Another Look at the Big Picture

Last week I bored you all with a (short) disquisition on historical cycles—“turnings” in one author’s phrasing, pendulum swinging in another—which then descended into a lecture on good manners, or the lack thereof, in how we treat our opponents in today’s policy debates. This week’s Big Picture review will look at where the trading system is now and where it appears to be heading, and then concludes with a comment on what to do about it.

The biggest geopolitical development is that the world seems to be moving out of the immediate post–Cold War era that featured the United States as a dominant global power facing a variety of crises—economic recession and potential collapse, terrorism, regional disputes, and a pandemic. Some of those remain (the Middle East), new ones have arrived (Ukraine), and others could very well reoccur (recession, pandemic). At the moment, the consequences of the past 30 years since the collapse of the Soviet Union seem to be reflected in two trends—economic fragmentation and the rise of a group of disruptive authoritarian states that reject the Western post–World War II consensus on how the world should work and how countries should treat each other.

The two are related. Economic fragmentation is due to countries choosing to regulate their economies in very different and often conflicting ways without regard to the impact on other countries or existing multilateral rules. This is seen most clearly in digital trade, where countries are addressing issues like privacy, content control, the free flow of data, and localization requirements in ways that are incompatible with each other. This is a widespread development, but it is particularly noteworthy in authoritarian states like Russia and China, which are pursuing policies of much greater state control over the economy, both conventional and digital, and are proud of it, arguing that their economic and political systems work better than those of the West. These states have coupled their arguments with acts of aggression that are both direct—Russia’s invasion of Ukraine—and more oblique—China’s actions in the South and East China Seas and its history of bullying smaller countries that do not do what it wants.

The Western response, aside from Ukraine, where consensus was quickly achieved and implemented, has been slow to coalesce, due in significant part to years of global economic integration that has left companies overinvested in China, vulnerable to retaliation, and resistant to anything that might expose them to it.

The United States, as usual, has led the way in trying to address these challenges. It has been easier for the United States because public opinion about China, not to mention Russia, is at rock bottom, so taking a hard line is politically popular. That has meant several things.

The first is the conflation of trade and national security. It is hard to have a conversation these days about trade without it becoming one about China and security. The result has been a series of actions that started in the Trump administration as an attempt to force China to change its economic policies but have now become measures intended to hold back China’s technology development and protect American companies in key sectors from Chinese imports.

These actions are overtly protectionist and violate World Trade Organization (WTO) rules, but the administration has justified them in the name of protecting U.S. national security. The result is that the United States, which was instrumental in designing the postwar economic system and has defended it for 75 years, is now undermining it. The argument is that the current rules are no longer fit for purpose. They are not able to deal with issues like Chinese manufacturing overcapacity that overwhelms other economies with imports they can’t compete with.

Unfortunately, that is correct. The economic world has changed, but the rules have not kept up. However, instead of working hard to develop better rules, the United States is ignoring the current ones and doing precious little to speed new ones along, even among willing countries. As a result, we risk pushing the WTO, already teetering from an inability to conclude much of anything, over the edge.

As multinational institutions start to crumble, the world is moving to a different kind of Cold War—a race for technological supremacy as the key to security, where the United States is simultaneously trying to run faster via industrial policy and subsidies and trying to hold China back via tariffs and export controls. It is unclear at this point whether that will work, but it is clear that if we abandon multilateralism and try to do it by ourselves, we will fail.

The administration has maintained a multilateral approach on defense issues like Ukraine, but it has abandoned it on economics. The administration will need to work much harder on coordinating trade policy on both imports and exports with our friends and allies if it wants to promote security and stave off looming economic fragmentation and the serious blow to economic growth that will come with it.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.