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Perspectives: A paradigm shift in global trade policy leaves the system at crossroads

Behind the increasing number of major ongoing trade policy initiatives at domestic and international level lies a fundamental question about the future structure of the world trading system, writes David Henig.

When we look back at the first few months of 2021 what might be most memorable is the sheer volume of significant trade policy activity. Whether at the World Trade Organization, or inside the European Union or United States: there seem to be developments almost every day.

Such is the pace that it is often not possible to try to place each development in context. Yet we need to do so, to realise the extent of change happening around us.

Industrial policy revival and environment focus

At a domestic level the EU and US have rediscovered industrial policy. The EU is finally hoping to close the International Procurement Instrument as the US plans a further expansion of ‘Buy America’ policies. Both are considering how to bring back manufacturing and supply chains, with a particular China focus. Enforcement of existing trade deals is similarly a priority, not to mention resolving existing disputes whether the one related to subsidies to Boeing and Airbus or to steel aluminium tariffs.

Looming large is also the bigger question of environmental policies and in particular in the EU’s plans for a carbon border adjustment mechanism. This alone could be one of the biggest changes in trade rules since the creation of the WTO.

This could tie into a WTO agenda which is already heavily focused on updating rules. The recent good news of the publication of a fishing subsidies text ahead of a sprint to a possible agreement in July has injected some optimism, badly needed given the many other negotiations struggling to progress. US support for the waiver of intellectual property protections on COVID-19 vaccines has also brought a new dynamic.

But such domestic and international activities don’t feel joined up. Instead it seems we almost have two different phases of trade politics in operation.

The WTO’s ‘plurilateral’ agenda aiming to further liberalise trade which gained traction with the failure of the Doha round is running into an emerging agenda of controlling globalisation and focusing on climate change.

Making progress to emerge with a functioning global trading system feels like a challenge under these circumstances. Indeed, we need to recognise that something more fundamental may be happening.

Closing some agreements in 2021 will be welcome. A good first step in any event will be progress at the WTO.

After years of growing uncertainties, an agreement over fisheries subsidies, COVID-19 vaccines, or a plurilateral agreement on issues such as services domestic regulations this year would point to a better future. It would in particular ease current doubts over the ability of diverse countries to agree new treaty commitments.

Not that any completed agreement should lead to complacency. No single agreement would be game changing, not while there are so many outstanding issues of importance. Negotiations falling in this category include those covering state subsidies, e-commerce, and most of all the restoration of the WTO’s Appellate Body. None of these appear particularly close to any resolution. India’s and South Africa’s concern over plurilaterals in general equally remains outstanding.

There are also the issues not yet inside the WTO system, including climate change and the talks over corporation taxes at the OECD, which were similarly energised by a US proposal. Whether agreement can be reached on the latter, or whether the US will proceed with threatened retaliation against national digital taxes of other countries, is a key issue to watch in thinking about the coherence of national and international initiatives.

Can the system cope?

Yet when we look particularly at the domestic agenda of the large trading powers that are the United States and the European Union we see something that looks more significant.

Since the formation of GATT it has been assumed that trade policy will aim at liberalisation, particularly at a multilateral level. That assumption can no longer be made, which if the case would be a change of huge significance little discussed to date.

The US and EU domestic agenda specifically seeks to reduce trade, for example in terms of public procurement or repatriated supply chains particularly for self-defined sensitive products.

There are also further measures in the EU aimed at companies receiving state subsidies, presumed to be mostly targeted at China.

The countries that were in the vanguard of free markets, the US and UK, have embraced more government intervention.

It might be that particularly on supply chains such domestic actions are not successful. Businesses are the ones that make decisions on locating production, rather than governments. Yet we know such decisions do respond to incentives particularly where there are subsidies involved.

We can also say that the global trading rules as we know them have worked in times of greater state intervention. Theoretically the system should be able to adjust to new priorities. However at that time the overall systemic objective was still liberalisation. We need to think about whether a global trading system that does not seek more openness is really sustainable, or needs change.

Clear trade policy principles are crucial

What makes it more likely that we are at a turning point for world trade is that a direction of travel has been consistent for five years, under different governments in different countries. This does not look like a temporary change liable to go away quickly, even without the equally pressing need for action over climate change.

Equally there are precedents which can be drawn upon. There has always been a tension between the notions of national policy space and international cooperation. This has been growing as more countries adopt more detailed regulations, and others seek to address new challenges such as climate change, antimicrobial resistance and animal welfare, but is not new.

It feels, however, like we need to go back to the principles that were discussed at the founding of the GATT, reaffirming or updating where needed, adding or subtracting where times have changed. If we have lost the conceptual framework of trade liberalisation we need to make sure we still have enough of a foundation. Non-discrimination is a good start, but even that might need updating and clarifying.

It is time to start addressing the new trade realities alongside any of the ongoing individual trade negotiations and policies.

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David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.

Views expressed by columnists at Borderlex are strictly their own.

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