Global trade has bigger problems than Donald Trump, and bilateral deals are not the solution

Anthony Rowley says the ‘global trading order’ is actually a mess of overlapping and widely varying accords that have resulted in social stresses for advanced economies, resulting in a recent wave of populism. Bilateral agreements, like the one between Japan and the EU, won’t make things right

PUBLISHED : Wednesday, 08 August, 2018, 5:02pm
UPDATED : Wednesday, 08 August, 2018, 10:31pm

Can Japan and the European Union together save the world trade order from destruction at the hands of Donald Trump, who seems intent on wrecking it in pursuit of America's national interest? Their recent agreement to sign what would be the world's biggest trade deal to date might appear to suggest so.

But the truth is that attempts by Japan's Prime Minister Shinzo Abe, European Commission president Jean-Claude Juncker and European Council president Donald Tusk to present themselves as champions of multilateral trade are really little more than political posturing in the face of deeper challenges to the global economic order.

Their agreement to create a trade pact covering around one-third of global gross domestic product certainly sounds enlightened at a time when, by contrast, Trump has pulled the US out of the Trans-Pacific Partnership (TPP) and is threatening to walk away from the North American Free Trade Agreement (Nafta).

Abe, meanwhile has managed to keep a scaled-down version of the TPP on the road among 11 of the original dozen members. This plus the Japan-EU agreement makes the Japanese leader look good at a time when China's President Xi Jinping is also billing himself as a champion of free trade.

By comparison, Trump's attempts to restore “balance” in US trade by levying tariffs on imports from key trading partners appear crude, inward-looking and autocratic. However, the global trade system was in trouble even before the US president weighed in.

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Trade has been used increasingly as a strategic weapon in recent years, not least in Asia where the TPP, for example, was based on bringing together countries that subscribed to similar views on how their economic and political systems should be organised, rather than on purely trade ends.

Increasing trade within and between regional blocs has also come at the cost of unemployment for certain groups of workers in advanced economies, thus contributing to income inequality and social stresses. In turn, this is helping to foster popular resentment against free markets.

Trump came to office in the US largely because he recognised and exploited this fact. Populist politicians elsewhere may ride to power on his coattails, and simply deploring this fact or rushing to create new trade blocs as counters to Trumpian protectionism will not solve the problem.

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The Japan-EU agreement may look good but it adds to a proliferation of trade blocs which in Asia are taking on baffling complexity and arguably distorting trade patterns. Japan is already a member of the TPP (now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership) and may join the Regional Comprehensive Economic Partnership (RCEP).

There are wider Asian free trade schemes planned too, and these form only part of a growing spider's web of such accords globally. Within these networks are complex and often conflicting “rules of origin” governing tariff treatment of goods exchanged among members.

It is a “dog's breakfast” of overlapping accords, a system that is costly for business and which can interfere with the working of supply chains so that suppliers from countries that have comparative advantage based on cost are disadvantaged by a political choice of trading partners.

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What is needed is some rationalisation of this largely ungoverned process if the forces of dissatisfaction driving populism and trade protectionism are not to become even more powerful and disruptive. There is a need for a more holistic approach if globalisation is to have any meaning.

For decades after the post-second world war period, the General Agreement on Tariffs and Trade or GATT (now subsumed in the World Trade Organisation) sought to further world trade through a series of globally negotiated trade “rounds”, but this ended with the failure of the Doha Round a decade ago.

One reason why the Doha process failed (apart from the fact that it attempted to address sensitive areas of trade such as agriculture and services) was because of the complexity of dealing with the wider problems that go with free trade, including service sector transactions.

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Instead of grappling with these problems at the time, a number of advanced economies opted to walk away from the multilateral process and focus instead on bilateral and regional free trade and investment agreements that were billed as “building blocks” for global free trade.

The building blocks are of such varying design, however, that they cannot easily form part of a global free trade architecture. Regional trading accords were seen as an easy way out and were not designed with a truly global trade and investment architecture in mind.

Meanwhile, Trump's pursuit of an aggressive “America first” bilateral approach to trade deals, and his preference for doing a US-Europe deal via a high-profile meeting with the EU's Juncker rather than having his aides approach this at a more considered and formal level, inflicts further damage on the system.

Only a return to the multilateral approach can solve the problems of the global trade order. This means looking at trade in the broadest possible – economic, monetary and political – context at the national and global levels. The system needs a thorough overhaul and not simply a quick “fix”.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs