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The True Toll of the Trade War

Behind the escalating global conflict over trade and technology is a larger breakdown of the postwar rules-based order, which was based on a belief that any country's growth benefits all. Now that China is threatening to compete directly with the United States, support for the system that made that possible has disappeared.

Another day, another attack on trade. Why is it that every dispute – whether over intellectual property (IP), immigration, environmental damage, or war reparations – now produces new threats to trade?

For much of the last century, the United States managed and protected the rules-based trading system it created at the end of World War II. That system required a fundamentally new outlook, and a break from the pre-war environment of mutual suspicion between competing powers. The US urged others see that growth and development for one country could benefit all countries through increased trade and investment.

Under the new dispensation, rules were enacted to constrain selfish behavior and coercive threats by the economically powerful, and the US served as a benevolent hegemon, administering the occasional rap on the knuckles to those acting in bad faith. Meanwhile, the system’s multilateral institutions, particularly the International Monetary Fund, assumed the role of helping countries in need, provided they followed the rules and met the conditions.

For decades, America’s power over the global economic system stemmed in no small part from its control of votes and influence over other voting countries in these multilateral institutions. That arrangement was possible because most countries trusted the US not to misuse its power to advance its own national interests (at least not excessively so), and the US had little reason to betray that trust. No other country approached America in terms of economic productivity, and its only military rival, the Soviet Union, was largely absent from the global trading system.

The expansion of rules-based trade and investment opened up lucrative new markets for US firms. And because it could afford to be magnanimous, the US granted some countries access to its markets without demanding the same level of access to theirs. If policymakers from an emerging-market economy expressed concerns about the potential effects of more open trade on some of their workers, economists were quick to reassure them that any local pain would be outweighed by the long-term gains. All they needed to do was redistribute the gains from trade to the groups left behind. This would turn out to be easier said than done.

Still, in the world’s nascent democracies, protests by those left behind were regarded as an acceptable cost, given the overall benefits, and were easily contained. In fact, emerging-market economies became so good at capitalizing on new technologies and lower-cost transportation and communication that they managed to take over large swaths of manufacturing from the industrialized countries. This time, however, it was moderately educated workers within developed countries – particularly small towns – who bore the brunt of the pain, while higher-skilled workers in urban service-sector industries flourished.

But, unlike in emerging markets, where democracy had not yet sunk deep roots, disaffection among a growing cohort of these countries’ workers could not be ignored. Policymakers in advanced economies thus reacted to the backlash against trade in two ways. First, they tried to impose their labor and environmental standards on other countries through trade and financing agreements. Second, they pushed for far stricter enforcement of IP, much of which is owned by Western corporations.

Neither approach was particularly effective at slowing job losses, but it would take something much bigger to upset the old order: the rise of China. Like Japan and the East Asian tigers, China grew on the back of manufacturing exports. But, unlike those countries, it is now threatening to compete directly with the West in both services and frontier technologies.

Resisting outside pressure, China has adopted labor and environmental standards and expropriated IP according to its own needs. It is now close enough to the technological frontier in robotics, artificial intelligence, and other areas that its own scientists can probably close the gap in the event that it is denied access to inputs it now imports. Most alarming to the developed world, China’s burgeoning tech sector is enhancing its military prowess. And, unlike the Soviet Union, China is fully integrated into the world trading system.

But now, belief in the central premise of that system – that each country’s growth benefits all countries’ growth – is breaking down. Industrial countries are increasingly concerned that their own higher regulatory standards are putting them at a competitive disadvantage vis-à-vis relatively poor but efficient emerging markets.

At the same time, emerging-market governments are growing more resentful of developed countries’ attempts to impose standards – higher minimum wages, low-carbon energy – that they themselves did not follow when they were developing. These governments have also become less willing to open their domestic markets to developed countries, having observed Western multinational corporations hankering for unfettered access to the Chinese market.

But most problematic of all is that the old hegemon does not see China’s rise as an unmitigated blessing. With little incentive for the US to support a system that has allowed China to grow both economically and militarily, it is no wonder the post-war order is collapsing.

So where do we go from here? Given that China can be slowed, but not stopped, it is imperative that it be made to see the value of rules-based trade. For that to happen, it must have a say in making the rules. Otherwise, the world economy could end up divided between two or more mutually suspicious blocs. Ending the flows of people, production, and finance that currently integrate the world economy would be calamitous, not just economically but also in terms of global security, owing to the heightened possibility of a new military conflict.

Unfortunately, there can be no going back in time. Once broken, trust cannot be magically restored. The best we can hope for is that China and the US will avoid opening up any new fronts in the trade and technology war, while acknowledging the need for negotiations to create a new world order. Whatever form that order takes, it must both accommodate multiple independent powers or geopolitical blocs and include new rules to ensure that all countries – regardless of their political or economic system and state of development – behave responsibly.

Is any of this possible? One can only hope. But, given the current state of affairs, I am not holding my breath.

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