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Every time the world economy totters and governments start putting up trade barriers, a ritual alarm sounds that we’re heading back towards the destructive protectionism of the 1930s.
In reality we’re not time-travelling to the Depression so much as to the 1970s and 1980s, which were far less economically calamitous. (Also, if we’re going culturally retro, it’s surely better to have punk, disco and electropop than big band and swing.)
In the 1970s, the US began to face what (rather quaintly now) seemed the existential threat of Japan emerging as a major exporter. Washington forced Tokyo into a series of exercises in “managed trade”, notably for autos and semiconductors.
In an echo of that era, Donald Trump (crudely) and Joe Biden (with more precision) have used quotas and trade barriers to protect the US steel and aluminium industry. The Biden administration is currently threatening the EU with the reintroduction of tariffs — temporarily suspended since 2021 and replaced with import quotas — unless Brussels signs up to a club to keep out steel imports from China. Brussels is correctly reluctant to do so. Certainly in its original version it’s a pretty blatant breach of World Trade Organization law and would undermine the carbon border pricing scheme that’s central to its environmental policy.
So how should it and other trading partners respond, and what lessons can be learnt from the 1970s and 1980s? Some of the countervailing forces present at that time are absent now, but there are still some general lessons about rolling with the punch while trying to avoid permanent damage.
The supposedly free-market Reagan administration pressed the auto VER on Japan in 1981, setting annual ceilings for Japanese car exports to the US and securing more US access to the Japanese market. Tokyo, concerned about a widescale trade war, complied — and in fact continued to limit exports for nearly a decade after Reagan lifted the VER requirements in 1985.
Ultimately the VER ended for two reasons. One, the multilateral “Uruguay round” of trade talks under the WTO’s predecessor, the General Agreement on Tariffs and Trade (Gatt), concluded in 1994 and outlawed such managed trade arrangements. Two, Japanese manufacturers set up in the US to serve the American market. Neither of these, unfortunately, provide models for the EU today. The Biden administration has little concern for WTO law, and the US wants to protect its existing steel producers in the electoral swing states of Ohio and Pennsylvania, not invite in new ones.
With semiconductors, the US and Japan in 1986 agreed rules to prevent low-priced Japanese chip exports flooding the US and global market — and more access for American producers to Japan. The trade restrictions were lifted by 1991 after the US lost a Gatt case in 1988 and US computer manufacturers increasingly pushed back against rising chip prices.
With the power of WTO law dwindling, the US’s trading partners today have resorted to expedient and opportunistic approaches. Japan, for example, managed to head off threats of car tariffs by Trump in 2019 by promising new import quotas for US agricultural products.
The EU harrumphed at this shift towards managed trade. But the European Commission had already made its own (somewhat more guileful) concession the previous year, bamboozling Trump by making promises to import more US soyabeans and liquefied natural gas that it had no ability to implement. In 2020, China agreed a deal with the US pledging a massive increase in imports from America, which in the event produced almost nothing.
When dealing with Biden’s China steel proposal, the EU is best advised to minimise political conflict and the short-term economic hit without making damaging long-term commitments.
The EU seems insistent that the suspended tariffs be permanently removed as early as possible, even before negotiations are complete. Certainly the temporary quota system is messy and unsatisfactory, but isn’t disastrous for the EU steel industry or global trade rules. Leaving it in place while protracted transatlantic negotiations continue is probably the least bad option.
At the least, the EU should be prepared to help Biden politically by keeping the fix in place until next year’s presidential election rather than riling the steel-producing states by loudly demanding the quotas and tariffs be lifted. Biden’s managed trade is a bad idea, but it’s far better than four years of Trump’s economic nihilism.
In a world of weak multilateral trade rules, it’s important to pick your fights. A full-on EU-US trade conflict over steel and aluminium isn’t wise for either side. The lessons of managed trade in the 1970s and 1980s are to sway with the wind without letting yourself be uprooted. Back then, Japanese car and semiconductor industries continued their path to becoming global players despite the machinations of the US. Today, the EU can preserve its economy and its environmental commitments by yielding where it’s necessary and holding firm where it’s vital.
