By: Dr Stewart Nixon, Deputy Director of Research, IDEAS
Discussion of the consequences of Trump administration economic policies — most notably increased tariffs on all countries but especially China — has centred on economic costs. Costs for businesses and consumers include higher prices for traded goods, production shifting to less efficient locations, and fewer choices where goods are no longer produced or traded.
The focus on economic costs neglects a more impactful and concerning shift in global trade governance and the exchange of goods under it. The United States has gone from being the establisher and leader of international trade institutions to being the single greatest threat to their continuation. Multinational enterprises that have prospered under this system face unprecedented uncertainty and increasingly stark choices between upholding the system and being undercut by competitors forced to circumvent it.
Businesses engaging in international trade and investment have long relied upon rules, principles and norms established under the General Agreement of Tariffs and Trade (GATT) in 1948 and deepened under the stewardship of the World Trade Organization (WTO) since 1995. The international system under GATT and the WTO supports trade through the elimination of trade barriers including tariffs, quotas and subsidies, by establishing principles of equal treatment, and by providing mechanisms to manage disputes between nations and companies.
Continuing business faith in multilateral trade rules and liberalisation is increasingly at odds with the positions of nation states. The global financial crisis (in 2007-08), China’s rapid rise to dominant global manufacturer since joining the WTO (in 2001), and legitimate concerns with the distribution of trade benefits within countries have contributed to popular backlash against freer trade. The rise of powerful global corporations that pursue profits, not sovereign interest, also plays on the fears of nation states that through liberalisation have ceded much regulatory autonomy.
Against this backdrop is a world besieged by increasingly frequent major shocks — of both human and natural origin. Businesses and nation states are navigating trade wars, disease outbreaks, military conflicts, and intensifying weather events; individually and in tandem.
Discourse typically bundles these shocks together to paint an overall picture of instability, lower confidence, and temporary disruption to economic activity. But to appreciate the sustained consequences for trade, the stepwise influence of each major shock deserves further examination.
The first Trump administration’s trade war from 2018 provided the first substantial and symbolic shift from trade liberalisation to restriction. It delivered an initial blow to the ‘made in China, sold in America’ model, prompting conversations in global boardrooms around the need to reduce dependence on production in China. But investors were largely unwilling to forgo China’s cost competitiveness, with the re-export of goods via third countries (particularly in Southeast Asia) the dominant response. Trade continued within the bounds of international governance.
The COVID-19 pandemic from early 2020 created more substantive fractures between business and government on trade governance. International institutions proved incapable of mobilising an effective and coordinated health and economic response, with business disruption amplified under diverging sovereign measures. China’s draconian response delivered an own goal for its reputation as a reliable production location. While economists and businesses marvelled at the adaptability of global supply chains, governments saw vulnerabilities requiring intervention on national security grounds.
Russia’s invasion of Ukraine in early 2022 poured salt into the open wound, bringing diverging business and nation state interests into stark relief. US-led sanctions on trade with Russia sought to divide markets along geopolitical lines with little regard for business impacts. The ability of businesses from Russia, China, India and elsewhere to circumvent inadequately enforced sanctions exposed the limits of international and national governance to uphold trade restrictions. Companies from America, Europe and elsewhere had to choose between supporting sanctions and sustaining profits, with many becoming circumventers. That markets did a better job of navigating sanctions and war than governments did of implementing sanctions reinforced the pandemic fracture between business and government, significantly eroding trust in international trade governance.
It is in this context that Trump 2.0 must be seen as an existential threat to prospects for restoring faith in the system. The United States is now the primary source of economic policy uncertainty and lead antagonist undermining international institutions, imposing and threatening smaller countries with tariffs and hollowing out the WTO.
Businesses conditioned by pandemic-induced disruptions and ineffectual sanctions face another choice between wearing tariff costs and being undercut by less scrupulous competitors. Maintaining support for formal, rules-based, and ethical international trade means contending with an increasingly formidable global network of informal actors and activities that outmatch the enforcement efforts of trade regulators. After all, border processes that have been streamlined and deregulated over decades to encourage seamless and trusted trade cannot be instantly and effectively converted to a punitive enforcement stance. And neither Trump nor the countries he threatens appear willing to plough resources into tighter trade regulation or have a vision for what enforcement looks like.
Arresting the decline of trade institutions may seem insurmountable in the current geopolitical environment, but the alternative is trending towards a future in which governments everywhere cede control of effective trade regulation. In such a world, the ability of international institutions and nation states to uphold product standardisation and safety, supply chain resilience and ethical practices is compromised. Where the capacity of governments to raise revenue and manage the macroeconomy is increasingly undermined by informality. And where businesses and consumers pay for the additional risk embodied in less-regulated trade.
The world sans the United States must act quickly to reinforce the international system, strengthening international institutions including the WTO. Space for greater leadership from large emerging economies must be created to forge a collective governance approach for countries across the development spectrum. Tackling systemic destruction is far greater and more economically consequential than addressing the immediate impact of Trump tariffs. A world in which trade operates outside of good governance frameworks would leave everyone poorer.
The views expressed in this article are solely those of the author and do not necessarily represent the views or positions of IDEAS Malaysia. All opinions are the author’s own.
