Too Early to Be Optimistic About the Future International Trade, Time to Wait

The world economy is witnessing a rising tide of protectionism. According to a recent WTO report, trade flows have been hit by a record number of new import restrictions since 2017.    However, this kind of report receives less attention because of recent trade conflicts among major trading countries. The US and China have dominated economic news headlines since 2017. Recently, Japan imposed export restriction on key materials for semiconductors against Korea for ‘non-economic reasons‘, creating worries in the global IT supply chain. The European Commission is considering introducing a ‘digital tax’, and the US has responded by threatening to introduce high retaliatory tariffs on European wines. Why are we experiencing this radical departure from decades of international support for trade liberalisation, in favour of a shift towards protectionism and unilateralism?

Looking back over the past half-century, it is both a new and a recurring phenomenon. We have witnessed big countries utilise a combination of unilateralism and multilateral cooperation to enhance market access. The ongoing conflict between the US and China reflects a similar push in the 1980s. The US initiated a series of trade-related measures against Japan, including the Plaza Accord to appreciate the Yen and the Structural Impediment Initiatives to enhance Japanese market access. They all happened amid the Uruguay Round of trade talks. Washington's justification for the measures was that it hoped to reduce the US - Japan trade deficit, even though a trade imbalance was not ‘the cause’ but ‘the result’ of US domestic policies such as unprecedented defence spending. Today's US - China trade quarrel is similar. It started with the US-China deficit argument. But it is different now as the conflict is being presented as a "security issue". Also, the economic size of China seems to matter, which makes the outcome of the trade dispute less predictable.  

We should acknowledge that world trade is no longer the growth engine of the world economy. In recent years, trade growth fell behind world economic growth for the first time in decades. The Doha Development Agenda has been practically dead for more than a decade. The weakened managing capacity of the WTO has resulted in more frequent trade disputes. The number of regional agreements is not increasing as fast as we have seen in previous decades. An obvious theoretical explanation is that the marginal cost of international cooperation exceeds marginal benefits from it. There is simply no sufficient demand from business sectors, unlike in the Uruguay Round, in which establishing rules for trade in services and the protection of intellectual property created a strong incentive for cooperation. The subsequent proliferation of RTAs is fully understandable because they cost less, with focused trade interests. The Doha Development Agenda (DDA) failed because it simply lacks any substantial economic interests. So it was a pity that the renowned pro-globalisation scholars Bhagwatti and Panagariya expressed optimism about the future of the DDA in 2008, saying “they (trade negotiations) come back like the proverbial cat and are concluded. Doha will be no exception.” As of 2019, it is safe to say they were outright wrong. 

Now the question is when and how the international community can restore the lost momentum of the liberal trade environment. Obviously, it won't be possible until the business sector develops sufficient economic incentives to find it necessary to pressure governments to write and rewrite international rule books to facilitate trade and investments in both new and traditional areas of business. They may include data, trade, e-commerce, protectionism regarding raw tech materials, as well as the traditional issues of service trade, intellectual property protection, agricultural reform and personal movement. Are we going to see any attempts to establish new rules soon? Negative. Remember, it took at least three years to agree on the agenda of the Uruguay Round. The WTO has not abandoned the old multilateral negotiation of the DDA yet. The major trading countries are still busy with unilateralism and reciprocity as they find them more effective for national interests. We may have to wait a few more years until they start to agree to talk on these issues. It requires substantial pressures from business sectors, which seem to be growing as new industries are burgeoning. So, it’s the time to wait.

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