Where is global trade and investment governance headed? A tour d'horizon

Since the US created the post-World War Two liberal international order and is still the pre-eminent global power notwithstanding the growing Chinese challenge, it is uniquely placed to determine the trade and investment system’s fortunes.

The answer to the question posed in the title, therefore, depends fundamentally on the medium-term trajectory of US politics, and the resultant US position in the world. Accordingly, in this blog I put forward my analysis of where the US political system is headed under President Donald J. Trump, how key countries are responding, and the ensuing implications for the global trade and investment system.

If trade scholars should thank US President Donald Trump for one thing, it is that he has put trade back on the mainstream media radar, with a vengeance. That makes writing a blog like this difficult, as everyone is now a lay expert. His ultimate contribution may be to render trade policy wonks redundant. Which is a way to say: apologies if you’ve already read or heard what I have to say.

A multi-facetted strategy

First, it is important to engage with the popular term ‘trade wars’. While it works well for headlines and talking points, it conceals more than it reveals. If we are to properly comprehend what is unfolding, we require a less catchy term. I prefer: ‘investment, technology, security, and trade wars’. Unwieldy, but more representative of what is going on.

Concerning investment, President Trump’s maximum objective seems to be to force repatriation of US multinational corporations’ (MNCs) cross-border value chains, and oblige foreign exporters located outside of the US to shift their investments into the US. Connecting this to the security realm, a minimum objective is to force relocation of export-oriented foreign investments, dependent on exports to the US market, out of China.

The economic policy logic of the maximum objective is located in the developing world of the 1950s and 1960s, in which countries desired to ‘own the value chain’, from intermediate products to final goods, and to export the resulting production, and is inimical to a world of cross-border value chains. If it becomes the new normal, then the future of the trading system is in serious doubt.

The security logic is located in the geopolitical realm, namely escalating US-China contestation, which some commentators argue is increasingly a clash of political systems (free markets versus state capitalism). This logic transcends the Trump Administration and is widely shared across the Western world. Unsurprisingly, notwithstanding reservations about President Trump’s trade tactics vis a vis China, there is tacit and explicit support for his objectives in many quarters.

Control over technology, particularly the commanding heights of the ‘fourth industrial revolution’, is intimately connected to outward investment from the US, as well as ‘predatory’ investments into the US, from Chinese firms in particular. Some of the technologies concerned are at the apex of cross-border value chains, others will be in the future, and are held by ‘lead firms’, many of them American. The concern is that when US firms are obliged to yield control over technologies in exchange for access to the Chinese market, strategic competitors are enabled, threatening the survival of the ‘lead firm’ and resultant control over the value chain. Similarly, when Chinese competitors acquire technology-rich US firms, the concern is that those technologies will be stripped out of the US, undermining the country’s long-term technological dominance, competitiveness, and military strength.

Again, these concerns transcend the Trump Administration, and are widely shared by US business, politicians, civil society, and, particularly, the military-industrial complex. The security dimension, for example, is of great concern to the US military establishment, particularly where the ‘dual use’ technologies constituting the ‘Fourth Industrial Revolution’ cluster. Furthermore, many US allies share these concerns, notwithstanding the bludgeoning some have received from the Trump Administration.

The fact that President Xi’s government has adopted a far more assertive stance on the regional and global stages, notably its forays into the South China sea and the Belt and Road Initiative, has heightened concerns in Washington. As a Chinese commentator observed in a closed-door roundtable I attended recently, we now face a clash of ‘Trumpism’ versus (Chinese) ‘Triumphism’; the latter occasioned by China emerging relatively unscathed from the global financial crisis in contrast to Western economies thus proving, to certain Beijing elites, the superiority of Chinese state capitalism.

These logics consequently find strong expression in the trade arena. The Trump Administration regards import tariffs as serving the twin objectives of obliging companies currently exporting to the US to engage in ‘tariff hopping’ investments into the US, yielding the additional ‘benefit’ of reducing the US’s trade deficit. Similarly, tighter rules of origin, which feature so prominently in the recently announced US, Mexico, Canada deal, will oblige companies to locate more of their value chains in the US in order to take advantage of tariff preferences. Furthermore, President Trump is not averse to using import tariffs as a tool of state craft to secure political concessions from trading partners, as Turkey’s President Erdogan recently found out.

Put the two together (protection plus statecraft), and President Trump’s approach to trade could be summed up as ‘geo-economic’ (combining economic and political objectives). The strong emphasis on the balance of trade, read together with security concerns, means it is best characterised as old-fashioned mercantilism, with modern characteristics given the focus on forcing value chain investment relocation.

There is a deeper, social, impulse behind President Trump’s trade stance, which could be characterised as ‘anti-globalization’. While it is ironic that a man borne into great wealth could claim the mantle of representative of America’s marginalised industrial workers, it is evident that he connects organically to this core of his political ‘base’. Interestingly, he mobilises this base on an anti-elite, particularly globalised elite, platform. This platform forms the core of his foreign policy impulses, which is to dismantle the institutions set up by that elite, or what some of his supporters refer to as ‘the blob’, in order to cement US power at the apex of the post-World War Two liberal international order.

The significance, and trajectory of Trumpism

Taken together, President Trump’s domestic and international postures have been characterised as ‘neo-Jacksonian’. President Andrew M. Jackson, the 7^th President of the United States (1829-1837), created the modern Democrat party by leading a breakaway from the Grand Old Party when its leadership rejected his candidacy for the Presidency – and went on to set the mould of US politics for a subsequent generation. President Trump mounted, in essence, a hostile takeover of the Republican Party and, with a second term beckoning, it is conceivable that he could do the same, this time on a global scale.

A key question to ask at this point is whether Trumpism will survive beyond President Trump? Part of the answer is that it depends on how long Mr Trump remains in office, and whether his term(s) in office will remould US political economy, leaving an enduring footprint. This is impossible to predict. While it is clear that a large swathe of US business is strongly opposed to President Trump’s trade policies, and many Republican Congressmen too, so far, he has been able to defuse resistance by holding out the possibility of success in his negotiations with China.

Quite how long he will be able to maintain this position is unknowable, and in part a function of how his party performs at the November 6^th mid-term elections. It is important to note, though, that if the Democratic Party does acquire control over the House of Representatives (it is unlikely they will acquire control of the Senate) in November, there are many Democratic Party politicians that support the direction of President Trump’s trade policies, if not the details.

Furthermore, and barring any highly incriminating revelations from the Mueller investigation into alleged Russian interference in the 2016 Presidential election, it is difficult to see impeachment proceedings against President Trump succeeding in a (likely) Republican-controlled Senate. If anything, such proceedings would mobilise the Trump political base. The odds, are, it seems to me, that President Trump contests the 2020 Presidential elections he could win.

Were he to lose, it may well be to a populist Democratic Party politician, perhaps a younger version of Bernie Sanders still to be revealed. Or US politics may throw up some other surprise. However, it is unlikely that a Democratic President, post 2020, will restore what remains by then of the liberal international economic order. It is very likely, though, that whoever is elected then will face inexorable pressure to continue ‘containing’ China’s rise, using a combination of trade and investment instruments, and military pressure.

The next phase

Within this broad framing, the rest is important detail. In NAFTA 2.0 companies are incentivised to locate more production in the US. Now the US will focus on Asia-Pacific, and particularly the countries comprising the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), looking to cement a series of bilateral deals in the trade equivalent of the ‘rolling thunder’ unleashed by a squadron of B-52 bombers. The intention: establish a ‘cordon-sanitaire’ around China, of like-minded allies. If this sounds remarkably like the original TPP’s intention, that’s because it is; the difference is the de-liberalizing content of the unfolding thrust.

Already countries in the region are bracing themselves, if my conversations with Japanese, Philippine, and Vietnamese trade policy wonks in recent days are anything to go by. The interesting thing is that these deals could be constructed relatively quickly, given that all CPTPP members had already concluded bilaterals with the US under President Obama’s TPP. Furthermore, if my reading of US domestic politics is correct, playing the waiting game in the hope that President Trump will soon be gone may not be an optimal strategy.

In-between the US and the EU will continue to square off, avoiding the difficult issues that divide them by focusing on greater regulatory cooperation and, where possible, convergence. As the TTIP negotiations showed, however, this agenda is unlikely to yield quick wins.

What about ‘the rest’?

The EU, for its part, is now actively stepping up its Asia-Pacific engagement strategy, through FTAs with Australia and New Zealand now underway, and its recently concluded bilateral FTA with Japan. Both FTAs are rightly seen as, in part, a strategic response to US trade strategy, involving key protagonists of the rules-based liberal international economic order. Similarly, Japan’s initiative to cement the CPTPP, supported inter alia by Canada, Australia, and New Zealand, was another very important response albeit one perhaps threatened by what may unfold post-NAFTA.

What of China? The CCP’s insurance strategy has 3 discernible dimensions. First, at the domestic level it is likely to pursue a strategy of reform and doubling down on its longer-term strategic objectives. Notwithstanding the evident appetite in China for more ‘Party-state’ direction of the economy, there is still a substantial constituency pressing for a renewed market opening phase; making concessions to this constituency could serve China’s economy, while placating domestic critics and the US in some measure, perhaps enough to defuse tensions and derail President Trump’s ‘tarrifying’ strategy.

Second, at the regional level China is looking to bed down the Regional Comprehensive Economic Partnership negotiations, increasingly, and an interesting sign of the times, in partnership with Japan. The ongoing challenge with RCEP remains what to do about India, whose trade policy is moving in an increasingly illiberal direction as its balance of payments challenges mount. Indeed, India has become a significant drag on the global trading system; no salvation with be forthcoming from that quarter.

Third, China may be keen to re-engage at the WTO, together with a constellation of large trading nations that share a common concern about the direction that US trade strategy is headed in. Quite how China will do so, however, remains to be seen. It is up against significant concerns across a range of trading partners about its economic model and how this translates into global rules.

So far Canada and the EU have put forward separate position papers on WTO reform aimed, in part, at addressing longstanding US concerns, notably with the Appellate Body of the Dispute Settlement Mechanism. The US, EU, and Japan are also cooperating to develop positions on reforming a number of WTO codes, notably the subsidies agreement. This is targeted squarely at China and suggests an underlying acknowledgement by US Trade Representative Ambassador Lighthizer that the US needs allies in its confrontation with China. Perhaps there is light at the end of the tunnel, although for China this could represent an onrushing train.

That said, if President Trump’s maximum investment strategy (repatriation of value chains to the US) is the aim, then it needs to be noted that this objective is not shared by the US’s main trading partners, and particularly vis a vis China. Taking the EU and Japan, both want to render China’s policy environment more conducive to investment by their companies – an aim diametrically opposed to President Trump’s maximum objective.

Who would dare to predict how all this plays out in the next, say, 3 to 5 years? Given how poorly the pollsters have fared in predicting electoral outcomes in Western democracies, it would be a foolish academic that attempted this. So that is where I shall end.

Professor Peter Draper

The views expressed here are the author’s, and may not necessarily represent the views of the Institute for International Trade.