Trump Protectionism and Us

There used to be a time when we, in developing countries, shouted anxiously: Global trade only benefits developed countries! Donald Trump has canceled the apprehension.

Now what happens is the opposite. It is the United States and Europe that are anxious about globalization. Trump\'s victory as US president, the Brexit phenomenon and anti-immigration show the anxiety and resistance to globalization. It does not stop there. The meeting of finance ministers and central bank governors of the G20 in Germany in mid-March 2017 failed to get an agreement on trade and investment. The US, which used to crown itself as the leader of globalization, took an opposite position.

Of course, it is too early to conclude that the world has become protectionist. However, we can read: The climate for trade cooperation is no longer bright. Interestingly, China and East Asian countries speak up about the importance of globalization. How do we explain this? What is the impact and what has to be done by ASEAN, including Indonesia?

Last week in Cebu, the Philippines, I gave my view to ASEAN finance ministers on the impact of US protectionism on ASEAN. In a limited retreat attended by 10 ASEAN finance ministers, including Sri Mulyani from Indonesia, I disclosed the risk if the world enters a new normal when the US becomes protectionist and this is endangering Asia. We know that the history of the economic success of East Asian countries, such as Japan, South Korea, China, Singapore and Taiwan, is a history of trade and industrialization.

Trade and industrialization have encouraged economic integration in this region. That was all possible because the global economy was relatively open at that time. A development strategy that focuses on exports and industrialization with a production network has allowed East Asia and ASEAN to become one of the regions with the highest growth in the world to date. Correspondingly, the poverty rate has declined in Asia.

Anticipation measures

The world is changing. The world economy is experiencing a slowdown and so is the global trade. The Chinese economy is also entering a new equilibrium. Amid the changes, the US is shouting its anxiety about globalization. If the US really wants to become protectionist, what are the impacts? Calculations made by the World Trade Organization in 2016 and the Asian Development Bank (ADB) in 2015 show that before a recent global financial crisis, a one-time increase in global economic growth would increase global trade by two or three times. However, this ratio decreased to one time after the crisis. Even in 2016, the ratio was less than one.

It means the global trade was even shrinking. An ADB economist, Cyn-Young Park, showed in 2016 that the trade in Asia focused on intermediary goods where the most influential end buyer was the US. That is, if the US becomes protectionist, the internal trade in Asia, including in ASEAN, will fall. ASEAN has to anticipate it. There are a few things that need attention here.

First, even though the world has entered a new normal, the economic growth in East Asia and ASEAN is still the highest in the world. It still has the potential to continue to grow. Unfortunately, the space for it is increasingly limited. A US Federal Reserve interest rate hike will limit monetary policy in ASEAN. Even if the US interest rate increase is quite drastic, the ASEAN countries have to raise interest rates. Learning from the experience of the so-called Taper Tantrum in 2013 – when the US planned to normalize its monetary policy by raising interest rates – the ASEAN countries were more ready to anticipate it.

The reason: The current-account deficit is being relatively maintained at present, as well as the budget deficit. What is more interesting, an adjustment to capital outflows and exchange rates has taken place since 2013 so that the effects that may arise may be minimal. However, if the interest rate increase in the US is drastic, the ASEAN countries need to anticipate the risk of capital outflows and exchange rate pressures. With the limited monetary policy space, the role of fiscal stimulus becomes very important. The fiscal stimulus certainly is not limited to the increased volume of expenditure, but the most important thing is the improvement of the quality of spending on productive sectors.

Second, to maintain growth, the fiscal policies have to be combined with policies on trade and investment. With regards to this, the continuation of structural reform and international cooperation in trade and investment becomes very important. Efforts to improve the investment climate, economic deregulation, openness of trade and investment through unilateral reform become the key. In the medium and long term, productivity must be enhanced through the improvement of the quality of human resources, infrastructure and governance. Unfortunately, this is not easy.

Unilateral reform is the ideal option, but it is not easy politically. The economic slowdown and protectionist tendencies in the US will lead to political pressure on the government to also become protectionist. On the other hand, the push for reforms through multilateral agencies is also not clear.

Third, the Brexit phenomenon, the collapse of support for free trade in the G20 meeting in Germany, the strengthening sentiment of anti-globalization and the withdrawal of the US from the Trans-Pacific Partnership (TPP), shows the first generation model of globalization – with the widest opening of trade barriers for goods and services – is not getting strong political support. The assumption that economic reforms caused by opening the market will be followed by political reform does not happen. Globalization fails to give instant benefits to most people. The success of reforms frequently does not depend on what is good or bad about the reform agenda, but on the political support that enables the reforms to continue.

The dilemma of reforms is that the sacrifices have to be carried out immediately, while the benefits will only be felt in the long term. For that, reform needs quick wins or success stories in which benefits can be felt by the people instantly. Reforms that focus only on long-term issues, paying attention to the political cycle, will get political support with difficulty.

Not easy period

Fourth, in the retreat of the ASEAN ministers I disclosed the importance of identifying regional cooperation that can be politically acceptable and economically beneficial. More importantly, the cooperation has to make an impact that can be felt by most people so that the political support for the leaders to carry out the regional cooperation is strong enough. Therefore, the continuity of regional cooperation can be maintained. I see that cooperation in infrastructure or connectivity is a good choice.

So also is the increase of human resources. Most ASEAN countries need infrastructure and all countries in ASEAN understand the importance of connectivity. Aside from that, the success of ASEAN cooperation will also depend on the leadership of Indonesia as the largest country and we know that infrastructure and connectivity are the main agenda items of the Indonesian government.

Therefore, Indonesia can make this agenda become the ASEAN agenda, as well as take the leadership initiative in ASEAN.

Infrastructure can be put on an initial joint agenda and after that be put on the more sensitive agenda. That is why the regional cooperation mechanism has to be gradual. Starting from the low target and after a successful start begin to increase toward the more complex cooperation.

The discussion mechanism also needs to be changed. I remember my discussion with Dani Rodrik in Harvard University recently. He mentioned the need to save globalization from the insistence of its fanatical supporters who want the policy of a country to adapt to global interests. Rodrik said this is politically impossible. He said that if it is imposed, resistance to globalization happens and he is right. Therefore, he proposed that globalization still allows space for national policy to protect the interests of each country. It means globalization must walk within the existing political constraints.

Fifth, in this regard I see the Regional Comprehensive Economic Partnership (RCEP) as one of the important options to consider. We know that the TPP practically ended when the US decided to withdraw from the agreement. Therefore, the RCEP is one of the existing options. When viewed from the characteristics side both the RCEP and the TPP cover more than a third of global GDP,  nearly a third of global trade. The RCEP even covers 48 percent of the world population, while the TPP 1  percent.

Some consider the RCEP to be an ongoing framework, which opens space for trade and investment talks gradually. Indeed, there is a risk that the negotiation process would take too long. However, in a political situation like this, this approach will be more effective to rebuild confidence in international cooperation. No less important, ASEAN must be able to play its geopolitical role to maintain a balance between China, Japan and India. This is where the RCEP becomes important because it emphasizes the importance of ASEAN centrality and because the RCEP is the initiative of Indonesia, the assumption that is the Chinese agency can be ignored.

I know this is not an  easy period. It is the period in which globalization has to continue under the existing political constraints, the period when we need to save globalization from it supporters. "How to save globalization from its cheerleaders?" asked Rodrik. I think it is a good question.

MUHAMAD CHATIB BASRI

Guest Professor of Australian National University, Canberra