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Perspectives: Adjusting to a new world of trade rules

Complexity and ambiguity are the new reality of global trade policy.

Last year was a watershed moment for many trade policy analysts in realising that the old system based on the centrality of WTO rules was passing. What we may see in 2023 is a growing realisation that there will not be a single replacement.

Traditional trade policy had one over-riding objective, that of trade liberalisation. Though there were many other factors to consider, such as developing country protections and foreign policy relationships, governments and stakeholders would set their positions primarily with regard to the major goal.

Similarly, there was a single anchor for rules relating to global trade, the World Trade Organzsation. Free trade agreements would go further than WTO on setting new trade rules and liberalising trade – but typically with reference to the WTO norm with chapters described as ‘WTO plus’.

Change has been in the air for some years, perhaps dating back to the global financial crisis, the collapse of the Doha round and the election of president Trump seeing the US turn its back on the Trans-Pacific Partnership.

A turning point has now surely been reached, in which those certainties can no longer be taken for granted.

The recent US rejection of the WTO dispute settlement panel on ruling Trump era steel and aluminium tariffs suggests Washington can declare any issue one of national security in order not to apply rules.

Similarly, there is a tension in discussions as to whether EU ‘strategic autonomy’ trade instruments must be WTO-compliant.

A new breed of protectionist argues that this is the only way to deliver a sufficiently powerful response to the climate emergency.

Vociferous ‘wolf warrior’ messaging from China about defending its own interests such as in disputes with Australia and Lithuania was suddenly replaced or supplemented by a placatory message at Davos.

Trying to follow each of these strands individually risks missing a bigger picture. A definitive objective cannot be identified with regard to the major players and their issues.

Unhappiness with the current systems of global trade and their local impacts does not mean there is a clear view of what to do differently.

Without a guiding principle, countries, companies and other stakeholders in the global trade system will have to adjust as best they can in thinking how to meet their own goals.

Multiple countries, multiple objectives

When considering their trade policy objectives, there are plenty of ambiguities for all of the US, EU, or China. All have economic as well as other concerns.

Maintaining or restoring manufacturing jobs is certainly one policy goal. Doing so through a transition to low carbon production is another. Subsidies are currently a major part of such discussions.

For the US and the EU, being rule-setters is also a motivation, though possibly in different ways. Whereas the US are more focused on not allowing China to have an advantage either by being WTO members or through introducing direct controls on accessing new technology, the EU is more concerned with being a global regulator to provide business with what is perceived to be a level playing field.

China and the EU both want a WTO and to be part of free trade agreements. Whether the US wants either is open to question, and for the time being its prefers engaging in policy dialogues without taking on binding commitments.

While there have been moments in recent months where the US has appeared utterly unconcerned about the interests of allies from the EU to Japan, crises have often been followed by returning to some dialogue. It probably helps that some of the closest allies of the US, namely the UK, Japan, and Australia, all want to emphasise the importance of global rules.

Predicting this year’s developments around any of these issues would be bold.

Businesses make their own decisions

Governments are only a part of the emerging global trade policy picture.

Corporate behaviour will inevitably be influenced by government regulation, explicit export controls, and subsidy offers. There will however be other factors such as competing with their rivals and reaching major markets, which will include huge populations in India, Indonesia, and of course China.

Information about sensitive private sector decisions is rarely easy to access. Representatives of large corporates have admitted to being under pressure from governments regarding where facilities are located, but are less open about how they are responding.

Access to raw materials for the low carbon transition is emerging as another significant driver of corporate decisions. The extent to which governments can work with companies to offer such access is unclear when there will be state and commercial secrets involved.

A further factor to consider is that goods trade has seemingly peaked with new growth to come from services. This trade is harder for governments to measure and control.

Dealing with complexity and ambiguity as the new trade policy principles

Both the EU and US will challenge existing understanding of global rules, most obviously on subsidies, and in mitigation suggest China has been doing this for years. At the same time there are dialogues and joint work covering various subjects.

The WTO is still too central to global trade to go away, and much will continue to happen there. In particular, countries other than the three major powers will try to protect a single set of rules as far as they can, which is unlikely to be to the current extent.

Companies will navigate an evolving order as best they can, taking advantage of subsidies where available, meeting regulations where necessary, and lobbying intensively. Indeed, the need to understand the new rules will only strengthen the advantage of large companies in global trade.

All of this is likely to remain fluid simply because the political and economic motivations in countries will demand that to be the case. For example, China’s strong position in electric vehicles will survive for some time.

Complexity and ambiguity should then be watch words at least for the time being, simply because there are too many diverse interests to allow for simple solutions.

 

 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.

 

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