Trade Wars

Building multilateralism in trade is essential

Failure to do so would be throwing the baby out with the bathwater.

Undoubtedly, the current state of global trade has its limits and is not entirely fair to all participants. A number of important issues, including those needed to make international trade fairer and more sustainable over time, remain insufficiently addressed. During its 27 years of existence, the World Trade Organization (WTO) has added a number of nations to its ranks and taken several notable initiatives that have increased the volume of trade. Yet its effectiveness remains hampered by a host of structural problems, including the lack of full commitment of its member countries to multilateralism, the very foundation of its creation. Nations, rich and poor, continue to be swayed by the short-term gains and immediate costs to them, rather than looking past their noses at the longer-term benefits that come with fair terms of trade for all.
Since the start of the GATT rounds after World War II, and the subsequent formation of the WTO more recently, there has been much talk of “fair trade”. This has focused on two key pillars: the creation of minimum barriers to trade, both tariff and non-tariff, and non-discriminatory treatment in trade. Significant progress in tariff reduction has been made over the years; although, as has been widely documented of late, protectionism through increased tariffs is once again rearing its ugly head in both the industrialized and less developed world. The intensification of non-tariff import restrictions has also accelerated. China, a latecomer to the WTO, and a few other countries have used a variety of ingenious means to impose themselves in this aspect, much to the chagrin of their trading partners.
Commonly adopted non-tariff barriers are not necessarily quantitative restrictions (which WTO rules do not allow). In addition to prescribing unusually high quality standards, tight delivery times, long-term service contracts and strict performance guarantees, these obstacles take the most mundane form. Delaying port moorings of vessels carrying imports and their mandatory customs checks, as well as the discovery of minor defects in accompanying documents are common practices. Just last week, during their deliberations in Melbourne, the Quadruple’s foreign ministers spoke out against coercive Chinese economic policies that run counter to the WTO system.
The recent escalation of such actions by China is, at least in part, attributable to the high-profile actions the United States launched against it during President Trump’s tenure (which the current administration has continued). Joe Biden’s recent decision to exclude China from evolving alternative global supply chains for semiconductors, and the US Congress’ decision to move forward with the enactment of specific competition law against him, will probably not remain without reprisals from China. In all likelihood, Chinese countermeasures against the United States and others who support it would be just as harsh and could hit them where it counts. Under broader geopolitical and strategic considerations beyond mere economics, an unfortunate consequence of these “trade wars” would be the sidelining of the rules-based regime of the WTO.
Under the second pillar of free trade, viz. non-discriminatory treatment, the move towards adoption of the most-favoured-nation (MFN) principle has made significant progress over nearly two centuries. From the time of Robert Peel, British Prime Minister in the mid-19th century until the start of the First World War, the MFN provision was included in a series of bilateral and other trade agreements. It was first Great Britain, then the leading trading nation, which unilaterally opted for it; later, even France and the United States joined in their bilateral trade and other treaties. This had a positive effect on the lowering of tariff barriers and the multilateralization of international trade since bilateral agreements based on MFN principles were also followed in their agreements with third countries. Britain’s position of taking the initiative in multilateral balance-of-payments clearance by allowing the debts of its trading partners to be set off against credits they had acquired elsewhere from countries with which Britain Britain had a negative balance, also gave a significant boost to this healthy practice.
For multilateralism to have a broad base and broad acceptance, it was crucial that each country realize that its “self-interest was broader than usual (and) longer-term than usual and that each state should believing that one’s present sacrifices would in fact yield a long-term return, that others would not renege on their implicit commitments when they found themselves in tempting positions” (R. Jervis, 1983).A remarkable feature of 19th century multilateralism was that it functioned without formal organization and that only an overall normative structure circumscribed it.The evolution towards institutions during the 20th century – first the League of Nations in 1919, then the creation of the UN in 1945 and finally the WTO replacing the GATT in 1995 – had initially created a degree of discontinuity and complexity in the evolving process of multilateralism.. However, this turned out to be essentially tran site.
Trade agreements are now applicable to a far greater number of countries and come with greater international legitimacy not enjoyed by other means. Coincidentally, after the 1945 war, American administrations had also found it appropriate that the intended hegemony of the world promote and reinforce the status of new institutions as well as influence their programs and desired outcomes. In the process, multilateralism and its pillars viz. tariff rationalization and reduction of barriers as well as the universalization of MFN treatment have received much attention.
Today’s re-emergence of unilateralism and bilateralism in international trade, driven primarily by non-economic considerations, leaves us with the risk that such historic positive steps will be undone. A self-fulfilling crisis, in itself, could become an additional cause for the intensification of non-economic issues of disagreement and disputes. The prospects of protectionism, with all its ills and afflictions, becoming more pervasive also remain high. Add to this the known limitations of the WTO, including the lingering sense of exclusion from the global trading order in many developing countries, and the situation does not bode well for the future effectiveness of the WTO. , unless certain corrective measures are immediately implemented.
While the procedural issues affecting its operation can be resolved through bold action by member countries, it is the substantive issues that require a willingness to compromise and sacrifice, especially from wealthy nations. So far, the agreed outcomes of the Doha Development Agenda have yet to become everyone’s “moving forward” plan of action. Continuing to pay lip service to the development concerns of poorer members and focusing solely on trade growth could further alienate many countries, especially in the context of the agony and anguish caused by the current Covid-19 pandemic.
In fact, trade must now be viewed through a development and climate change lens, with the added objective of improving the health of vulnerable people everywhere. This would require revising the intellectual property provisions of the WTO TRIPS to make it easier for the developing world to manufacture essential medicines and vaccines, to have access to the technologies needed to mitigate the consequences of climate change and to better enable them to produce the basic foods necessary for the cohesion of the body and the spirit, in particular in the poor and less developed countries.
In the same vein, the focus of its rules-based trade regime must evolve to rapidly cover the full range of services, the main strength of most developing countries. Negotiations must begin to establish the regulatory basis for open markets for biofuels, including the definition of what constitutes a biofuel in terms of quality, composition or other relevant classifications necessary for the emergence of an international market. Such work should encourage the flow of global finance towards the production and commercialization of biofuels.
In the absence of a set of global rules established by the WTO on carbon emissions in the production or manufacturing process, we have all already witnessed how the cause of climate change is not served. . In 2012, the Chinese government refused to accept the inclusion of aviation in the European Union’s cap and trade scheme (the emissions trading system) forcing airlines to pay the price CO2 emitted by all aircraft flying to the EU. Almost all non-Chinese airlines had agreed to comply with the new rules. China’s bullying tactics were on full display when it banned its airlines from paying these fees or raising ticket prices and stopped a subsidiary of Hainan Airlines from buying a major plane order. to the European Airbus. It is now imperative that WTO member countries agree on a variety of measures to reduce greenhouse gases that would include tariffs on highly polluting industrial goods produced outside their borders. Without it, the manufacturing hubs of China and a handful of other countries will continue to create liabilities for other countries.
Ultimately, tackling the issues associated with the transition to desirable free and fair trade across borders requires looking beyond the present moment and thinking about the future. It is obvious that the ability and the luxury to do so are much higher in industrialized countries than in poor and emerging countries. Either way, given the vast externalities that become available to wealthy nations by freeing the less developed from acute deprivation, pestilence, and social instability, it should work to their advantage. Their interest in trade cannot be limited to obtaining energy and inputs for their industrial economies. In the prosperity of their trading partners lies the sustainability of their own well-being and security.
Now that the WTO has reached its maturity, it must adopt such a vision and a long-term perspective in its functioning. At the same time, just as Britain did in the mid-19th century when it began to reap the benefits of the Industrial Revolution, today’s two economic superpowers – the United States and China – must openly embrace multilateralism and its ingredients as a dictum of their business behavior. By doing so, they undoubtedly have a lot to gain in the long run.

Dr. Ajay Dua, a progressive economist, is a former trade union secretary in the Department of Trade and Industry.