real purpose: “ensuring the future of the auto industry will be made in America by American workers”. The president’s “trade promotion authority” is supposed to encompass tariffs only if they’re used to force open foreign markets. Instead, he used them to advance overt protectionism.

In June, the EU also imposed tariffs on Chinese EVs. It set them at much lower rates than the US — not high enough to close the market to Chinese producers. Most important, it designed them to offset specific Chinese subsidies. This approach conforms to international trade rules and invites Beijing to negotiate. In that sense, the tariffs are pro-trade.

No doubt, the effort might fail; China has threatened retaliation. Even so, “Let’s talk about the rules” is less lethal to good-faith cooperation than “Your products are banned. What’s to discuss?”

Bear in mind, both sets of EV tariffs are ill-conceived for other reasons. Fighting climate change should be an overriding priority, and faster adoption of cheap EVs would help. The more heavily China is willing to subsidise the technology, the better for the planet, as well as for consumers and taxpayers in the US and EU. Still, the difference between the two approaches matters. Europe still wants cooperation on trade, and the US doesn’t. Quite the opposite: The Biden administration is proudly protectionist, and Donald Trump promises the same, only more so.

That still leaves a crucial choice: Let the rules-based order collapse altogether, or modernise and repair it. Until the earlier pro-trade consensus is revived and refashioned, governments must ensure these frictions get no worse. And the key to that is negotiation.