Only a rules-based trading order can keep the long peace

The global trade and investment patterns that have undergirded the long peace of the last several decades are being upended and scrambled. The challenge going forward is to not break that peace while reassembling the system in response to present practices that have failed and to new changes that have taken place.

By and large, the multilateral trading system has succeeded in spreading prosperity, particularly to Asia — first to Japan and South Korea, and then to China. Without question, those advances came at the expense of certain industries and communities now politically awakened in the West.

Along with that expansion came an interdependence of supply chains in which end products for export are a mixed bag of imports from all over — for example, German cars manufactured in the U.S. for export to China, cars assembled in Mexico with U.S. parts destined for export back to the U.S. or iPhones engineered in the U.S. and assembled in China for export to the world. Without doubt, that has benefited other industries and communities. How to calculate and manage the deficits and benefits when value is added at each step along the line is now a complex exercise for which the blunt 20th-century instrument of national tariffs is a poor match.

Further, the comparative advantages of trade in one integrated world have altered its composition as the once advanced manufacturing powers evolved into post-industrial societies in which services and information — from finance to entertainment to digital networks — make up the bulk of economic activity and exports.

To add further disruption to the old patterns, China’s industrial policies aimed at conquering the latest technologies, and its new Silk Road infrastructure investment plan to bring countries from Africa to the marginal Eurasian land mass into the core of the global economy, will shift the center of gravity even further to the East.

In The WorldPost this week, we address these manifold conundrums of a global economy in transition.

Though perplexed by the Trump administration’s trade assault on some of its closest political and military allies, Pascal Lamy nonetheless agrees with the need for change. “Criticism of the existing system makes sense,” writes the former director-general of the World Trade Organization. “The E.U. would fully agree with the U.S. that existing disciplines do not adequately constrain Chinese practices and that China should open its public procurement market. The E.U. would also agree with China that U.S. agricultural subsidies distort trade and need to be revised and that intellectual property protection for medicines should be time-limited at a reasonable level. So in many ways, there is ample scope for negotiation to improve the WTO rulebook, if that is Trump’s intention.”

Yet, if the intention is to abandon the multilateral system in favor of bilateral deals that benefit the U.S. to the detriment of others, Lamy departs from the Trump gambit.

“The U.S. could be targeting the WTO system in order to blow it up, to make bilateralism the new norm, based on Trump’s belief that the U.S. will always win in a bilateral trade confrontation,” he writes from Paris. “In that case, the adequate reaction by U.S. trade partners would be to join forces in order to protect the multilateral trading system from U.S. aggression. They need to make clear that, if the U.S. won’t play ball, they stand ready to put together a ‘WTO minus America’ option, a formula similar to what Japan achieved with the TPP after the U.S. pulled out.”

Economist Alexis Crow tackles the myth of a U.S. trade deficit with the world. “While much of the acrimony emanating from the White House on trade focuses on America’s trade deficits in goods — like steel, aluminum, textiles and auto parts — the simple fact is that the U.S. actually runs a surplus in services with the world. And that surplus continues to expand and grow,” she writes.

U.S. trade in services, by type of service (U.S. Bureau of Economic Analysis)

Being able to boost the export of services is central to the future health of the American economy, Crow argues. “By 2026,” she reports, “services-providing jobs are set to make up 81 percent of jobs in the U.S., with goods-producing jobs comprising just 11.9 percent. Jobs in services already reached 77 percent of employment by industry sector over a decade ago.” Trade war, she fears, would threaten America’s prospects.

On the other front of new global investment patterns, Jonathan Hillman worries that China’s infrastructure outreach may repeat some of the same errors the U.S. made in the 19th century, when politically connected barons built out the transcontinental railroad linking the East and West Coasts in America.

“Infrastructure projects under President Xi Jinping’s Belt and Road Initiative echo many of the same mistakes. Financing is often opaque. Heavy subsides fuel China’s state-owned enterprises. Projects favor speed over safety, breaking ground quickly and dealing with environmental and social concerns later,” he writes.

For Hillman, the Chinese project is infused with the same kind of nationalism that animated the American project, leading to a tendency to ignore the local interests of those in the path of development. He also worries that, as was the case with the railway bonds that financed the American infrastructure expansion of the late 1800s, heavy debt loads will prove unsustainable.

Johns Hopkins University scholar Deborah Bräutigam has a different take on what she calls “the myth” that China is a new imperialist when it comes to Africa. She reports that contrary to what many seem to believe, roughly three-quarters of the jobs generated by Chinese investment employ local workers. To answer the question of whether China was engaging in predatory lending, Bräutigam’s research team assembled a database of all Chinese loans in Africa since 2000.

“In Africa,” she writes, “we found that China had lent at least $95.5 billion between 2000 and 2015. That’s a lot of debt. Yet by and large, the Chinese loans in our database were performing a useful service: financing Africa’s serious infrastructure gap. On a continent where over 600 million Africans have no access to electricity, 40 percent of the Chinese loans paid for power generation and transmission. Another 30 percent went to modernizing Africa’s crumbling transport infrastructure.”

Keeping the long peace amidst so much change will only be possible if all players settle, in the end, on an inclusive rules-based order that governs their interactions. By definition, unilateral action that seeks advantage over mutual benefit in a deeply interdependent system threatens the order upon which peace rests. The stability that has been the condition for growing prosperity for so many for so long should not be taken for granted. History has regrettably demonstrated that if economic war erupts, more dire consequences are never far behind.

This is the weekend roundup of The WorldPost, of which Nathan Gardels is the editor in chief.


This was produced by The WorldPost, a partnership of the Berggruen Institute and The Washington Post.

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