The lessons for US trading partners from the 1970s and 1980s are to lean with the wind without being buffeted by it
Every time the global economy falters and governments start erecting trade barriers, the alarm is sounded that we are returning to the destructive protectionism of the 1930s, writes Financial Times columnist Alan Beattie.
In reality, we are not so much going back to the Great Depression as we are to the 1970s and 1980s, which were far less economically disastrous.
In the 1970s, the US began to face what seemed (now rather strangely) to be the existential threat of Japan becoming a major exporter. Washington has forced Tokyo to take a series of “managed trade” actions, particularly in autos and semiconductors.
Echoing that era, Donald Trump (roughly) and Joe Biden (more precisely) used quotas and trade barriers to protect the US steel and aluminum industries. The Biden administration is currently threatening the EU with the reimposition of tariffs – temporarily suspended after 2021 and replaced by import quotas – unless Brussels joins a club to prevent steel imports from China. Brussels is rightly unwilling to do so. Of course, in its original version this was a rather egregious violation of World Trade Organization (WTO) rules and would have undermined the carbon cap scheme that is central to European environmental policy.
So how should the EU and other trading partners respond, and what lessons can be learned from the 1970s and 1980s? Some of the countervailing forces available at the time are now absent, but there are still some general lessons about deflecting impact while avoiding permanent damage.
The Reagan administration imposed tight market restrictions on cars from Japan in 1981, setting annual caps on Japanese car exports to the US and giving America greater access to the Japanese market. Tokyo, fearful of a full-scale trade war, complied — and in fact continued to restrict exports for nearly a decade after Reagan lifted the policy in 1985.
Ultimately, this American policy ended for two reasons. The first, the multilateral “Uruguay Round” of trade negotiations under the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), ended in 1994, banning such managed trade agreements. Second, Japanese manufacturers established divisions in the United States to serve the American market. None of this, unfortunately, offers models for EU action today. The Biden administration cares little about WTO rules, and the US wants to protect its steel producers in the swing states of Ohio and Pennsylvania before the presidential election, not invite foreign ones.
In semiconductors, the U.S. and Japan agreed in 1986 to rules that prevented exports of cheap Japanese chips from flooding the U.S. and global markets — and gave more access to U.S. manufacturers in Japan. Trade restrictions were lifted in 1991 after the US lost the GATT case in 1988, and US computer makers increasingly objected to rising chip prices.
With the weakening of WTO rules, US trading partners today are resorting to expedient and opportunistic approaches. Japan, for example, was able to fend off Trump’s threats of tariffs on its cars in 2019 by pledging new import quotas for American agricultural products.
The EU resented this shift to managed trade. But the European Commission had already made its own (somewhat more cunning) concession the year before, outing Trump by promising to import more US soybeans and liquefied natural gas, which he had no capacity to deliver. In 2020, China made a deal with the US, promising a huge increase in imports from America, which ended up achieving next to nothing.
When considering Biden’s Chinese steel proposal, the EU would do best to minimize political conflict and short-term economic shock without making damaging long-term commitments.
The EU appears to be pushing for the frozen tariffs to be permanently lifted as soon as possible, even before the negotiations are over. To be sure, the temporary quota system is messy and unsatisfactory, but it is not catastrophic for the EU steel industry or for global trade rules. Leaving it in place while transatlantic negotiations continue is probably the least bad option.
At the very least, the EU should be willing to help Biden politically by keeping the current deal in place until next year’s presidential election, rather than upsetting steel-producing states by demanding that quotas and tariffs be removed. Biden’s managed trade is a bad idea, but it’s much better than Trump’s four years of economic nihilism.
In a world of lax international trade rules, it’s important to pick your battles. A full-scale trade conflict between the EU and the US over steel and aluminum is not sensible for either side. The lessons of managed trading in the 1970s and 1980s were to lean into the wind without getting knocked around. The Japanese auto and semiconductor industries then continued on their way to becoming global players despite US machinations. Today, the EU can preserve its economy and its environmental commitments by giving in where necessary and standing firm where vital.