A Post-America Future for the WTO?

14.09.2018

On August 30, US President Donald Trump told Bloomberg the US would withdraw from the World Trade Organization (WTO) unless it favored Washington in its trade disputes. “If they don’t shape up, I would withdraw from the WTO,” Trump said.

Trump began his campaign against the WTO on his first days in the White House. Over time, his strategy has become increasingly clear: to replace the liberal global trade system with a multitude of bilateral agreements, each more profitable for Washington than the status quo. Based on the rather dubious conclusion that the US enjoys unqualified economic (and military) superiority over any individual country in the world political and economic system, Trump gave his administration a tall order: to restructure all trade and economic relations with partner countries, making them significantly more profitable for the US – “profit” in this case being measured by a positive trade balance – and open up segments of foreign markets currently closed to US companies for whatever reason.

Washington’s closest partners (Canada, Mexico, the EU and Turkey) were targeted, as were its opponents (China, Russia and Iran), for a variety of reasons: China’s theft of intellectual property and currency manipulation, the EU’s closed agricultural market, Russia's actions in Syria and Ukraine, dissatisfaction with the Iran nuclear deal made by the previous US administration in July 2015. But the methods Washington is employing to revise current trade arrangements are always the same, something we clearly saw in the NAFTA crisis – ignoring multilateral formats for trade regulation, waging sanction wars, and imposing pressure on foreign leaders and major businesses interested in access to the American market.

The initial results of this policy greatly reassured President Trump and his administration. The European Union essentially capitulated in July 2018, opening its market to agricultural products from the United States, and “agreeing to negotiate” in response to Washington’s unilateral imposition of protectionist tariffs. Mexico and a number of other countries followed.

Yet, the White House should not be in a hurry to declare victory. They might not even win in the end. The problem lies in the complex model of the modern global economy, whose growth has relied on the gradual opening of national markets and the gradual reduction of trade barriers since the mid-19th century. Its most acute crises (at the end of the 19th century, then in the 1930s) were triggered by sharp increases in customs duties and deteriorating conditions for international trade. The immediate benefits of trade wars actually undermine the foundations of the global trade and financial system, and all actors in that system, both the initiators of change and their victims, will soon feel the repercussions.

The theoretical model of the liberal economic system was thoroughly described by the hegemonic stability theory formulated back in the 1970s, which is experiencing a revival now. According to the theory, a liberal economy can only function on a global scale when a single nation-state is the dominant world power, or hegemon, that performs several basic functions:

• Maintaining relative market openness for trade in goods;

• Reversing economic cycles, or at least providing long-term financial assistance to countries suffering from crises;

• Maintaining the stability of exchange rates;

• Taking the lead in coordinating other countries’ macroeconomic policies;

• Acting as a lender of last resort, providing liquidity to countries in crisis (especially during severe financial crises).

This is not an easy mission, but for the hegemon (Britain in the 19th century and the United States after World War II) it resulted in gigantic profits, along with other market economies’ willingness to recognize the hegemon’s dominance and play by its rules. In the long run, it was this combination of “voluntary subordination” and the ability to export political-economic institutions tailored to American leadership that formed the foundation for London’s and then Washington’s economic prosperity and military-political might. Globalization has gradually undermined this form of leadership, but it would have greater staying power were it not for Donald Trump and his simplistic idea that the US economy can be run like a large corporation.

Trump’s Twitter diplomacy, which increasingly takes aim at the WTO and international trade, brings to mind a quote from the anti-hero of a popular Soviet film: It's impossible to understand the logic of a non-professional. While Trump's protectionist policy initially triggered an unprecedented rise in the value of US tech stocks, this policy will inevitably lead to the closure of markets to American goods, services and investments, a decline in the US dollar’s share in the world economy, a series of destructive trade wars and competitive currency devaluations.

The entire edifice of American prosperity presently relies on the fact that no one has yet seriously challenged Washington's unilateral moves. The only players capable of doing so at the moment are the EU, China and, under certain circumstances, BRICS. The leaders of these states and associations are currently only contemplating the long-term consequences of America’s potential fall from its economic Olympus. Yet, if the US crosses a line, then Beijing and Brussels will be forced to defend themselves, and several dozen states, Russia certainly among them, will willingly support them. And the world economy as we know it today will never be the same. Therefore, Trump’s statement that the WTO should submit or be disbanded represents a colossal political and economic blunder. A blunder, as one well-known French magistrate said in 1804 commenting on the execution of the Duke of Enghien on Napoleon’s order, can be worse than a crime.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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