PM Wong on 3 implications US tariffs have on global trading system

SINGAPORE – The sweeping

tariffs imposed by US President Donald Trump

on countries around the world have consequences that extend far beyond economics, even as business and consumer confidence has already taken a hit.

Prime Minister Lawrence Wong told Parliament on April 8 that while the tariffs themselves are already damaging, this new wave of protectionism is unpredictable and unstable, with businesses likely to hold back on investments.

“Protectionism is already bad, unstable protectionism is even worse,” he said.

“All this creates an environment of deep uncertainty – one that could tip both the US and global economy into recession,” he added.

PM Wong said the tariffs have three wider implications for the global trading system and the world economy.

1. ‘Reciprocal’ tariffs a fundamental rejection of WTO rules

The US’ new tariff regime is a complete repudiation of the Most Favoured Nation (MFN) principle, one of the cornerstones of the World Trade Organisation’s (WTO) multilateral trading system, said PM Wong.

Laying out why the MFN is important, he said the principle might sound like it gives certain nations special privileges, but it is in fact the opposite – every member must treat all other members equally.

In other words, if a country extends more favourable terms or imposes additional restrictions on one trading partner, it must do the same to all other WTO members, PM Wong stated.

“(The tariffs) open the door to selective country-by-country trade relationships, based on unilateral preferences,” he said.

While he noted that there are some carve-outs and exceptions to the MFN rule, for example to allow free trade agreements, the MFN principle has long been the bedrock of the multilateral trading system, PM Wong said.

“It ensures a level playing field, prevents discrimination, and enables countries – big or small – to compete fairly in global markets,” he added. “This has helped to liberalise trade amongst more than a hundred WTO members, each with different economic, and political and social concerns.”

If other countries adopt the same approach as the US, the rules-based trading system will unravel, warned PM Wong.

Such an unravelling will spell trouble for all nations, especially smaller countries like Singapore, which will face more pressures, he said.

“Small countries have limited bargaining power in one-on-one bilateral negotiations, so the major powers will dictate the terms, and we risk being marginalised and sidelined,” he said.

2. Likelihood of a full-blown global trade war is growing

This round of tariff increases by the US may just be the beginning of more increases to come globally, PM Wong said, adding: “We’ve seen this play out before.”

In 1930, when the US enacted sweeping tariff increases through the Smoot-Hawley Tariff Act, many countries protested, and a number of them retaliated with their own trade restrictions and tariffs. This deepened and extended the Great Depression, he noted.

Today’s risks may be greater in some ways, PM Wong then said.

The new US tariffs, if fully enacted, are higher than the ones in Smoot-Hawley, he noted. Trade today is also a much bigger part of the American and global economy compared to the 1930s, with supply chains being more interconnected than before, he added.

Any disruption to present-day trade flows will therefore have wider knock-on effects on the world, he said.

PM Wong said that some think the new tariffs are a negotiation tool by the US to extract concessions in other areas, mirroring what US President Richard Nixon did in 1971.

The then US President had slapped a 10 per cent surcharge on imports to pressure Germany and Japan to devalue their currencies, and when that was accomplished, the tariffs came off.

While there is a brief window for countries to negotiate and get some reprieve from the US before their higher tariff rates take effect, and there is possibility for some of the rates to be lowered, PM Wong said people have to be realistic.

“Once trade barriers go up, they tend to stay up. Rolling them back is much harder, even after the original rationale no longer applies,” he said.

“Even if some partial accommodations are eventually worked out, the uncertainty generated by such a drastic move will dampen global confidence. It will be very hard to restore the previous status quo.”

In particular, it does not look like the 10 per cent universal rate is open for negotiation, he added, and that this looked like the fixed minimum tariff, regardless of a country’s trade balance or existing trade arrangements with the US.

PM Wong also flagged the US-China relationship as a major concern.

The US views China as a strategic competitor that must be dealt with now, while China has said it is ready for a “tariff war, a trade war, or any other type of war”, he noted.

Neither side looks to be backing down for now, and the latest development is the US has threatened an additional 50 per cent tariff on China.

PM Wong noted that compared to the past, the two powers now have fewer channels for dialogue, which can serve as guard rails to manage the relationship.

“If the disputes escalate and destabilise US-China relations, the consequences for the world would be disastrous,” he said.

3. Rising ‘me first’, win-lose mindset in global economy 

Beyond the economic impact, the US tariffs look to be a harbinger of greater protectionism, noted PM Wong.

“More and more, countries are turning away from win-win cooperation and deeper integration,” he said.

“Instead, we see a rising ‘me first’, win-lose mindset – where it’s every country for itself. Some are even prepared to use aggressive or coercive means to get what they want at the expense of others.”

Meanwhile, global institutions are getting weaker, and longstanding norms of cooperation are breaking down, he said.

While it is too early to tell how the sharp, negative reactions in global stock markets over the past few days will spill into the real economy, the downside risks are clearly rising, he said.

“What’s troubling is not just the tariffs themselves – which are already damaging – but the fact that this new wave of protectionism is unpredictable and unstable,” he said.

The result is business and consumer confidence has been hit, and international trade and investments will suffer, he said.

PM Wong said that in the wake of the tariff announcement, Singapore’s economic agencies have been in touch with several multinational enterprises and local businesses.

The sense they have is that even those who are not directly affected by the tariffs are worried about weakening demand from their customers, and some firms have put new projects on hold while they assess the full implications of the tariffs.

PM Wong said Singaporeans must be mentally prepared, as the predictable and rules-based order they once knew is fading.

“The new era will be more volatile, with more frequent and unpredictable shocks,” he said.