In the wake of the announcement on steel and aluminum tariffs, and complaints against China’s thefts of intellectual property, the trade discussion emphasizes a U.S. administration perceived as alarmingly protectionist; and the risks of a damaging trade war between the U.S. and China, and perhaps globally.
But the real problem is much broader: a multilateral trade system is seen as moribund, unable to meaningfully reduce barriers and effectively adjudicate disputes. And there is growing unease about the overall state of economic globalization.
Related questions include: Is the U.S. undermining the WTO, and if so what are the implications? What are the consequences of the US withdrawal from the TPP, and possible withdrawal from NAFTA?
All of these items are merely symptoms of four fundamental underlying issues, which have been slowly coming to a head for years and in some cases decades:
1. The existing trade architecture is deeply flawed. Our current trade system is incapable of addressing a range of practices, which have increasingly come to shape the landscape of trade since roughly the 1980s. With tariffs and quotas reduced or eliminated, the most significant barriers to trade are now embedded in opaque regulatory and industrial regimes, and industrial policies that violate conventional free trade but that are not reached by current trade rules. Discrimination against foreign products and services takes place behind the border, often via un-codified “understandings” that are interwoven into informal public-private relationships. This could include, for example, unwritten rules that manufacturers source inputs from domestic suppliers only, or that indigenous technologies will be preferred over foreign alternatives.
Another issue—currency manipulation—can decisively tilt the playing field of trade, yet it sits entirely outside the trade architecture. And evasion of trade obligations has been elevated to an art form by many countries, but trade institutions have proven incapable of adequate enforcement.
For countries so inclined, there has been ample latitude to game the rules of international trade, and disadvantage trade partners. Tactics such as dragging out losing dispute settlement cases long enough to allow domestic companies to gain a dominant market position, or simply using trans-shipment through third countries to evade legitimately applied anti-dumping or countervailing duty measures, have all achieved their desired aims.
The result has been a trade system that has failed to produce mutually beneficial trade –in perception and often in reality. This has inevitably eroded confidence in trade and given rise to the populist backlash being experienced in the U.S. and elsewhere. The fact that these sentiments found political expression in the 2016 U.S. presidential election – and in the trade policy of the current administration—should not come as a surprise. The U.S. administration is not the cause of dysfunction in the trade system; it is a symptom.
2. The United States and its trading partners have failed to make a deliberate and orderly transition away from the unique and unsustainable role the US played in the immediate post-WWII era. U.S. unilateral market-opening was initially undertaken almost as a developmental program to help devastated allies and former adversaries rebuild. Given the circumstances, this was not an unreasonable approach: The U.S. accounted for 50 percent of global GDP and enjoyed unrivaled economic superiority, while Europe was in ruins and Japan was under military occupation.
In the years that followed, geostrategic considerations were given a place of prominence in trade policy, and trade agreements were negotiated as a means to signal commitment or win influence with partner countries—while domestic U.S. economic considerations often took a back seat. Although the world has changed immeasurably, the vestiges of this initial role have remained in US trade policy.
3. There has been an inability or an unwillingness to comprehend—and effectively manage—the implications of China’s industrial strategy and its integration into the global trade system. Virtually all of the assumptions made at the time of China’s WTO entry have proven to be incorrect. The U.S. and much of the West eagerly sought China’s integration into the multilateral trade system in the 1990s, believing that this would inevitably cause China to develop along the lines of the free-market Washington Consensus principles, ultimately becoming a “responsible stakeholder” in the U.S.-led global system.
In reality, China had pursued a state-directed form of capitalism which provides advantages to domestic companies over foreign, combined with a quasi-mercantilist trade regime which conditions market access on technology transfers and local production and partnerships, along with a host of other predatory practices. Large state-owned-enterprises impact global markets, but are often more responsive to central government policy directives rather than market considerations. And recent scholarship indicates that labor market dislocations in the U.S. caused by China’s state-led export surge have been far more detrimental than previously understood.
What is needed—but still lacking—is a clear-cut strategy on how to manage China’s ambitions in a way that respects China’s legitimate development objectives, but also respects a rules-based trade system and the needs and interests of China’s trade and investment partners. A pragmatic, cooperative, and reality-based modus vivendi is required, and could be possible—but only with greater realism on the part of both countries.
4. There is no common understanding on how to assess and rationally debate the costs and benefits of trade, or even define a national interest.
We lack broad agreement on even basic questions such as: Are trade deficits critical or irrelevant? To what extent are labor market dislocations being driven by trade and to what extent by other factors such as technology and automation? To the extent labor dislocations are being driven by trade, have we fully accounted for the social as well as economic costs, and appropriately factored these into trade policy? To the extent that we have national policies to protect worker rights (minimum wage laws, rights to unionize, etc.) how do we reconcile these with “free” trade—or does trade need to be partly conditioned on social norms? In an era of truly global corporations, are the interests of an “American” company necessarily synonymous with the national interests of the U.S. and its citizens? And if not, why do these large global corporations enjoy such preponderant influence over the development of U.S. trade policy?
For the most part, these issues have not been adequately acknowledged, let along satisfactorily addressed. While the precise path forward is open to debate, it should take into account at least some of the following points:
Move beyond the use of loaded and ill-defined words such as “free,” “fair,” or “reciprocal” trade. They are frequently misunderstood, easily manipulated, and often used to justify almost anything. The focus should instead be on establishing a framework, which engenders mutually beneficial trade, as understood by the individual trading partners.
More “free trade” is not always and automatically the best answer. Greater emphasis should be placed on ensuring that trade is mutually beneficial, and capable of achieving and maintaining the level of integration envisioned.
It is no longer 1948—the trade architecture needs to catch-up. The existing trade system was predicated on countries more or less following free trade, free markets, and a hands-off government approach to the marketplace. In practice, many countries such as Japan and South Korea, never followed that model. China’s rise, built on a model of state-directed capitalism and quasi-mercantilist trade practices, was hidden in plain view, but widely denied. The current trade skirmishes reveal beyond question how ill-equipped the existing system is to adjudicate the inevitable conflicts that will arise between these very different systems.
Navigating this fraught path forward will require the same level of astute leadership that conceived and established the modern trade architecture in the aftermath of the Second World War. Unfortunately, we seem stuck in a counterproductive cycle of denial alternating with tit-for-tat retaliation.
But it doesn’t necessarily have to be this way. Escalating trade tensions have a tendency to focus the mind and create a sense of urgency that can otherwise be lacking from staid trade deliberations. As we edge closer to the brink, the pressure of the moment might finally compel long overdue changes to our underlying assumptions about trade and the manner in which we reconcile conflicts between different economic and governance models.