Needed: A New Global Trade System

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Needed: A New Global Trade System

Disrupting the old one was the easy part.

Needed: A New Global Trade System
Credit: The White House

Any jackass can kick down a barn, but it takes a village to raise one. It was easy to disrupt the world trade system that existed before Donald Trump entered the White House and COVID-19 hit. Now, before the global “village” has a chance to fashion a new system, one hopes after the U.S. elections, academics and policy analysts should consider what such a system might look like.

The disruptions brought about by the trade war are causing economic losses to both the U.S. and China. As described by Heather Long in the Washington Post, “U.S. economic growth slowed, business investment froze, and companies didn’t hire as many people. Across the nation, a lot of farmers went bankrupt, and the manufacturing and freight transportation sectors have hit lows not seen since the last recession. Trump’s actions amounted to one of the largest tax increases in years.”

A study by the Brookings Institution cited the following data in support of the overall thesis that the trade war led to “more pain than gain”: “A September 2019 study by Moody’s Analytics found that the trade war had already cost the U.S. economy nearly 300,000 jobs and an estimated 0.3% of real GDP. Other studies put the cost to U.S. GDP at about 0.7%. A 2019 report from Bloomberg Economics estimated that the trade war would cost the U.S. economy $316 billion by the end of 2020… U.S. companies primarily paid for U.S. tariffs, with the cost estimated at nearly $46 billion. …Trump’s unilateral tariffs on China diverted trade flows from China, causing the U.S. trade deficit with Europe, Mexico, Japan, South Korea, and Taiwan to increase as a result.” The Brookings report does not provide the same kind of data about the losses the trade war has inflicted on China; however, they too seem considerable.

In the next years, American businesses will be at a disadvantage because they will be increasingly shut out of the Chinese market, and they are likely to exert growing pressure on whoever is in the White House to work out a deal with China. A recent Fortune report spells out the reasons: “A billion prospering consumers cannot be forsaken by any business that hopes to remain globally competitive. In addition, few companies will want to remove China from their supply chains entirely. While trade tensions and the pandemic have shown many companies worldwide that they were too reliant on Chinese suppliers, Chinese companies often have manufacturing expertise that can’t be found elsewhere.” By any account, China is the world’s largest market for increasing numbers of products and services.

The move to decoupling is being extended to the internet. China continues to put up various barriers to prevent its citizens from accessing the web. Recently, the U.S. has also been moving, in effect, to promote “net nationalism,” seeking to curb Americans’ access to Chinese social media, such as TikTok and WeChat. These moves by both sides undermine the means of international communication, the free flow of information and of ideas. A major side effect is to make it easier for China to impose its increasingly authoritarian regime.

Where do we go from here once the election posturing is over? Given the economic facts, the worst course seems to be for the U.S. to extend the policies that the Trump Administration has often touted and sometimes followed: for the U.S. to increasingly withdraw from the world and seek to become self-sufficient. Trump campaigned on a promise to restore the U.S. industrial base by bringing back the manufacturing jobs that had moved overseas. He pressured American corporations to relocate their headquarters to the U.S. and bring home their investments; he also called on Americans to buy American products. He sought to pressure U.S. companies not to sell chips to Chinese companies or to use the equipment they produced. The pandemic gave a strong new push to these autarkic polices as the U.S. discovered the extent to which it was dependent on China for basic medical equipment and ingredients for medications.

The Wall Street Journal recently reported that, “[f]or decades, Chinese leaders embraced foreign investments and exports to power China’s economy. Now, with the world in recession and U.S.-China tensions deepening, President Xi Jinping is laying out a major initiative to accelerate China’s shift toward more reliance on its domestic economy.”

There is wide agreement that the costs of such autarkic polices for all nations are high. This does not mean that one should seek to embrace simplistic, globalist, free trade uber ales. We must drop the binary thinking of either-or and realize we shall need a three-pronged system. In some limited selected areas, there is room to increase self-sufficiency. In effect, these efforts never ceased. The U.S. and other nations have long protected their farmers from international competition to ensure food security. The U.S. is among many nations that have limited the exports of items whose overseas marketing may undermine national security. And even when the pandemic dies down, the U.S. should continue to ensure that it is better prepared to face a future pandemic. In general, though, a return to freer trade will greatly benefit the consumers of all of the nations involved, and using trade limitations for geopolitical purposes has rarely had the desired effects, especially when dealing with nations the size of China.

The second prong calls for the U.S. to lead many nations to form a freer trade zone. The Bush and Obama Administrations took a step in this direction when they worked to form the Trans-Pacific Partnership (TPP), a subsequent version of which now includes 11 nations (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) but not China. The Trump Administration withdrew from the original TPP, but has sometimes indicated support for an Indo-Pacific alliance. Heavy-handed Chinese intervention in Australia and border conflicts between India and China have led these nations to express interest in such an alliance. However, time and again, the strong appeal of the Chinese market and its capacity to make large investments abroad have persuaded these and other nations—including the EU—to try to maintain economic ties with China.

Economic considerations that favor freer trade among all nations, including China, may trump geopolitical considerations. That is, if the U.S. and its allies view China as out to become a global hegemon, to replace the U.S. as the only superpower, and to impose its own rules on the world order, global economic bifurcation is likely to persist. However, if there is a growing recognition that China is merely seeking to increase its role in its own sphere of influence and secure a flow of the raw materials and energy on which its survival depends, the way I see it, there will be much more opportunity for freer global trade.

In the past, China’s violations of intellectual property rights have been a major hurdle for freer trade. However, three factors should be considered in this context. One is that, in the past, when trade negotiations included a commitment by China to protect intellectual property, its government moved to make some of the called-for corrections. Another is that, as China is increasingly making its own technological breakthroughs, it may well become more interested in protecting these kinds of property rights. Lastly, the U.S. may join all the other major industrial nations, led by France, in using their intelligence services to help protect their businesses’ property rights, leveling the play field.

The third prong entails international collaboration among scientists who are working on finding medications to treat COVID-19 patients and creating vaccines. Chinese scientists published the genome of COVID-19 on an open platform, and scientists all over the world thanked them for taking this step. Jeremy Farrar, head of the Wellcome Trust in London, tweeted, “Potentially really important moment in global public health-must be celebrated, everyone involved in Wuhan, in China & beyond acknowledged, thanked & get all the credit.”  The U.S. and other nations should consider the suggestion of Dr. Joanne Lynne, who pointed out that we do not know which nation will be the first to come up with a viable vaccine. Hence, it would make sense for all nations involved to pool their resources to develop the vaccine and agree now to an equitable worldwide distribution of the first safe and effective vaccines.

In the wake of a crisis, nations tend to prepare for a future in which they face the same crisis that just hit them. After 9/11, the U.S. spent ten years giving very high priority to avoiding another major terrorist attack on the homeland. People all over the world are still screened whenever they fly. The U.S. and China may hence be inclined to prepare for the next pandemic. However, the next major crisis is already at hand, and it concerns the climate. Major collaboration is essential here because otherwise, whatever one nation gains, often at high cost to itself, can be lost if other nations neglect their role. Moreover, many of the policies that environmentalists favor have high political costs. Hence, as I see it, a major part of the climate crisis mitigation effort will have to come through carbon capture and sequestration, which impose few political costs. Developing this technology would greatly benefit from major international R&D collaboration. Finally, all sides should help with the introduction of solar power systems, rather than fighting to promote their own, because this technology has matured to a point where it could play a significant role in coping with climate change, and it could benefit many parts of the world that are sunny but lack other sources of energy.

In short, the next global economic system may be a mixture of: (a) industrial policy to reduce dependence on foreign powers in a crisis; (b) East-West collaboration on specific scientific developments, especially concerning Covid-19 and climate change; and (c) freer trade, either in an Indo-Pacific alliance or, best, in a system open many nations, including China.

Amitai Etzioni is a University Professor and professor of international affairs at The George Washington University. He is the author of Avoiding War with China. His latest book, Reclaiming Patriotism, was published by the University of Virginia Press in 2019 and is available for download without charge.