International Business Quarterly: Trade Policy for a World at G-Zero

For most of the past year, Washington’s band of free traders have been practicing damage control on an almost daily basis. Stepping back from the day-to-day scrum, perhaps our larger concern should be the general absence of direction in trade policy. From the late-1980s through 2007, policymakers chose liberalized, rules-based trade and deeper economic integration, but that “virtuous cycle” has stalled. Much as the “commodities supercycle” came to an end following the Great Recession of 2008–2009, movement toward improving terms of trade reinforced by improvements in communications and transport technology has slowed markedly. Trade as a share of global output peaked in 2007, and policymakers mostly seem indifferent. Cooperation on new initiatives is scarce; we seem to have entered the “G-Zero World” foreseen by Ian Bremmer in his 2012 book, Every Nation for Itself.

Technology Changes Everything

The institutional arrangements we call “the trading system” appear unable to make significant progress. The General Agreement on Tariffs and Trade (GATT) 1994 was in many ways a landmark achievement; yet its progeny, the World Trade Organization (WTO), has been unable to promote a liberalizing agenda (the shining exceptions being the Information Technology Agreements of 1997 and 2015). The lost momentum of multilateral liberalization was masked for a time by the immense popularity of the “regional trading arrangement” (RTA). Today, the time series chart of completed RTAs shown below reveals that diminishing returns may have set in on this agenda as well. So, what happened?

Globalization’s essence is technological progress. It’s evident to all that technology has reduced the costs of moving goods, people, ideas, and culture, while it increased intra-country competitiveness. This progress changed some key factors: what is traded, who trades, and how trade is managed. Not surprisingly, the dynamism placed strains on a system designed to deal with other problems.

Consider, who trades? During the GATT’s most influential period, it was the big industrial democracies that accounted for most manufacturing value added and, by extension, most industrial goods trade. Consequently, GATT’s primary focus was dealing with the trade problems shared by these participants. Today, many important traders (and WTO members) are neither industrialized nor democracies: China, for instance, was not a GATT member until 2001, but now accounts for 25 percent of global manufacturing value added.

Source: Congressional Research Service.

How is trade managed? The original rationale for trade rules was the need to regulate mainly arms-length transactions between buyers and sellers with different domiciles. Today, the UN Conference on Trade and Development (UNCTAD) reports that over 80 percent of all trade is “firm directed.” Most firm-directed trade is organized as “value chains,” thanks to modern logistics, information and communications technology (ICT) advances, and efficient transport. A major consequence was increased trade in intermediate goods: what were once factory intra-plant transfers or the supply of components from nearby suppliers to an assembly operation became international trade in tasks.

What is traded? We have noted the rise in intermediate goods. Trade in digital services, a category that practically did not exist in 1990, has grown exponentially—digital services exports from the United States are now double the level of U.S. agricultural exports. New communication technology, combined with advanced logistics and electronic payment systems, have accelerated small shipments from small firms (both a “what” and a “who”). For the most part, current trade rules fail to account for these trends.

From 193 WTO Members to “Every Country for Itself”

GATT 1994, which formed the World Trade Organization, now appears to be a high-water mark in multilateral governance. Improvements once brought about by sequential negotiating “rounds” are no longer reaching conclusion, and the institution seems incapable of action to address changed circumstances. As a practical matter, the WTO’s primary role seems to have shrunk to the administration of a partially obsolete, 23-year old treaty.

Value-chain development led governments to see RTAs as the “path of least resistance” to improved economic performance. The network of RTAs succeeded in reducing trade frictions as technology allowed for specialization in tasks, benefiting the economies that became part of regional production networks. But the pace of regional integration has slowed, suggesting that the deals that made economic sense for the parties have already been concluded. More recently, domestic political concerns at least temporarily changed the political economy of RTAs. The last three U.S. RTAs to enter into force were signed 10 years ago.

Source: WTO.

A Vacuum among the Majors

Absent meaningful action at the WTO, the Group of 20 (G20) held promise as a forum to reinforce the once-sturdy political commitment to open markets. Unfortunately, it appears, “talk is cheap.” Since 2008, G20 Leaders’ Statements have pledged to support open markets and avoid protectionism; the Hamburg Statement, while adding some ambiguity, promises to “continue to fight protectionism.” Yet the Geneva-based Global Trade Alert lists 7,826 trade-restrictive interventions since November 2008. Disappointingly, no observer of the G20 expects a better result in the future. For trade liberalization, the G20 is not much different from “G-Zero.”

For 70 years, the United States served as founder and “team captain” of the multilateral, rules-based order as a tool for achieving our security goals. Global growth fostered by the World Bank, International Monetary Fund (IMF), regional development banks, and the GATT contributed to relative peace and prosperity. Now, American voters have opted for a period of reassessment, and the administration and Congress must now consider which policies best secure the country in future years.

While the United States reconsiders, it is heartening to see other nations act to advance their economic interests within the framework of a liberal, rules-based order.

Four Latin American Countries Lead the Way

The Pacific Alliance, established in 2012 by Chile, Colombia, Mexico, and Peru, shows how a commitment to regional integration can boost global competitiveness. The four economies have set and delivered ambitious goals, including liberalizing over 90 percent of intra-region trade by May 2016. The parties have forged ahead with agendas to accelerate innovation, attract investment, improve infrastructure, and streamline the regulatory environment. The conclusion of their latest Summit last month stands as an impressive example of how the habits of cooperation can bring benefits to their citizens. Progress has not gone unnoticed—52 other economies have official observer status, some of which intend to become full partners.

The Pacific Alliance, like the TPP-11 and other groups inclined toward advancing economic freedom, offers the example of how not to lose track of core principles in turbulent times. As the United States debates its preferred approach to restore economic opportunity and boost competitiveness, free traders should show respect to our neighbors as they “take care of business.” Thanks to these initiatives, the world has not yet reached “G-Zero” when it comes to economic integration.

International Business Quarterly is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2017 by the Center for Strategic and International Studies. All rights reserved.
Scott Miller
Senior Mentor (Non-resident), Executive Education