The global economy today is dominated by three major players – China, the EU, and the US – with roughly equal trading volumes and limited incentive to fight for the rules-based global trading system. With cooperation unlikely, the world should prepare itself for the erosion of the World Trade Organization.
BRUSSELS – Free trade seems to have few supporters these days. Though actual trade volumes are recovering from the post-crisis recession and drop in commodity prices, “globalization” has become increasingly contentious, as exemplified by the election of US President Donald Trump on the back of a promise to rip up international agreements and get tough on trade partners. What does this mean for the future of the rules-based trading system?
The Year Ahead 2018
The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.
Order now
Some 60 years ago, when the current rules-based global trading system was conceived, the United States was the world’s sole economic “hyperpower,” possessing unquestioned dominance in the day’s most advanced manufacturing industries. With enough power to impose rules, and enough dominance to be able to count on accruing the largest share of the benefits, it could – and did – perform the role of “benevolent hegemon.”
As Japan and Europe recovered from World War II – with the latter getting an added boost from economic integration – America’s lead began to dwindle, and by the 1970s and 1980s, the US was sharing power over the world’s trade agenda with Europe. Nonetheless, because the US and Europe share so many common interests, they generally adhered to a cooperative approach.
It was not until imports began to overwhelm a growing number of industries in the US, fueling the emergence of large and persistent external deficits, that the country’s trade policy became more defensive, creating friction with many of its partners. Yet, even then, US leaders understood the value of the liberal multilateral trading system, and supported the establishment, in 1995, of the World Trade Organization as the successor to the General Agreement on Tariffs and Trade.
The WTO’s creation amounted to a major step forward, as it addressed not just tariffs, but also other trade barriers, including indirect barriers arising from domestic regulations. Given the complexity of assessing how domestic regulations might impede trade, especially compared to judging whether a tariff has been correctly applied, the WTO needed effective dispute-settlement mechanisms, with members agreeing to binding arbitration. The system worked, because its major members recognized the legitimacy of independent panels, even if they sometimes deliver politically inconvenient judgments.
Yet this recognition is now increasingly in doubt. Consider what type of economy would support a rules-based system. After WWII, the US supported such a system, because of its unassailable economic supremacy. An open rules-based system would also be highly appealing in a world comprising only small countries, none of which could hope to gain by relying on its relative economic power.
Things become more complicated when the global economy includes a small number of economies of similar size, larger than the small economies from the previous example, but not large enough to dominate the system alone. That is the scenario the Nobel laureate economist Paul Krugman considered in a 1989 paper on bilateralism, in which he reported that a world consisting of three major trading blocs constitutes the worst constellation for trade, as a lack of explicit cooperation among all three would lead to increasing trade barriers.
Unfortunately, this is exactly the situation in which the global economy finds itself today. There are three dominant economies or trading blocs – China, the European Union, and the US – with very similar trade volumes (exports plus imports) of around $4 trillion each. (Japan, which was a strong contender 25 years ago, now has a much smaller trade volume.) Together, the G3 economies account for 40% of world trade and 45% of global GDP.
With economic power distributed in this way, explicit cooperation by all three actors is crucial. Yet there are compelling reasons why they would be reticent to pursue such cooperation.
Even if Trump weren’t president, the current global trading system would present problems for the US, whose trade policy has long focused on manufactured goods. (Trade in raw materials has always been relatively free, and trade in agricultural goods has usually been considered special, and thus not subject to rules like the “most favored nation” principle, which applies to manufactures.)
Because the US is now self-sufficient in energy, it needs to export fewer manufactured goods than industrialized countries with no domestic energy resources. Annual US exports of manufactured goods thus now amount to only about $1 trillion annually – significantly less than both the EU and China, which export almost twice as much in manufactured goods, despite having somewhat smaller economies.1
To be sure, Trump is unlikely to start an outright trade war, because any US tariff would harm the interests of the country’s largest companies, which have invested huge sums in production facilities abroad. Yet no individual firm will be willing to give up much of its political capital to defend the rules-based system, either, because it would have to bear the losses, while its competitors shared the gains. The same goes for the G3 trading blocs: if the EU expends political capital to stop the US from undermining WTO mechanisms, China (and the rest of world) will reap most of the gains.
That dynamic goes some way toward explaining why China’s leaders, despite having proclaimed their support for the multilateral rules-based trading system, haven’t taken concrete action to reinforce it. Their reticence is probably intensified by the assumption that, within the current generation, their country will dominate the global economy; at that point, they might no longer want to be bound by somebody else’s rules.
It does not help matters that the Communist Party of China has recently been empowered even further in all areas of the economy, with all major firms now having to accept a CPC representative on their board. It is difficult to see how a dominant economic power governed by a single party – especially one with such extensive control over the economy – would accept the primacy of international rules and procedures over domestic considerations.
The conclusion is clear. The world should prepare itself for the erosion of the rules-based trading system enshrined in the WTO.2
Muslim leaders, and much of the UN General Assembly, have denounced Donald Trump’s decision to recognize Jerusalem as the capital of Israel.
How much damage has Trump done to prospects for peace?
Shlomo Ben-Ami thinks that while Donald Trump’s decision to recognize Jerusalem as Israel's capital was bombastic, in reality it will not change much as it does not preclude the city’s eventual division into two capitals.
But Joschka Fischer argues that what’s new is Saudi Arabia cannot ignore the Muslim consensus, with the Israel-Palestine dispute taking a back seat to both countries' confrontation with Iran.
Nonetheless, Javier Solana believes that Saudi Arabia cannot ignore the Muslim consensus in support of the Palestinians, and that the EU should immediately recognize the State of Palestine to help save the two-state solution.
China’s Belt and Road initiative, launched in 2013, is the biggest and most ambitious infrastructure project ever undertaken. But while China touts its benefits, especially for developing countries, others see traps, downsides, and a worrying drive for hegemony.
Stephen Roach believes that the Next China is becoming a Global China, upping the ante on its connection to an increasingly integrated world – and creating a new set of risks and opportunities.
For the first time, Project Syndicate has asked its contributors what they’ve been reading, and why.
Their choices may surprise, but surely will not disappoint, readers seeking the most important books on history, politics, economics, as well as more than one novel.
Economists have always believed that previous waves of job destruction led to an equilibrium between supply and demand in the labor market at a higher level of both employment and earnings. But if robots can actually replace, not just displace, humans, it is hard to see an equilibrium point until the human race itself becomes redundant.
As the European Central Bank pursues monetary-policy normalization in 2018, it should proceed with caution. It will need to balance mounting pressure from Germany for faster normalization with a realistic assessment of the durability and breadth of the unfolding recovery.
If a hard Brexit is economically unacceptable to British business and Parliament, a soft Brexit is politically unacceptable to EU leaders, and a fake Brexit is unacceptable to almost everyone, just one alternative remains: no Brexit. That would mean revoking Britain’s withdrawal notice under Article 50 of the Treaty on European Union.
In the tenth year since the start of the global financial crisis, the US economy reached a new high-water mark, and the global economy exceeded expectations. But whether these positive trends continue in 2018 will depend on a variety of factors, from fiscal and monetary policymaking to domestic politics and regional stability.
For decades, Australia has maintained a close partnership with the US, not least on security matters. But President Donald Trump's antics have lately put a heavy strain on the bilateral relationship, with potentially serious consequences, particularly for the Australian authorities' effort to curb Chinese political meddling.
The Year Ahead 2018
The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.
BRUSSELS – Free trade seems to have few supporters these days. Though actual trade volumes are recovering from the post-crisis recession and drop in commodity prices, “globalization” has become increasingly contentious, as exemplified by the election of US President Donald Trump on the back of a promise to rip up international agreements and get tough on trade partners. What does this mean for the future of the rules-based trading system?
The Year Ahead 2018
The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.
Order now
Some 60 years ago, when the current rules-based global trading system was conceived, the United States was the world’s sole economic “hyperpower,” possessing unquestioned dominance in the day’s most advanced manufacturing industries. With enough power to impose rules, and enough dominance to be able to count on accruing the largest share of the benefits, it could – and did – perform the role of “benevolent hegemon.”
As Japan and Europe recovered from World War II – with the latter getting an added boost from economic integration – America’s lead began to dwindle, and by the 1970s and 1980s, the US was sharing power over the world’s trade agenda with Europe. Nonetheless, because the US and Europe share so many common interests, they generally adhered to a cooperative approach.
It was not until imports began to overwhelm a growing number of industries in the US, fueling the emergence of large and persistent external deficits, that the country’s trade policy became more defensive, creating friction with many of its partners. Yet, even then, US leaders understood the value of the liberal multilateral trading system, and supported the establishment, in 1995, of the World Trade Organization as the successor to the General Agreement on Tariffs and Trade.
The WTO’s creation amounted to a major step forward, as it addressed not just tariffs, but also other trade barriers, including indirect barriers arising from domestic regulations. Given the complexity of assessing how domestic regulations might impede trade, especially compared to judging whether a tariff has been correctly applied, the WTO needed effective dispute-settlement mechanisms, with members agreeing to binding arbitration. The system worked, because its major members recognized the legitimacy of independent panels, even if they sometimes deliver politically inconvenient judgments.
Yet this recognition is now increasingly in doubt. Consider what type of economy would support a rules-based system. After WWII, the US supported such a system, because of its unassailable economic supremacy. An open rules-based system would also be highly appealing in a world comprising only small countries, none of which could hope to gain by relying on its relative economic power.
Things become more complicated when the global economy includes a small number of economies of similar size, larger than the small economies from the previous example, but not large enough to dominate the system alone. That is the scenario the Nobel laureate economist Paul Krugman considered in a 1989 paper on bilateralism, in which he reported that a world consisting of three major trading blocs constitutes the worst constellation for trade, as a lack of explicit cooperation among all three would lead to increasing trade barriers.
Unfortunately, this is exactly the situation in which the global economy finds itself today. There are three dominant economies or trading blocs – China, the European Union, and the US – with very similar trade volumes (exports plus imports) of around $4 trillion each. (Japan, which was a strong contender 25 years ago, now has a much smaller trade volume.) Together, the G3 economies account for 40% of world trade and 45% of global GDP.
With economic power distributed in this way, explicit cooperation by all three actors is crucial. Yet there are compelling reasons why they would be reticent to pursue such cooperation.
Even if Trump weren’t president, the current global trading system would present problems for the US, whose trade policy has long focused on manufactured goods. (Trade in raw materials has always been relatively free, and trade in agricultural goods has usually been considered special, and thus not subject to rules like the “most favored nation” principle, which applies to manufactures.)
Because the US is now self-sufficient in energy, it needs to export fewer manufactured goods than industrialized countries with no domestic energy resources. Annual US exports of manufactured goods thus now amount to only about $1 trillion annually – significantly less than both the EU and China, which export almost twice as much in manufactured goods, despite having somewhat smaller economies.1
To be sure, Trump is unlikely to start an outright trade war, because any US tariff would harm the interests of the country’s largest companies, which have invested huge sums in production facilities abroad. Yet no individual firm will be willing to give up much of its political capital to defend the rules-based system, either, because it would have to bear the losses, while its competitors shared the gains. The same goes for the G3 trading blocs: if the EU expends political capital to stop the US from undermining WTO mechanisms, China (and the rest of world) will reap most of the gains.
That dynamic goes some way toward explaining why China’s leaders, despite having proclaimed their support for the multilateral rules-based trading system, haven’t taken concrete action to reinforce it. Their reticence is probably intensified by the assumption that, within the current generation, their country will dominate the global economy; at that point, they might no longer want to be bound by somebody else’s rules.
It does not help matters that the Communist Party of China has recently been empowered even further in all areas of the economy, with all major firms now having to accept a CPC representative on their board. It is difficult to see how a dominant economic power governed by a single party – especially one with such extensive control over the economy – would accept the primacy of international rules and procedures over domestic considerations.
The conclusion is clear. The world should prepare itself for the erosion of the rules-based trading system enshrined in the WTO.2