Abstract

Whether existing multilateral trade commitments really deter larger trading nations from taking steps that further weaken cross-border commercial ties is assessed here. Evidence from salient commercial policy episodes of recent years is combined with information on the actual leeway available to G-20 members under extant World Trade Organization rules. The upshot is a bleak assessment of the capacity of the existing multilateral trade rule book to rein in any attempt by larger trading nations to “deglobalize” the world economy.

Introduction

After the Global Financial Crisis analysts debated whether globalization – the ever-greater integration of national markets – was slowing down. Recently, the debate has shifted to whether the world economy has entered a phase of deglobalization. In light of growing geopolitical tensions and the so-called Polycrisis, some have gone so far as to argue that deglobalization – taken here to mean the conscious thinning of cross-border commercial ties through state action – is necessary.

My goal here is not to assess whether the world economy is or has been deglobalizing. Nor is my purpose to assess whether deglobalization is desirable or what its end point might be. Nor will I consider the factors that have triggered discussions of deglobalization. Here, I ask a different question: If a government contemplated trade policy measures that markedly thinned cross-border commercial ties, would the current corpus of multilateral trade rules prevent them from doing so? In short, I will examine what contemporary evidence reveals about the degree to which World Trade Organization (WTO) rules can really act as a bulwark against deglobalization.

The approach taken in this paper is not to assume or contend that existing multilateral trade rules have no bite. Demonstrating such a strong proposition is unnecessary given my research objective. Rather, I will marshal enough evidence on actual contemporary commercial policy decisions and on the leeway afforded to governments in current WTO accords that might give a reader inclined to believe that existing multilateral trade rules will act as an effective bulwark against deglobalization second thoughts. If this argument is correct then, as geopolitical rivalries intensify, we should moderate our expectations as to what WTO accords can deliver and look elsewhere for centripetal forces that might hold the world trading system together.

Assessment: Current WTO Rules cannot Contain Pressures to Deglobalize

The evidence presented in this paper implies that we should moderate our expectations as to the extent to which existing multilateral trade rules can limit state-induced deglobalization. Earlier, it was argued the WTO rule book is incomplete – for example, there are no rules on digital trade. Rules on foreign direct investment are patchy. Even where multilateral trade rules have been agreed, they allow many governments significant leeway to fragment markets (recall the size of the import tariff binding overhangs), or contain exceptions (recall the Article XI exceptions and those pertaining to national security) or they can be honored more in the breach (recall the evidence on the build-up of corporate subsidies) seemingly with impunity. Even when the rules were subject to dispute settlement, foundational principles – such as the MFN tariff treatment – have been simply ignored by major trading nations.

The best that can be said about the current multilateral trade rule book is that, to date, many governments (of mainly small- and medium-sized economies) have chosen not to openly violate their commitments. Pressures to favor national interests have been channeled away from transparent forms of trade discrimination (such as import tariffs) to less transparent forms of selective intervention (corporate subsidies, government procurement measures, export controls, and the like.) This shift toward harder to detect and less closely observed commercial policy intervention may have created the impression of a system capable of deterring government steps that fragment markets. If that was the case, the public revocation of MFN tariff treatment for most of China’s exports by the USA shattered that illusion. China’s retaliation and the enduring breach of the MFN principle have not been lost on observers either. Furthermore, the manner in which governments reacted to the crises of recent years and to intensifying geopolitical rivalry suggest little interest among the larger trading nations in returning to rules of the game agreed at the end of the Uruguay Round 30 years ago.

That multilateral trade rules are not likely to be an effective bulwark against conscious efforts to fragment markets or to offers of inducements to move factories across borders does not imply that these are desirable policy interventions. Indeed, that so many governments have chosen not to abandon the MFN principle, and that dozens of WTO members chose to lower trade barriers on medical goods and food during the crises of recent years, suggests that unilateral commercial policy is not always moving in a discriminatory direction. My conclusion here is that, for better or for worse, we have reached a point where governments have options that are no longer meaningfully constrained by multilateral trade rules. Of course, these findings make a mockery of the mantra that governments have insufficient policy space.

In principle, groups of like-minded nations could deter state-led deglobalization within the group – although that proposition ought to be evaluated on a case-by-case basis. Perhaps the expansion of membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) can secure an oasis of less-distorted trade among its members? But creating an oasis does not address the root causes of the growing impotence of multilateral trade rules evidenced in this paper. Still, should compliance with multinational trade rules weaken further, one option available to governments is to seek to substitute lost multilateral market access with an expanded and deeper network of regional trade agreements.

If multilateral trade rules cannot do the job of discouraging policy-induced deglobalization, what can? The decisive battles over unilateral policy will take place in national capitals. With intensifying geopolitical rivalry, we can reasonably expect that national security and foreign policy officials are likely to play a greater role in shaping commercial policymaking. Too many of the former cross-border commercial ties are said to be a source of risk, so little discouragement to deglobalize can be expected from that quarter. For these officials, trade policy is, at best, part of second order diplomacy, to be invoked symbolically and not because of any expectation that curbing trade will actually change a foreign government’s actions. One potential source of countervailing power comes from that part of the business community which has a significant stake in an open global trading system. Whether enough senior executives are willing to do so is an open question.

To read the full research article as it was published in Wiley Online Library, click here.

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Trade wars are usually bad for the countries involved. After the U.S. and China launched tit-for-tat tariffs on imports from each other in 2018, prices rose for American consumers, jobs were lost and corporate profits fell. Economic growth in both countries slowed. 

There was also some fear that the Trump administration’s tariffs, which hit other U.S. trading partners, would suppress global exchange and lead to a new period of protectionism. 

But for countries not in the middle of the trade war, research suggests, the opposite happened. 

In a working paper, UCLA’s Pablo Fajgelbaum, Yale’s Pinelopi Goldberg, UC Berkeley’s Patrick Kennedy, Yale’s Amit Khandelwal and the World Bank’s Daria Taglioni describe how “bystander countries” — those on the sidelines of the U.S.-China dispute — increased their exports of products subject to the tariffs to both the U.S. and to the rest of the world. (Exports to China were mostly unchanged.) 

The findings suggest that these countries didn’t just shift goods from their existing trading partners to fill a gap caused by the higher tariffs. Instead, they were able to boost production and increase exports of targeted goods into new and expanded markets. Overall, bystander countries increased their exports of taxed items an average of 6.7% during the period studied, compared with nontaxed products.

Winners and Losers 

“The trade war created net trade opportunities rather than simply shifting trade across destinations,” the authors write. 

Not all countries benefited, though. Some — notably Vietnam, Thailand, Korea and Mexico — were able to boost exports significantly, in part by providing substitutes for goods subject to the U.S.-China tariffs. Others, such as Ukraine and Colombia, saw a decline, largely because their exports complemented goods hit by the tariffs. 

The U.S.-China trade war began in mid-2018 when then-President Donald Trump hit China with a series of rising tariffs on a variety of imported goods and China retaliated by raising duties on U.S. products. (At the same time, the Trump administration also imposed duties on steel, aluminum and machinery imports from other trading partners.) The U.S. tariffs affected about $350 billion in imports from China, or about 18% of the total, while China’s tariffs covered about $100 billion, or about 11%, of goods imported from the U.S. 

Although trade tensions eased in 2020 when the two countries agreed to put a freeze on plans for additional trade duties, the existing tariffs remain in place.

Tariffs Caused a Huge Shift in Trade

The tariffs quickly had an impact. An analysis by the Peterson Institute for International Economics found that in 2022, Chinese imports subject to the highest U.S. tariffs — including semiconductors, furniture and some consumer electronics — were about 25% below their levels before the start of the trade war. The decline wasn’t due to a larger economic slowdown — Chinese imports that weren’t covered by added duties, such as laptops and computer monitors, increased by 42%.

But what about the rest of the world? To see how the trade war affected exports from bystander countries, the authors examined data from the United Nations’ Comtrade database about the trading patterns of the 48 largest exporting countries, (excluding oil exporters) between 2014 and 2019. 

They found that bystanders increased exports to the U.S. for products with high tariffs, but not to China. Shipments to the rest of the world increased for products subject to both U.S. and Chinese tariffs. Not only was there considerable variance among exporting countries, but also the most successful were those that were able to increase exports to the rest of the world, not just to the U.S. 

Two factors seem to explain the difference. For one, successful exporters tended to ship goods that were substitutes for Chinese imports. So when U.S. customers looked for a replacement for, say, smartphones made in China, countries like Vietnam that made phones were poised to benefit.  

What’s more, they were able to scale up production and achieve economies of scale so that the unit costs of their goods fell. This meant that the countries not only could compete successfully with the higher cost of taxed items, but their products became more competitive in markets that weren’t subject to the tariffs. 

Vietnam, for instance, was one of the biggest winners from the trade war, increasing its exports of tires, sweatshirts and vacuum cleaners to both the U.S. and the rest of the world. 

The study also suggests that successful countries weren’t just lucky enough to already specialize in products that would increase in demand after the trade-war tariffs hit. Instead, country-specific factors — such as a strong labor market or preexisting trade agreements — likely accounted for all the variation among countries.

Michael Totty is a freelance reporter and editor. Previously, he was a news editor with the Wall Street Journal in charge of assigning and editing Journal reports on technology, energy, health care, management and other topics. Totty works from Berkeley, California.

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To read the full report as it was originally published by the National Bureau of Economic Research, click here.

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To read the full report by the National Foundation for American Policy, please click here.

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High pay for manual manufacturing jobs followed the union organizing successes in the 1930s, which was followed by strong economic growth after World War II. The 30 years after World War II were economically strong across all high-income countries—the French called this the “30 glorious years.”

To read the full report from the Center for Strategic & International Studies, please click here.

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2020 may well go down in history as a great global inflection point. It is thus worth looking back to examine what happened and why and to reflect on where we may be headed in the decade ahead. The Avoidable War: The Decade of Living Dangerously, the third volume of ASPI’s annual Avoidable War series, does precisely that. It contains selected essays, articles, and speeches by Asia Society and ASPI President the Hon. Kevin Rudd that provide a series of snapshots as events unfolded over the course of 2020 — from the COVID-19 pandemic, through an implosion of multilateral governance, to the impact on China’s domestic political economy.

Finally, it concludes with a discussion of the growing challenges the world will face as the escalating contest between the United States and China enters a decisive phase in the 2020s. No matter what strategies the two sides pursue or what events unfold, the tension between the United States and China will grow, and competition will intensify; it is inevitable. The Chinese Communist Party is increasingly confident that by the decade’s end, China’s economy will finally and unambiguously surpass that of the United States as the world’s largest, and this will turbocharge Beijing’s self-confidence, assertiveness, and leverage. Increasingly, this will be a “decade of living dangerously” for us all. War, however, is not inevitable. Rudd argues that it remains possible for the two countries to put in place guardrails that can prevent a catastrophe: a joint framework he calls “managed strategic competition” that would reduce the risk of competition escalating into open conflict.

To read the full report by The Asia Society Policy Institute, please click here. 

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Subsequent retaliation by trading partners and the prospect of further escalation risk significantly hampering trade and investment, and possibly the global economy.

The timelines below track the development of the most pressing trade conflicts with links to the latest available data and PIIE analysis.

Read the full report here

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