Navigating Trade Amidst United States Protectionist Policies: Suggestions for Small-Open States

by max cheung

Policy Recommendation

The world’s largest consumer market, the United States, is imposing tariffs and restrictions on countries employing unfair trade and industry practices. Small-open states can no longer adopt the East Asian development model without thinking twice about the implications on their trade and industrial strategies.

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"Joe Biden" by Gage Skidmore is licensed under CC BY-SA 2.0.

Concerns over national security pervade the zeitgeist of policymakers in Washington, as protectionist policies become commonplace vis-à-vis big power competition.

In response to China’s industrial overproduction, Washington has adopted their own industrial and protectionist policy playbook. The Biden administration recently placed tariffs on Chinese cranes, justifying the shift toward strengthening domestic industries with concerns over US national security. It argues that US reliance on cheap Chinese ship-to-shore cranes poses a significant national security threat to its maritime economy, which contributes nearly 2% to the US GDP.

The US has cracked the pandora’s box of hawkish trade policies wide open. The world that once pledged to relinquish tariffs as a weapon will soon be a distant memory, and small-open economies around the world must reassess their strategies to prepare for a mercantilist Washington. Now, the priority of small-open economies, especially those reliant on trade, should be to promulgate liberal trade—which has served to provide foreign market access to supplement their small domestic markets—while also strengthening their domestic sectors. The challenge is to build-out said domestic sectors that may outcompete and disrupt US firms and supply chains without becoming a target of Washington’s economic stick.

Play around the high fence

Despite rarely being on the receiving end of US tariffs, Policymakers from small-open economies should be mindful of targeting industries and value chains that fall within the US’s small yard, high fence strategy. The US has identified domains for their protectionist regimes, placing strict restrictions on a small number of technologies while keeping other domains of trade accessible. Key technologies such as semiconductors, which are considered indispensable to the US’s competitive edge and national security, are protected by export restrictions to limit technology diffusion. Countries that can potentially leapfrog in these select industries to overtake American primacy risk facing economic pressure from the US.

Small open economies should approach collaboration with the US on worker-centric policies, the US Trade Representative’s official position on bilateral trade policy, that prioritize the growth of its middle class, protect industrial jobs that are being injured by global trade, promote labor rights, and, most importantly, security of supply chains. Philippines, for example, has pledged to work with the US to implement internationally recognized labor laws as part of their trade framework to collaborate on strengthening agricultural supply chains.

However, finding mutually beneficial domains will involve reckoning the realities of geopolitical risks.  Washington’s ambiguous friendshoring policies limit where sensitive, supply-chain- critical inputs, such as rare earth minerals, can be located: it all depends on who the US believes to be their ‘friend’. Vietnam, for example, received the coveted comprehensive strategic partnership, the highest bilateral diplomatic status for essentially being the enemy of its enemy.

Maintain WTO status quo

For decades, the World Trade Organization (WTO) afforded immeasurable economic benefits to small-open economies. The WTO played a significant role in the success of large economies such as Japan and China—two of the US’ biggest economic rivals in history

Washington is naturally a supporter of a WTO reform that limits the institution’s capacity to breed new economic rivals. Consequently, the Biden Administration continues to sustain the impasse that crippled the WTO’s dispute settlement mechanism. As the US continues to block appointments to the Appellate Body, the current WTO is unable to maintain an open, free, and non-discriminatory rules-based multilateral trading system that provides equitable judicial outcomes during trade disputes.

Small open economies should become champions of the WTO status quo as the existing dispute settlement will give them a fair fight against unilateral tariffs in lieu of market power that empowers effective retaliatory tariffs. Alternatively, they can engage earnestly in multilateral alternatives to supplant their lack of economic leverage with institutions that enable equitable negotiation.

The restoration of the WTO’s functionality must include reinstating the appellate court, resuming the Doha rounds of negotiation, and amending to include jurisdiction over national security-based trade sanctions. It is extremely unlikely the US will backtrack from their newly established agenda, but small-open economies must continue to urge for these changes as a trade and foreign policy priority.

Champion regionalism

Instead of relying on the WTO, Small-open economies can divert their commitmentto regional blocs and agreements that provide small-open economies with collective market power, greater leverage in negotiation, and a wider range of free trade agreements. The ASEAN, for example, has sustained strong year-on-year trade growth to allow better allocation of economic factors through trade creation for ASEAN Member States (AMS).

 
Beyond quantifiable benefits, prominent regional trade blocs such as the EU, Mercosur, ASEAN, and AfCFTA have internal dispute protocols in place to promote intra-trade stability. However, there are no iterations of any regional dispute mechanisms that can supersede the WTO’s institutionalized mandate to enact penalties. For example, ASEAN’s Treaty of Amity and Cooperation (TAC), although a legally binding instrument, lacks effective enforcement mechanisms as it is still just an agreement to dispute settlements exclusively by peaceful means. While there has been progress since the Bali Concord II in 2003 to improve “the existing ASEAN Dispute Settlement Mechanism to ensure expeditious and legally binding resolution of any economic disputes”, there are no signs of effective policy deliberation to determine TAC’s institutionalization process. Small open states owe far more attention and effort to the supplantation of WTO.

Establish high-level dialogue

Developing clear lines of communication will help mitigate trade tensions escalating towards protectionist policies, as they enable countries to share concerns and address misunderstandings.

US-led agreements such as the Indo-Pacific Economic Framework for Prosperity (IPEF) create high-level multilateral coordination on trade-related issues such as supply chain resiliency and outlines transnational industry practices. They also provide a platform to address tensions deriving from industrial policies, preventing unilateral response on trade disputes.

Even though the IPEF only provides non-binding initiatives and no opportunities for market access, the opportunity for open dialogue may still be worthwhile. Small open economies must recognize the IPEF and similar US-led initiatives for what they are: a containment strategy against Chinese economic coercion. These economies must decide the degree of their commitment based on their existing hedge vis-à-vis US-China competition.
Given the increasing prioritization of national security in trade policy, these strategies collectively enable small-open economies to safeguard their interests, balance geopolitical risks, and ensure sustained economic growth while navigating the emerging mercantilist landscape.

Max is a graduate of the Jackson School of International Relations at the University of Washington.
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