Trade talk has gone mainstream as a result of President Trump’s actions. On top of reporting costs and uncertainty to business this has meant numerous bold statements like the world never being the same again.
Look closer and what we see are the complex realities of world trade play out in real time, defeating the always optimistic hopes of bringing back manufacturing through tariffs. Bipartisan US thinking since 2016 is failing alongside narratives of deglobalisation.
Underlying reactions to Trump are trade trends evident before this daily saga. This is particularly the struggle of governments to find their role after global commerce was transformed by the internet in a way that only previously happened with the coming of the railways. How to balance openness with economic security, regulation with competitiveness, and large corporate against other interests should be the questions we ask.
Contrary to widespread views, trade was always intently political. Governments know of its disruptive power and potential to stir anger. Populism is the warning sign of confused response rather than offering serious solutions. While this time is different because it is the world’s largest economy rejecting almost all norms, trade professionals have seen most of the elements before – not least the weakness of international law and institutions, and the strength of global supply chains.
Protectionism and Trade Co-Existing
Trump’s trade narrative that other countries took advantage of the US through unfair barriers aligns with the hyper-globalisation thesis in which politicians left their countries defenceless through naïve openness. In reality his predecessors since the onset of modern globalisation in the late 1980s mixed a desire for trade with protectionist measures including tariffs, distinctive national standards and regulations, Buy America public procurement provisions, and various subsidies.
Other countries did the same. A certain amount of informal reciprocity held as long as the most powerful actors broadly believed in the system, supported by a WTO dispute settlement system. Meanwhile modern supply chains were driven by technology, consumer demand, and profit, and developed around national decisions.
Trump has proclaimed that he wants to change this system. Other countries, US companies and financial markets are among those pushing back, so far relatively successfully. This reaction on its own suggests that this is not the end of globalisation.
Arguments that trade has failed because not all citizens have gained, that their barriers are more unfair than ours, or that another country’s rise threatens our economies are regularly used by protectionists. That’s an eternal battle vying with the proven benefits of trade meaning that almost every country continues with its mixed economy of openness, national regulations and tariffs balancing its interests. This includes for trade in services, mostly ignored by Trump, where growth is strongest. Call it post-neoliberalism, or just the reality of modern system of globalisation.
Governments in Search of Impact
Before Trump’s tariffs came concerns about resilience from both EU and US, which always seemed rather odd when there was more extensive trade than ever before. As is being seen, modern supply chains are highly flexible even while including specialist inputs from around the world. Companies find ways to get final products and services to consumers. This does however leave a big problem for governments in understanding how to achieve their policy goals when they don’t control much that affects their economy.
Whether it is export markets for their production, the location or type of new investment, or the supply of essentials like food and medicines, decisions are predominantly made by companies. Trade deals or tariffs, subsidies, regulation or deregulation, all can contribute, but direct impact is often limited. This is particularly given that aims like attracting inward investment or top talent often run counter to other policies such as on regulation or immigration. In other cases there is a denial of trade-offs such as in focusing on new industries while preserving the old.
Failure to influence the national economy leaves an easy gap for populists or simple explanations not least at a time of slow growth. This has been the story of the US for eight years, bringing back manufacturing being a bipartisan desire for slightly vague reasons of prestige jobs, national security, or simple nostalgia.
Hiding behind trade as scapegoat for the technological evolution is a serious challenge of national control. Economic security may yet be at least part of the answer, but right now that is less a cohesive concept and too much a receptacle for varied difficult issues. Whatever it becomes there is an urgent need for governments to understand what they can do and explain this well.
Corporatism Growing
Trade flows in today’s globalised system mainly because the business of modern corporations is to make that happen. Whether through famous brand-name companies, platforms delivering services, often unknown but huge tier one suppliers, or logistics providers, this is the majority of trade.
Part of this happens through funding significant teams to work with politicians and governments on issues like regulation, tariffs, subsidies, taxes, or other policy levers. Behind the by now well-known headline asks of easier business frameworks are individuals whose job is to make sure their companies don’t lose when governments decide.
This modern corporatism has been growing for some time in Europe and North America, and is arguably moving in the direction of traditionally closer relationships in East Asia. There are obvious drawbacks particularly small companies being squeezed out, a perfect illustration of which comes with debates over the ending of de minimis which tend to treat them as an optional extra.
Growing demand across the political spectrum in ‘the old west’ for companies to reflect political values of governments adds to this picture, whether that is support for or opposition to the likes of climate change and diversity. Interestingly the centre-right has broadly abandoned its previous position of free trade in favour of conditionality in much the same way as was always the case on the left. Free trade now has no reliable political supporters, even while globalisation is an evident reality. This adds to the fragmentation between economics and politics.
European Unity and Leadership Are Fragile
With the United States in retreat from its post-war guarantor role, and China historically wary and widely viewed with suspicion, Europe and particularly the EU is seen as the best promoter of global trade rules. This is to be done simultaneously with protecting Europe’s security. While the EU has done an impressive job of coalescing views, one doesn’t have to look too far for splits that will make this task extremely difficult.
While there are a number of Member States who are firm supporters of free trade, others have a view similar to the USA of the bloc losing out from global trade, notably France, though with the different solution of level-playing-field regulations with global effect. While of a different order there are parallels between the business pushback to overly burdensome rules and what is happening to Trump’s tariff plans.
Across Europe as a whole there is a desire for trade simply to be an easy win given politicians want to avoid criticism from those who lose out. This particularly applies to the UK, a long-standing free-trader with international convening ability. Post-Brexit the country is however struggling with its geography and history, not wanting to be too close to the EU or too distant from the US even while in reality sharing far more attitudes with the former.
With the EU traditionally not strong in convening plurilateral groups, Europe’s efforts to support free trade are fragile. Fortunately for the avoidance of a 1930s style depression modern globalisation is proving stronger than even the largest economies.
Limits of Traditional Trade Tools
Thirty years since the creation of the World Trade Organisation expanded trade disciplines from the post-war GATT have seen intense global trade policy activity. At the apex has been a myriad of Free Trade Agreements offering greater market access and enhanced rules, including some with multiple members. Then there have been subject specific agreements, preferences for developing countries, domestic and international standard-setting and regulations, and much more.
On the surface these have correlated with growing global trade, making them a success to be continued in difficult times. There is however a reasonable argument that the causation was the other way round, or at least that there was a virtuous circle, of flowing trade and growth encouraging agreements. Symbolic commitment to open markets may also be more significant than the specific content, in particular for those companies building supply chains.
There is now little popular belief that trade agreements bring prosperity. Most developed countries have probably opened their economies as much as is likely to happen and new trade agreements will therefore only have slight impact. That said, if other countries are tempted to follow the US lead then there is definitely a need to show how much this would cost.
Some would have this as, finally, the age of coalitions of the willing going further in liberalising their economies, but there is little sign many countries want to do this. This is the same affliction as hits global institutions, of domestic resistance making international agreements very difficult. Fixing evident problems like the missing WTO appellate body is difficult in such circumstances.
There is definitely space for discussions on subjects not well covered by existing trade rules such as economic security and regulations with global impact. More important is however the need for countries to once again value trade and rules in general, and then to think about their role in the world of supply chains.
Conclusion – Global System Fragile Politics
Fear driving populism and protectionism at a time of significantly changing economic order is historically unsurprising. This latest iteration which has largely divorced production from place may have some way to go yet as Artificial Intelligence leads to more upheaval, and economic growth figures remain unsatisfactory particularly in mature and ageing economies.
Trade is a useful scapegoat, even when the vast majority have gained immeasurably in better jobs with greater spending power for more consumer goods. This is not least given a complex and apparently self-sustaining global system, out of democratic control. Ageing societies are also ironically a function of this, given medical advances now move around the world quickly.
Proclamations of deglobalisation probably strengthen understanding of this modern world when they fail. That is the world that will never be the same again, of sprawling factories. How long today’s rather fragile imbalance between a robust trade system and insecure politics lasts is hard to tell. Perhaps there will soon be another age of optimism, or other topics such as climate change will take precedence.
For the time being though, governments, companies, consumers and others are left to navigate trade, the modern economy, and politics as best they can. How this happens should be a far greater focus than nostalgia or simple assertions.