The question seems almost facile in a day and age when so many countries have so many trade agreements. But COVID-19 is leading to us to focus on aspects of globalization that have long been ignored. So let’s reevaluate the basics – like the purpose of these agreements.
The Foreign Policy View
The foreign policy establishment’s answer is that liberalized trade promotes peace and prosperity among allies. During hearings that set the stage for the crucial Trade Act of 1974, the Chairman of IBM, Arthur Watson, cited his father’s slogan: World peace through world trade.
That slogan has generally carried the day, from senior policymakers to the general public. But he also pointed out that the Soviet Union had to remain on the outside looking in because it was not a “friendly” country. He said, “I am not ready to suggest such trade with Soviet Russia.”
The Economist’s View
The economic establishment’s answer is that liberalized trade promotes the efficient use of resources. The economist’s view is apolitical: whether nations are “friendly” is immaterial as long as the agreement promotes efficiency.
The problem we have today is that trade agreements are drafted along the lines of the economic establishment’s philosophy – and then marketed along the lines of the foreign policy establishment’s philosophy.
As a consequence, we have a massive mismatch. The content of the agreements isn’t designed to deliver the top-line goal.
This, in a nutshell, is what the TPP fight was about. The foreign policy establishment was simply not equipped to understand how the agreement works on a technical level – and the technical level is what really matters when it comes to delivering results. Peace and efficiency haven’t pulled in the same direction. They’ve pulled in opposite directions.
It’s one of the reasons this blog focuses so often on (yawn) rules of origin. They’re where the rubber meets the road in terms of trade in goods. Yet hardly anyone knows what these rules actually do. Critically, the rules for industrial goods were drafted according to the economic establishment’s model: maximize sourcing from anywhere, not necessarily from the parties to the agreement.
Even progressive economists tend not to get it: they often consider efforts to tighten up rules of origin to be “protectionist,” when instead, tightening up those rules of origin is precisely what creates the bloc the foreign policy types say we need. This is how many experts have come to believe TPP creates a bloc to fight Chinese state capitalism, without realizing the actual rules of TPP facilitate state capitalism instead. How are we fighting state capitalism with TPP if a TPP car can be made with more content from China than TPP members? Here we see how the foreign policy goals are in direct tension with the economists’ efficiency goals.
The TPP parties still haven’t figured it out. They’re purportedly trying to expand TPP membership as a result of the heightened concern over dependency on Chinese supply chains – yet they don’t seem to have reckoned with the fact that TPP aggravates the problem instead of remedying it. And while the auto rules have been discussed the most, the rest of the industrial products are even more problematic. For example, medical equipment only requires 30% regional content. The other 70% can come from China. Expanding TPP won’t change that — unless the rules themselves are changed.
We Forgot the “Friendly Nations” Part
With this lens, it becomes clear that the mantra of “world peace through world trade” hasn’t been realized, because we forgot Watson’s caveat: that such trade occur among friendly nations. We most obviously neglected that part of the equation when we let the PRC into the WTO without adequate safeguards against backsliding from market-oriented commitments. But we repeat the mistake with every new agreement we sign.
And Now the Flaws Become Clearer
In light of COVID-19’s exposition of the fragility of concentrated supply chains, we’re becoming more attuned to the flaws in the economists’ model. For example, the economists’ system doesn’t actually reward efficient use of resources. The PRC has used massive subsidies and currency manipulation to lure capital to its shores. Newsflash: if you have to rely on subsidies and currency manipulation, you’re not the most efficient producer.
We’re also increasingly aware that “efficiency” itself isn’t all it’s cracked up to be. Not only are our supply chains concentrated, they’re concentrated in the hands of the undemocratic PRC. And the PRC has used its leverage to, at least according to state-dominated media, threaten our very lives. That’s part of the reason there is a push to onshore manufacturing of medicines and medical equipment.
Whither – or Wither – the WTO
In this context, the WTO becomes increasingly quixotic. The WTO’s reform agenda is grossly insufficient to address the problem – but even the modest efforts underway have already been rejected by the PRC.
And then, in the face of that, a group of WTO Members plunged ahead this past week with setting up an alt-Appellate Body mechanism. That coalition of the willing includes the PRC. So, even as supply chains melt down all over the world and the PRC makes it clear real WTO reform is off the table, this group of WTO Members boxes itself into the very rules that enabled the PRC’s mercantilist behavior. The food is terrible, and the portions so small!
The Way Out
It seems the United States will have to lead the way on a new model for conducting trade so that we are no longer enslaved to faux-efficiency at the expense of the more important values we hold dear. If you pay close attention, the one thing that seems to trouble the PRC is the idea that we will reverse course on our willingness to allow them to be the World’s Factory Floor. It turns out it isn’t just the suppliers who have leverage – the customers do, too.
The EU’s windmill-tilting alt-AB efforts notwithstanding, they are a natural partner to join us in an effort to diversify away from this flawed system. But it also shouldn’t simply be an undertaking by the West. (Not only because it has a neo-colonial feel to it, but because, as Commissioner Phil Hogan pointed out, the EU and the U.S. fight like siblings. It’ll go better if a grownup sits between us in the backseat so we don’t punch each other.)
The most likely candidate? Japan, which has not (yet) joined the alt-AB group. (India hasn’t, either – nor did it join RCEP. India seems to be keeping its distance from China.)
Deeply invested in the global trading system, Japan tried to play a constructive role the last time the system melted down, in the 1970s. According to historian Judith Stein, the Europeans wouldn’t play ball, and the result was the first crack in the Bretton Woods system: Nixon abandoned fixed exchange rates.
The stakes are even higher today. Can we rise to the occasion?
March 31, 2020