Page 11 - July-August 2018 GSE Report Flip Book

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normalization, while increasing the likelihood of global financial instability. The resulting systemic cracks could jeopardize the entire rules-based multilateral trading system at a time when there is no good alternative.
Many economists hesitate on precisely what lies ahead. For example, one group, while recognizing that the current tensions increase the risk of a policy accident or mistake, views them as part of a process of posturing and negotiation. ... Another group, citing historical precedent, warns that beggar-thy-neighbor trade measures can quickly spiral out of control, taking a heavy toll on living standards....
But the comparison to Reagan suggests that there may be other, broader implications. By forcing the Soviet Union into a military spending race that only the US could win (at the cost of rising debt and a higher risk of conflict), Reagan accelerated the demise of what he called the “evil empire.”
It was a bold and risky strategy that ultimately changed the political map of Europe. Even before the Soviet Union’s demise, resulting in 15 new countries, its European “empire” had collapsed. The Berlin Wall had fallen, bringing German reunification, and Yugoslavia was disintegrating. Soon after, Czechoslovakia’s “Velvet Divorce” gave rise to the Czech Republic and Slovakia, which – together with other Central and Eastern European countries (including Hungary and Poland) – then anchored themselves firmly in the West by joining NATO and the EU.
Today, a trade war would damage all economies. But the US – which is relatively less dependent on foreign markets, possesses deeper domestic markets, and is generally more economically resilient than other countries–would do better than most others in a contracting world economy. Already, Chinese financial markets have suffered, while those in the US have held their own.
Game theory suggests that rational actors, recognizing how damaging a trade war would be for them, would see the merit of abandoning a retaliatory strategy, and instead accede to many US demands. All of this could leave the US more able and willing to halt the multi- year erosion of its global economic influence and standing.
... It is too early to say whether a “Reagan moment” on trade will play out and deliver more than a fairer system. After all, such an approach would require careful strategic design and skillful implementation – not to mention plenty of good luck – guided by a nuanced understanding of economic, political, and geopolitical factors. That is why we must move
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