Trump’s tariff thunderbolt strikes a world with proven resilience 

The WTO may be weakened, but a pragmatic resistance to protectionism among other nations could save world trade 

 Donald Trump’s disdain for the WTO and the system it represents are dramatic, but the US’s attachment to it was always somewhat transactional .

 It is tempting to see Donald Trump and his wrecking policies on trade as a destructive thunderbolt from a clear blue sky. Certainly many of his domestic policies, even compared with his first term, have taken a sharper and more definitive turn towards the extreme. 

 In the case of trade and globalisation, however, there is perhaps a little more continuity, not just with his first time in office but with previous US administrations. Regardless of whether it was actually reflected in broad US public opinion, there were clear strands of thought in US politics which had already begun to treat trade deals and often trade itself as toxic. 

 Trump’s tariffs are the most extraordinary act of far-reaching protectionism since at least the Great Depression, but there has been a latent inclination in US politics towards blaming trade for everything that has gone wrong with the US economy and society.  The effect of Trump on the global trading system and particularly multilateral institutions like the World Trade Organization is likely to be profound. The US was instrumental in setting up that system and was traditionally one of its most active users. Its departure from rule-setting, and even more the direct effect of its tariffs and other interventions on world trade, are the system’s biggest test since the Depression.

There are, however, several causes for optimism that Trump’s measures will not prove anything like as destructive as the high US tariffs of the early 1930s which set off a spiral of protectionism. 

Firstly, no other major economy, including the US’s great commercial rival China, has the same huge political aversion to globalisation. Unlike the 1930s, other economic policy institutions, particularly central banks, have tools to cushion the impact of a trade shock and prevent it from deepening a global recession. And the lesson of the 35 years since the post-cold war wave of globalisation took off is that actual trade — not just cross-border movement of goods, but also of services, foreign direct investment, capital, people and data — has proved resilient to a whole variety of shocks. 

 While Trump’s disdain for the WTO and the system it represents are dramatic, it also remains the case that the US’s attachment to it was always somewhat transactional. When the WTO was created in 1995 out of the more informal General Agreement on Tariffs and Trade (Gatt), there was suspicion in Washington right from the beginning that it was creating a system of supranational law which would reduce the US’s sovereignty.  

 In particular, although the US was an active user of the WTO’s dispute resolution system and won many cases, there was resentment particularly on Capitol Hill over rulings that seemed to interfere with the US’s right to tax and its ability to deal with unfair trade practices as it saw fit. Once the negotiating function of the WTO seized up in the 2000s — it has never completed a broad and deep multilateral agreement — the US became increasingly disillusioned. 

 It was Trump’s first administration that froze the dispute resolution system by refusing to approve new judges. But his successor Joe Biden thereafter continued the same policy, his administration insisting that it would be willing to unfreeze the mechanism only if the rest of the WTO’s membership would agree to changes that other countries said it never properly got around to articulating. 

 Today, the WTO still struggles to conclude large-scale binding agreements, even among a subset of membership — in part due to India’s obstructionism, driven by its own institutional grievances and political calculus. 

Still, a coalition including the EU, China and Japan has created a workaround dispute mechanism to keep things moving. The same kind of pragmatism might well save global trade itself as well as its formal mechanisms of governance. Doomsters have been talking for a long time about the global trading system splitting into geopolitical blocs, perhaps two centred on the US and China or three if there is also a grouping led by the EU. There has certainly been some movement in that direction, according to studies by the WTO and the IMF. 

 The first Trump administration put hefty tariffs on China, which certainly diminished bilateral trade between the two. But the IMF has also talked about the emergence of “connector countries”, especially emerging markets such as Vietnam and Mexico, which managed to trade with both the US and China. 

 The Biden administration made more subtle and targeted attempts to pull other economies, particularly its foreign policy allies, out of China’s economic and technological orbit, especially in areas like electric vehicles. But even its supposed close allies such as the EU preferred to operate in both the US and Chinese orbits. 

The Trump administration’s attempts to force countries to cut China off as the price of reducing threatened tariffs is similarly unlikely to work. The threat from Trump to world trade is undoubtedly the greatest since the second world war. But assuming that the US’s tariff pathology is also infecting the rest of the world looks like a mistake.

Slowbalisation - Economist article on international trade from 1st Trump term:

 

The steam has gone out of globalisation Jan 24th 2019 

NB Some of the material is already out of date; we have had Covid since – but analysis is excellent and trends are clear:

When America took a protectionist turn two years ago, it provoked dark warnings about the miseries of the 1930s. Today those ominous predictions look misplaced. Yes, China is slowing. And, yes, Western firms exposed to China, such as Apple, have been clobbered. But in 2018 global growth was decent, unemployment fell and profits rose. In November President Donald Trump signed a trade pact with Mexico and Canada. If talks over the next month lead to a deal with Xi Jinping, relieved markets will conclude that the trade war is about political theatre and squeezing a few concessions from China, not detonating global commerce.

Such complacency is mistaken. Today’s trade tensions are compounding a shift that has been under way since the financial crisis in 2008-09. As we explain, cross-border investment, trade, bank loans and supply chains have all been shrinking or stagnating relative to world GDP (see Briefing). Globalisation has given way to a new era of sluggishness. Adapting a term coined by a Dutch writer, we call it “slowbalisation”.

The golden age of globalisation, in 1990-2010, was something to behold. Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalised. International activity went gangbusters, as firms set up around the world, investors roamed and consumers shopped in supermarkets with enough choice to impress Phileas Fogg.

Globalisation has slowed from light speed to a snail’s pace in the past decade for several reasons. The cost of moving goods has stopped falling. Multinational firms have found that global sprawl burns money and that local rivals often eat them alive. Activity is shifting towards services, which are harder to sell across borders: scissors can be exported in 20ft-containers, hair stylists cannot. And Chinese manufacturing has become more self-reliant, so needs to import fewer parts.

This is the fragile backdrop to Mr Trump’s trade war. Tariffs tend to get the most attention. If America ratchets up duties on China in March, as it has threatened, the average tariff rate on all American imports will rise to 3.4%, its highest for 40 years. (Most firms plan to pass the cost on to customers.) Less glaring, but just as pernicious, is that rules of commerce are being rewritten around the world. The principle that investors and firms should be treated equally regardless of their nationality is being ditched.

Evidence for this is everywhere. Geopolitical rivalry is gripping the tech industry, which accounts for about 20% of world stockmarkets. Rules on privacy, data and espionage are splintering. Tax systems are being bent to patriotic ends—in America to prod firms to repatriate capital, in Europe to target Silicon Valley. America and the EU have new regimes for vetting foreign investment, while China, despite its bluster, has no intention of giving foreign firms a level playing-field. America has weaponised the power it gets from running the world’s dollar-payments system, to punish foreigners such as Huawei. Even humdrum areas such as accounting and antitrust are fragmenting.

Trade is suffering as firms use up the inventories they had stocked in anticipation of higher tariffs. Expect more of this in 2019. But what really matters is firms’ long-term investment plans, as they begin to lower their exposure to countries and industries that carry high geopolitical risk or face unstable rules. There are now signs that an adjustment is beginning. Chinese investment into Europe and America fell by 73% in 2018. The global value of cross-border investment by multinational companies sank by about 20% in 2018.

The new world will work differently. Slowbalisation will lead to deeper links within regional blocs. Supply chains in North America, Europe and Asia are sourcing more from closer to home. In Asia and Europe most trade is already intra-regional, and the share has risen since 2011. Asian firms made more foreign sales within Asia than in America in 2017. As global rules decay, a fluid patchwork of regional deals and spheres of influence is asserting control over trade and investment. The European Union is stamping its authority on banking, tech and foreign investment, for example. China hopes to agree on a regional trade deal this year, even as its tech firms expand across Asia. Companies have $30trn of cross-border investment in the ground, some of which may need to be shifted, sold or shut.

Fortunately, this need not be a disaster for living standards. Continental-sized markets are large enough to prosper. Some 1.2bn people have been lifted out of extreme poverty since 1990, and there is no reason to think that the proportion of paupers will rise again. Western consumers will continue to reap large net benefits from trade. In some cases, deeper integration will take place at a regional level than could have happened at a global one.

Yet slowbalisation has two big disadvantages. First, it creates new difficulties. In 1990-2010 most emerging countries were able to close some of the gap with developed ones. Now more will struggle to trade their way to riches. And there is a tension between a more regional trading pattern and a global financial system in which Wall Street and the Federal Reserve set the pulse for markets everywhere. Most countries’ interest rates will still be affected by America’s even as their trade patterns become less linked to it, leading to financial turbulence. The Fed is less likely to rescue foreigners by acting as a global lender of last resort, as it did a decade ago.

Second, slowbalisation will not fix the problems that globalisation created. Automation means there will be no renaissance of blue-collar jobs in the West. Firms will hire unskilled workers in the cheapest places in each region. Climate change, migration and tax-dodging will be even harder to solve without global co-operation. And far from moderating and containing China, slowbalisation will help it secure regional hegemony yet faster.

Globalisation made the world a better place for almost everyone. But too little was done to mitigate its costs. The integrated world’s neglected problems have now grown in the eyes of the public to the point where the benefits of the global order are easily forgotten. Yet the solution on offer is not really a fix at all. Slowbalisation will be meaner and less stable than its predecessor. In the end it will only feed the discontent.

This article appeared in the Leaders section of the print edition under the headline "Slowbalisation"