OPINION: IMF member countries made one good and one bad decision this week in Washington. Both will profoundly shape our world.
The good one endorsed for the first time the IMF’s climate change agenda, despite President Trump’s denial of the issue and actions to exacerbate it. The agenda says “countries should not leave the mounting economic consequences of climate change for future generations”.
The bad one dropped the IMF’s pledge to resist trade protectionism, one of its core principles since its creation 72 years ago. It seems the IMF felt the need to pander to President Donald Trump who loves to rail against trade.
The decisions were made by the IMF’s International Monetary and Financial Committee, comprising 24 finance ministers and central bankers.
READ MORE: Free-trade deals still vital for New Zealand
“The use of the word protectionism is very ambiguous,” said Agustín Carstens, the committee’s chair, in seeking to explain the IMF’s historic change of mind. “Our final goal is just to take advantage of trade. Nobody denies that and I think everybody is in line that we need free and fair trade.”
The IMF’s sharp shift on trade mirrors the action of the G20’s finance and central bank governors at their meeting in March. US Treasury Secretary Steven Mnuchin had refused then to endorse strong language on protectionism.
As Governor of the Bank of Mexico, Carstens and his fellow citizens are getting a dose of what Trump means when he talks of “fair trade” under the North American Free Trade Agreement (Nafta). He has used subsidies and presidential pressure to persuade some US companies not to invest in Mexico. Likewise he is threatening Canada, its other Nafta partner.
Trump frequently calls Nafta “the worst trade deal maybe ever signed anywhere”. Yet since its inception 23 years ago it has delivered considerable benefit to the three countries by improving the integration of their economies. For example, every dollar of Mexican exports to the US included 40 cents of US value embed in it.
Trump’s threat to quit Nafta may be just a tactic to increase his leverage to renegotiate the treaty, a process he has already initiated. Indeed, some modernisation of Nafta is needed to reflect, for example, trade and investment flows and business practices in the internet age.
But Trump’s many other actions show that’s far too benign an interpretation. He is actively working to overturn the nature of trade as we’ve known it and have benefited from since the end of World War II.
Examples include his “Buy American, Hire American” executive order, his insistence that Japan would have to give the US in a bilateral free trade agreement all the liberalisations Japan might offer in a revamped TPP, and his deep disdain of the rules of the World Trade Organisation, which keep international trade relatively orderly and arbitrate disputes between countries.
The greatest concern of all is the economic fantasies informing the world view of Trump and his economic and trade advisors. They believe that imports and deficits of trade and current accounts are bad, while and exports and surpluses are good.
“How are trade partners to respond when US policymakers talk nonsense?” asks Martin Wolf, chief economics columnist of the Financial Times, in his recent article “Dealing with America’s trade follies”, available at nz2050.com/WolfTrade
Comments by US Commerce Secretary Wilbur Ross and his colleagues in the Trump Administration are “rubbish”, Wolf writes.
“A trade deficit is not proof that a country is open to trade. It is proof that it is spending more than its income or investing more than it saves. This is not just a theoretical point. Solid evidence supports it.”
When leading IMF countries start prevaricating on their trade principles, we should worry and demand better from them.
Likewise, we need to worry about our own government and demand more of it. Last month it released its review of our trade strategy out to 2030, available at nz2050.com/NZtrade2030.
Calling it merely a policy “refresh”, the Government said “public support for globalisation and trade liberalisation has fractured in some countries”. The report was bereft of analysis of what’s actually happening.
Political and economic upheaval is shaking the world. We need a government that knows how New Zealand should respond.