Over the past few years, shifting trade tensions between major players in the world economy — the United States, China, and the European Union in particular — have generated a great deal of instability and uncertainty in the global economic system.
This idea was taken up during at a panel forum entitled, Recharging International Trade, at the World Economic Forum (WEF) in Davos, Switzerland. Reuters Editor-in-Chief Steve Adler began the discussion by asking whether the very idea of free trade might be dead, given the recent trend toward protectionism in so many parts of the world.
With so many concurrently unfolding trade events — Phase I of the re-negotiated trade deal between the U.S. and China; approval of the U.S.-Mexico-Canada (USMCA) trade agreement; the new U.S./Japan trade deal; ongoing trade tensions between the U.S. and Europe, including Brexit — the answer to this question is a subject of intense interest and speculation at the WEF. Adding to the uncertainty is the Trump administration’s continued refusal to name any new judges to the World Trade Organization’s (WTO) appellate body, a move that effectively neuters the only international institution with the power to adjudicate and resolve trade disputes between countries.
“I’m generally an optimist by nature, but on this WTO question I’m very worried,” said panelist Chad Bown, a Senior Fellow at the Peterson Institute for International Economics. “I think one of the bulwarks pushing back against protectionism that might otherwise have been worse over the past two or three years are institutions like the WTO… . These institutions can’t push back forever, so I am worried that things could get worse.”
“The WTO will survive, but it will change… it’s not surprising that we now have people who are unhappy with the way it has developed. The questions is how quickly we can fix it.”
Asked whether the WTO would survive as a dispute-resolution body, Robert Azevêdo, Director General of the WTO, shared a more positive view with the panel. “The WTO will survive, but it will change,” he said, noting that WTO rules for dispute resolution are 25 years old and need to be updated. “Twenty-five years later, it’s not surprising that we now have people who are unhappy with the way it has developed,” he said. “The questions is how quickly we can fix it.”
Among the developments that have thrown the WTO’s role into question is the rise of China as a global economic superpower. Panelist Jin Keyu, Professor of Economics at the London School of Economics and Political Science, noted that when the WTO’s dispute-resolution rules were originally developed, they did not anticipate that such a dramatic economic change was even possible. According to Keyu, the WTO did not take into account “that emerging markets can graduate, and they can become huge — and that’s what happened to China. The terms that were agreed upon at that stage of China’s development all seemed reasonable. So, the new system has to take into account that emerging markets can graduate.”
As for Phase I of the current trade deal between the U.S. and China, the panelists were split on who got the better end of the deal. “The grand irony is that if China actually did everything the U.S. demanded it to do, the result is going to be a much more successful Chinese economy, and a much larger trade deficit in the U.S.,” said Keyu. That’s “because the trade imbalance is the result of China’s success, not because of unfair practices” — which do exist, she admitted, “but they aren’t the main driver.”
Bown thought the deal was welcome to the extent that it calmed markets down, “but otherwise it is essentially a disaster,” he said. “It doesn’t address any systemic issues.” He explained that there is a need for new international trade rules, whether it’s for subsidies that different countries use, or preferential treatment of intellectual property, or foreign investment. “Those things have to be dealt with, and very little of that is contained in this agreement.”
“We are now in a world with new systems, and we need to come up with new rules, and have a conversation about this.”
The possible impact of the recently approved USMCA — sometimes called NAFTA 2.0 — was also discussed by the panel, along with the question of whether free trade increases or decreases wealth disparities. Graciela Márquez Colín, Mexico’s Secretary of the Economy and another panelist, was generally in favor the USMCA, because it does address some of the issues that NAFTA overlooked. “Small and medium-size enterprises were left out of NAFTA, so the USMCA is a better approach to trade integration, taking into account the needs of small and medium-sized organizations,” Márquez Colín said. She was also hopeful that such USMCA labor provisions as higher minimum wages and the right to collective bargaining would help Mexican workers, but noted that the country had already successfully raised average wages without the help of the USMCA or any other trade agreement.
The Peterson Institute’s Bown was cautiously optimistic about the USMCA as well, noting that “the new labor enforcement provisions in this agreement are unlike anything we have ever seen before.” The agreement provides for the enforcement of labor standards that allow for collective bargaining and the right to unionize at manufacturing plants in Mexico — rights that will be enforced by the United States, he explained. “It’s a very new approach to trade agreements, and to thinking about the role of labor standards in particular,” Bown said. “To my knowledge, it hasn’t been tried anywhere else.”
As for how all the current trade uncertainties will play out, Bown said that “everyone is a sinner in global trade,” and conceded that some of the U.S.’s unfair trade claims are legitimate. He summed the session up by saying, “We are now in a world with new systems, and we need to come up with new rules, and have a conversation about this.”