Last week President Donald Trump seemed to be on the cusp of a trade deal with China. A couple of threatening tweets later, the odds of ending the 16-month-old U.S.-China trade war have dropped dramatically.
Whether or not American and Chinese trade negotiators ultimately salvage a deal – the U.S. says China backpedaled on a commitment and intends to raise tariffs within days – the episode highlights drawbacks in Trump’s trade strategy, which tends to be protectionist, confrontational and negotiated one on one.
Unfortunately, Trump’s policies are only an acceleration of a trend in international trade that’s been going on for several decades. It’s a move away from multilateralism – in which many countries agree on certain trading principles – and toward bilateralism – which pits nation against nation, raising the stakes.
I am a specialist in the politics of trade. My observations lead me to believe that the increasing abandonment of multilateralism will have pernicious long-term consequences. Not only will trade become more costly for businesses and consumers, it may even make the planet a more dangerous place.
World trade – Trump style
Before we can understand what has changed, we need to revisit how trade deals have historically been done.
In the decades following World War II, the General Agreement on Tariffs and Trade was the center of gravity for trade negotiations. While that system wasn’t perfect, most of the world’s countries could at least participate, to one degree or another, in hammering out the rules of trade.
This multilateral trading order reached its heyday in 1995, with the creation of the World Trade Organization. But more recently, the system has weakened. Today, most of the world’s new agreements are struck between only two countries or within a single region.
Trump has shown little appetite for continuing the multilateral negotiations his predecessors were working on. He’s also hammered on regional accords, famously renegotiating the North American Free Trade Agreement and withdrawing from the Trans-Pacific Partnership.
Trump’s clear preference is for bilateral deals where the U.S. can use its market power to force concessions from its negotiating partners. But Trump has added a level of confrontation and antagonism to world trade not known in the postwar era.
For evidence, look no further than his threats to raise tariffs on hundreds of billions of dollars of Chinese goods if a deal falls through.
In essence, the United States under Trump has begun to see itself as the victim, rather than the guarantor, of the liberal trading order. This new perspective has made American negotiators more willing to extract temporary concessions from trading partners, even when these come at the cost of destabilizing the system as a whole.
Rules upon rules
One pernicious consequence of abandoning multilateralism is the mounting complexity and discriminatory nature of global trading arrangements.
In international trade, the fewer rules there are the better. One real benefit of the WTO system is that the same rules, more or less, apply to everyone.
But the world’s increasing rejection of multilateralism is creating a complex web of trade regulations that are tremendously hard to navigate. The number of preferential trade agreements jumped from just over 50 in 1990 to nearly 300 in 2010.
More deals like these mean that one set of rules is overlaid by more rules that only apply when trading with specific countries in certain goods and services. For this reason, the economist Jagdish Bhagwati has called bilateral deals “termites in the trading system.”
These “termites” and the informational burdens they create have real costs for companies and consumers, whether in Europe, Asia or the United States. And this growing complexity weakens competition by giving certain companies an edge over others based on their national origin, distorting the efficiency of global markets.
In the end, these burdens can discourage smaller companies from engaging in global commerce, make it more expensive for even the largest businesses and drive up the cost of products for consumers.
A second drawback to Trump’s approach is that it increases the risk of war, at least over the long term.
As the political economist David Lake has pointed out, one purpose of the trading system that the U.S. helped set up after World War II was to forestall mutually antagonistic trading blocs like the ones built by Adolf Hitler or, earlier, by the European and Japanese colonial powers.
The origins of the two world wars may have been principally political, but there is little doubt that economic conflicts between blocs contributed to the military tensions.
During the postwar era, the multilateral system took a major step toward insulating trade from such international disputes and strategic competition. Outside of relations with the communist bloc, which only later participated in multilateral trade deals, there is ample reason to believe that economic interdependence helped produce the “long peace” of that period.
For this reason, we should all be worried about the wobbly state of the global trading system. Bilateral and regional deals are making it easier for large countries to use trade policy more explicitly as an arm of foreign and military policy.
Modern bilateral deals are not recreating the colonial systems of the past, but they do tend to center on major powers in what some scholars have called a “hub” and “spoke” pattern. The “hub” often enjoys significant influence over the “spoke,” and not just in commercial affairs. China’s overtures to African countries over a free trade deal, for example, are likely linked to its strategic interest in securing access to national resources.
While I’m not suggesting that these deals are likely to trigger a shooting war anytime soon, an increasingly fractured world will gradually reduce interdependence among countries – which can act as a strong incentive to avoid a fight.
If the rising number of bilateral deals become an instrument of security policy, and trade increasingly flows only to strategically friendly countries, we should all prepare for more violent conflict in the future.