Unfolding trade war: The architecture

He might be the most vocal and damaging post-World War II US president for trade relations, but trade-related displeasure at the highest US policy-making level did not originate with Donald J. Trump. Richard M. Nixon's New Economic Policy of August 1971 first sought to level the post-World War II multilateral playing-field. Trump's administration seeks it more earnestly.

Behind the tariff sound-bites (discussed in July 26, 2018 Scopus piece), the European Union and Japan culminated their negotiations from April 2013 with an Economic Partnership Agreement (EPA) and Strategic Partnership Agreement (SPA) on July 17, 2018. Seeking to lift Japan's morale after the North Korean ballistic tests and China's South China Sea island-building exercises, their attention must now address Trump's tariffs and retaliatory impulses. Japan's deep US security dependence might now lock horns with an unfolding trade war.

All major US trading partners need adjustments since they are all US tariff targets: not just Japan, but also Canada, China, the European Union, and Mexico. All of them, except China and to some extent Mexico, benefited from US Cold War engagements through generous market accesses, often with US encouragement. After the United States began a piece-by-piece reconstruction of the multilateral trade network after the Cold War, evident in the 1995 emergence of the World Trade organisation (WTO), the 'competitive liberalism' policy approach it adopted either opened new cans of worms, or complicated old ones.

As free-riders of both the US market (seeking funds to develop or reconstruct after World War II), and security umbrella (protection against communism), many of these countries (again, with China and Mexico being excepted), challenged the United States economically even amid the Cold War, often on the back of an increasingly more dynamic economy. Canada became the top US trading partner, Japan the second, while also boasting the second largest global economy, and the European Union (EU) revolved around Germany, suddenly the second-largest exporting country.

As the Cold War eased (mid-1980s), then disappeared (1990s), the United States selected some for a free-trade partnership (Canada notably, Japan more loosely), leaving others as competitors (the European Union). Either overlooking some egregious lapses of other countries (reluctantly living with Canada's supply management, for example), or arm-twisting policy outcomes (of Japan), prevented confrontation (with the European Union slowly becoming the US trade villain). Not as much attention was paid China's low-wage trade export invasion, seemingly through the playing-field's back-door, as to Mexico's low-wage migrant exports (almost all to the United States), brazenly through the front door. WTO membership expansion, meanwhile, particularly inducting China, fed the US perception of isolation in its own 'body'.

If these did not themselves stoke a post-Cold War policy-making fire, 9/11 resurrected Cold War-type security considerations, and fettering trade retaliation took the world to another bringing with it the Great Recession of 2008-11. Unilateral actions/voices robustly challenged multilateral rules. Trump's tariffs can institutionalise them against enfeebled multilateralism.

Far looser regional arrangements than those we know seem set to rise from this flux. Peter Katzenstein's 2005 book, A World of Regions: Asia and Europe in the American Imperium captured it in its formative stage. All three NAFTA (North American Free Trade Agreement) partners, for instance, have sought European deals: Canada's 2016 Comprehensive Economic and Trade Partnership began in May 2009; Mexico's April 2018 agreement, in principle, further liberalised trade than the free-trade agreement of 2000; and the aborted US-Europe Transatlantic Trade and Investment Partnership (TTIP), from November 2011. The July 25, 2018 Trump-Juncker ceasefire, seeking merely to return to the pre-Trump status quo rather than break new ground, symbolises this wave.    

These confirm internal NAFTA disagreements, with asymmetries, immigration, and imbalances widening the gulf, while Europe's challenge of the United States in Latin America, vigorously sought from the 1997 Rio Summit, came to naught, give or take the asymmetrical Central American associational agreements to show.

Begun in Latin Americas, US 'competitive liberalism' diffused to an explosive Asia, but could do only what was done during the Cold War: open proportionately more US markets than the United States opening markets elsewhere, much to the benefit of free-riders, like China. Though the 2016 Trans-Pacific Partnership (TPP) originated with Brunei, New Zealand, and Singapore forging a strategic partnership with Chile in 2005, it attracted Canada, Mexico, Peru, and the United States on one side, and Australia, Japan, Malaysia, and Vietnam, on the other, by 2008, before transforming into a US vehicle. Corralling an expansive China became the clarion call. After Trump's 2017 TPP exit, the remaining 11 members softened up on China.

Both TPP-11 and Europe-Japan EPA/SPA stand out for prioritising how trade life could proceed without the United States. As such, they serve as tips of a tariff iceberg without any foresighted US leadership, multilaterally or selectively through 'competitive liberalism'.

Whereas one Donald played the signature tune of this unfolding battlefront (Trump), another Donald across the Atlantic, as President of the European Council (Tusk), proudly beams at what the 600-million-strong Japan-EU market would do: boost European farm exports, mostly dairy products and wine, after a sluggish few years, and Japanese automobiles as the US market pulls shutters down. The Europe-Japan EPA/SPA seeks wholesale tariff reductions, an outcome neither side fully embraced before. Trump's arrival is breeding some restructuration.

China's European turn only means a deliberately wider market-access for European exporters than for their US counterparts, given China's tendency to punish harder where and when it has been hit forcefully. The immediate future could produce the much anticipated, but laboriously avoided trading-bloc rivalry of the 1970s and 1980s between the United States, West Europe, and the Far-east, only this time Japan finds an independent China alongside on the eastern Pacific rim. As the tariff battle-cry bugler, Trump has gone beyond his predecessors: their threats produced cooperation, his retaliation. His may be the game-changing difference.

The EU star is not necessarily shining brighter for no reason: this year has seen the most promising growth-rate in that part of the world in quite a while; and though many problems remain, particularly persistently low growth-rates, the psychological effects of the Japan-EU deals could generate windfall market consequences.

US alarm bells may resonate in Great Britain. Whereas Trump can put a punch behind his protectionist pronouncements, at least for now, Britain has been caught flat-footed: it is unlikely to play more than a secondary role to the European Union should any in a string of other countries (from Australia, Canada, and New Zealand to India, Indonesia, Latin countries, Malaysia, and South Korea, among others), seek European markets, investors, and partners.

For countries like Bangladesh, the tight global market does not immediately threaten its prized ready-made garment (RMG) exports, but without entering free-trade compacts and diversifying its exporting industrial-base, like other countries, it can be swept in this whirlwind. Each must be well-dressed to appeal, carry a Plan B for a rainy day, and get into the habit of signing free-trade deals.

Dr. Imtiaz A. Hussain is Professor & Head of the newly-built Department of Global Studies & Governance at Independent University, Bangladesh.

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