The future of the global trading system

Muhammad Mahmood   | Published: June 01, 2019 21:30:28 | Updated: June 10, 2019 21:56:56

Since assuming office, President Trump has taken an increasingly strong protectionist stance on trade which has created a significant amount of uncertainty with his arbitrary unilateralist imposition of tariffs and continuing threats of further escalation of tariff measures along with determined efforts to turn the WTO Dispute adjudication mechanism dysfunctional. His actions are contributing to shifting the current multilateral trading system increasingly towards bilateral trading arrangements.

However, the current trend towards a more protectionist trade policy can be traced back to the Bush and Obama administrations with Buy America Act favouring US-made goods over imported goods in public purchases. This was clearly designed as a stimulus package in the wake of 2007-08 Global Financial Crisis. President Obama in particular shared and also articulated many misgivings about the WTO (World Trade Organisation). Trump's ascent to power has made  just a much bigger shift in that direction.  His Trade Representative Robert Lighthizer has asked the WTO to "shape up''  or else -,a no uncertain threat to leave the organisation. Also, many in the US Congress share Trump's list of grievances  against the WTO.

Since the end of World War II, a global economic system gradually emerged through a series of negotiations held over five decades among most of the world's trading nations. The result was the establishment of the WTO in 1995. The foundation of the global trading system under the auspices of the WTO is based on rules. These rules govern the conduct of trade between nations. These rules are designed to protect against unilateral actions or unfair trading practices by countries which harm the economic welfare of other trading nations. This rules-based multilateral trading system intends to provide a stable, predictable, and internationally recognised codes of conduct to be adhered to by all trading nations equally.

Despite continuous derision of the WTO by Trump and his economic advisers, it is the only multilateral institution that continues to provide the global framework for trade taking place on the general principles of non-discrimination, market access and others. No wonder its membership has grown from the original 23 signatories of GATT (General Agreement on Tariffs and Trade) in 1947 to 128 in 1995 when the WTO was established and to 164 today with more than 20 more countries waiting to join up. Though very harsh terms of accession were imposed on China in 2001, yet China has proved to be an outstanding success story of the benefits of WTO membership. It is not only China but also many other developing countries like Bangladesh enormously benefitted from WTO membership. In many ways the WTO now appears to be the victim of its own success.

The US and many major trading nations, including the EU, consider that the WTO needs reforms on a number of issues relating to rules, dispute settlement mechanism, intellectual property transfer including its approach to trade and development and many other issues. While it is true the WTO must adjust its rules and institutional framework with the progression of time to keep it relevant and meaningful, countries like the US is now pursuing a politically motivated tirade against the WTO to reengineer China's economic and political system.

President Trump continues to be very unhappy with the US trade deficit, in particular with China and other major trading partners like the EU. He or his economic advisers never cited any coherent economic arguments why the trade deficit remains a serious economic concern for the US. Instead Trump unilaterally imposed massive tariffs on much imports on national security grounds, not on economic grounds. He even threatened to slap taxes on US companies investing overseas (read China). He has targeted not only imports for special treatment but also the outflow of investment.

The US is the most dominant player in the global capital market and now accounts for 18 per cent of global FDI (foreign direct investment). Trump's restrictions on the outflow of capital will have serious consequences on the global capital market. Trade policies are designed keeping in view corporate interests behind closed doors. In this instance it is US import competing with US corporate interests that appears to have won the battle and export-oriented corporates will have to bear the costs of adjustment arising from Trump's protectionist trade policy.

The US is the largest economy in the world accounting for 24 per cent of global GDP (gross domestic product) but accounts for only 11 per cent of global trade volume. This indicates the US is relatively a quite closed economy, yet it holds the single largest share of global trade and also FDI. As such the US turning more protectionist will have both short-run and long-run consequences for the global economy. Worse even, many countries might impose retaliatory tariffs and take other protectionist measures precipitating a trade war. Both China and the EU have already hinted at taking retaliatory measures against Trump's protectionist measures. On the contrary, countries like Italy, Poland and Hungary have decided to follow Trump's trade rule book. It is likely that some other countries will also flout global rules and defy global institutions undergirding the global trading system simply because the US itself has abandoned them. Discontinuity of such a long-standing policy will only engender uncertainty for all trading nations. Uncertainty makes investment more risky and will lead to less investment, therefore reduced growth.

The WTO remains the principal target of President Trump's ire for all the economic woes of his country. However, the origins of US disillusion with multilateral institutions predate the Trump administration. But now with the rise of China that disillusionment has snowballed into direct hostility to these organisations except the World Bank and the International Monetary Fund (IMF), the two organisations practically run by the US State Department in conjunction with the US Department of Treasury. The relative decline of the American economy is causing it to look more inward (protected domestic market) as other policy options are becoming increasingly limited to keep it to continue to remain the only global economic hegemon. This is reminiscent of the onset of the relative decline  of the British empire in the 1880s when the rise of  other powers caused Britain to increasingly focus on the empire to trade (protected market) than competing in the global market.

The global financial crisis (GFC) of 2007-08 played a catalytic role in transforming the global economic and financial architecture. Its after effect is clearly visible in the slowdown of the global economy. World trade grew at a faster rate than global GDP over the 1990s to 2007 and thereafter trade has been expanding at slower rate than global output and continues to be so till now. No wonder many no longer subscribe to the notion trade as an engine of growth can catapult the economy out of the crisis faced by many advanced economies including the US. In fact President Trump is blaming trade for all the economic woes of his country, not any other factors.

But still the US remains the most dominant economy in the world and all other leading economies have close trade and other economic and international cooperation relationship with the US. Therefore, a WTO without the US will be an ineffective institution. But to reform the current multilateral trading system will be a long haul if one takes into account how the Doha round of trade negotiation ended up. More precisely, the transition from the  GATT to the global rules-based open multilateral trading under the auspices of the WTO took almost five decades.

Meanwhile, as the post-war rules-based multilateral open trading system is slowly collapsing, this will most likely give rise to economic blocs and that would imply a fundamental change in the economic environment that we live in now. This also signals to a world of multiple economic powers with more than one major currency giving effect to international transactions. All things considered as they stand now, the future of rules-based open multilateral trading system does not look very optimistic, indeed it has changed to such an extent that its future can not be guaranteed.

Muhammad Mahmood is an independent economic and political analyst.






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