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Today, no government sees defending liberal trade as its first order of business. More urgent matters demand attention. But trade is no sideshow. If governments fail to shape a stronger trade system, and defend it to their voters, a reversal of globalisation is possible. That could end up causing more long-term economic damage than any other consequence of the coronavirus calamity.
The world’s leaders need to understand, first, why a permanent retreat from liberal trade could indeed happen. They next need to see just how dangerous such a development would be. Then, having belatedly grasped how much is at stake, they should repair and improve the order that risks coming apart — by realigning the politics of free trade, refurbishing the global trade architecture and strengthening the domestic response to globalisation and its discontents.
At the turn of this century, the economic consensus in favour of liberal trade had been fairly solid. In the time of Bill Clinton and Tony Blair, centre-left politicians subscribed to it as much as pro-business conservatives did. Over a period of decades, lower tariffs and lighter restrictions, together with technological progress in transportation and communications, drove a massive expansion in global trade volumes. From 2005 to 2014, for instance, world trade in goods nearly doubled, from about $10 trillion to $18.5 trillion.
Yet this expansion also ran alongside China’s rise as a new economic power, which some found disturbing in its own right. In the US, the domestic implications of a growing trade deficit with China were brutal. More broadly, manufacturing output in advanced economies shrank (as a share of the total, if not in absolute terms). Under the combined pressure of cheap imports and automation, manufacturing jobs disappeared.
This shift, in turn, gave rise to the view that the benefits of free trade had been exaggerated and its costs too long ignored. In one way, this was puzzling: Nobody had ever denied that liberal trade, like technological progress, causes economic disruption. Even so, prevailing opinion shifted from “We all believe in free trade” to “It’s complicated.”
Then came US President Donald Trump. Fixated on the idea that trade is a battle that the US was losing, he set about wrecking the system. Attesting to the wider shift in thinking, his political opponents criticised him only tepidly, if at all, for this new direction. The country’s immune system was compromised: American politics had lost the antibodies it needed to reject protectionism.
And that was before Covid-19. The pandemic caused critical shortages of essential equipment and materials, exposing the fragility of finely tuned, geographically extended supply chains. Suddenly liberal trade was not just a destroyer of jobs, but a killer as well, leaving countries bereft of life-saving supplies. The implication seemed clear: Rather than worshipping the false god of free trade, countries should be thinking more about safety and self-sufficiency.
It would be hard to overstate the damage this thinking might do if it tightens its grip on Western politics. Of late, the remaining support for liberal trade has been powered more by popular opinion than by expert consensus or political leadership. (Guided by mere common sense, people object to tariffs that raise prices and lower their standard of living.) The rigors of Covid-19 and its aftermath, especially if it involves persistently high unemployment, might change this, recruiting broader opinion to the anti-trade cause. The retreat from globalisation might then accelerate.
Downplaying some of the costs of liberal trade was wrong, but ignoring the benefits is certainly no smarter. Over the years, these have been enormous for rich and poor countries alike. They go far beyond the classical gains due to specialisation and economies of scale. Trade strengthens competition, which erodes monopoly profits while promoting innovation and efficiency. It spreads knowledge and capital. And it expands the variety of goods available — an effect that’s difficult to measure and often ignored, but which raises living standards greatly in its own right.
Recoiling against globalisation doesn’t just involve forgoing those benefits, serious as that would be. It also means incurring the costs of dismantling existing economic networks and scrapping the associated investments. It would pile another set of shocks on the stresses that economies already face. It would make a bad situation much worse.
Recognising this danger is the first step toward a political and intellectual realignment that restores the commitment to liberal trade. This restoration is essential, but by itself it won’t be enough.
The purpose of the World Trade Organisation, established in 1995, was to extend and underpin the liberal trading order. The US and its allies used its predecessor, the General Agreement on Tariffs and Trade, to superb effect from 1948 onward, lowering trade barriers and building a globally integrated economy through successive rounds of wide-ranging talks. But since the turn of the millennium, they’ve let the WTO fade into irrelevance.
The most recent round of multilateral negotiations is a case in point. After years of getting nowhere, it eventually collapsed altogether. Progress toward freer trade, such as it is, has moved to regional agreements such as the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — a second-best approach, because it lets barriers between insiders and outsiders persist. The WTO’s dispute-settlement mechanism, flawed to begin with, now stands crippled thanks to a US policy of aggressive non-cooperation. And just this week, it was reported that the organisation’s head, Roberto Azevedo, is stepping down before the end of his second term. In effect, the WTO no longer exists. It needs to be reinvented.
Of all the factors serving to undermine the WTO, the challenge posed by China might be the greatest. When the WTO’s members allowed China to join in 2001, the US and others were gambling. They believed that China was moving toward a market-based economic model, and that membership would sustain and accelerate that shift, to everybody’s advantage.
In part the bet came off, because China’s integration into the world economy has undoubtedly, on balance, benefited its trading partners as well as China itself. Its supply of cheap exports has materially lowered the cost of living in the US and other advanced economies, boosting real incomes for the great majority of households. In part, though, the gamble failed, because an increasingly self-confident China regards its non-Western economic model as not merely viable indefinitely, but better.
China is not a market economy in the sense envisaged back in 2001, and it evidently has no intention of becoming one. Its government retains a commanding role in the economy through a variety of direct and indirect channels. That’s a problem because the WTO was designed as a forum for cooperation among market-based economies; it lacks the rules and instruments to cope with Chinese characteristics.
Take subsidies, for instance. Subsidies granted by governments and “public bodies” fall under WTO disciplines. Unsubsidised firms can’t be expected to compete in international trade with producers receiving payments from their governments. WTO members are allowed to impose tariffs (called “countervailing duties”) on subsidised imports. But China’s government provides subsidies through channels that it doesn’t necessarily regard as “public bodies” — in the form of below-market interest rates on loans issued by state-owned banks, or cheap inputs from suppliers that might be part-owned or otherwise influenced by the state. The WTO’s rules don’t unambiguously forbid such practices.
China is far from unique in exploiting these and other grey areas in WTO understandings. But China’s sheer size, the extent of its explicit and implicit government direction and its evident determination to defend its methods as successful and legitimate parts of its development model do pose a uniquely threatening challenge to the liberal trading order.
Exasperation with the WTO’s impotence in the face of this challenge was building long before Trump took office in 2017 — but Trump and his advisers decided enough was enough and chose trade war as the answer. With so much at stake, this course of action was reckless from the outset. The coronavirus emergency adds to the risk, because it imperils worldwide economic growth.— Bloomberg.
Online Reporter