Random Thoughts on International Trade

Buried in last week’s avalanche of trade tweets were two interesting data points that did not make the front page. The first is a speech by World Trade Organization (WTO) director general Roberto Azevedo that rolled out the WTO’s annual trade forecast. He noted that global trade grew 4.7 percent last year, which was the largest increase in six years, and that it is predicted to grow at the rate of 4.4 percent this year and 4 percent next year.

This data was accompanied by the now-standard caveat that an increase in protectionist actions and particularly a “cycle of retaliation” (no names mentioned, but we all know who he was talking about) could negatively affect these numbers. The report also noted that these numbers are below the average annual growth rate since 1990, which is 4.8 percent.

So, the news is not spectacular, but it also is not panic inducing. There has been an increase in the number of articles recently about the end of globalization, declining world trade, and what that means for everybody (something bad, for sure). The actual data suggests, however, that panic may be premature. World trade is not declining—yet—it is growing, and growing at a still-respectable rate. The question the United States faces is to what extent we will continue to be a part of it.

When I teach globalization, we have a discussion about whether it is reversible. The outcome is usually agreement that the answer is “yes,” but it takes a fairly cataclysmic series of events for that to happen. There are three historical examples, two of them very old: the collapse of the Roman Empire in the fifth century and the recurring arrival of plague in Europe in the thirteenth and fourteenth centuries. The more recent example is the period after 1913, when global trade began a steep decline that was not entirely erased until around 1970. Two world wars and the Great Depression had a lot to do with that.

We can never rule out a new cataclysm. Neil Howe and William Strauss, in their 1997 book, The Fourth Turning: An American Prophecy, see history as a series of roughly 20-year cycles that begin with strong institutions and high social confidence and culminate in a “third turning,” which is a time of weak and distrusted institutions, strong individualism, rampant cynicism, and weak civic authority. (Sound familiar?) The fourth turning that follows, appropriately called “Crisis,” is when we rebuild from the ground up. That may well be our fate, but as far as the global economy is concerned right now, we are clearly not there yet. The sand may be leaking out of the bag, but so far it’s just a dribble, which means there is still time for repairs.

The second piece of news that seems to have escaped the front page is a report by the Rhodium Group and the National Committee on U.S.-China Relations on Chinese investment in the United States. The study reports a significant drop in Chinese investment here: $29 billion last year, a 35 percent drop from 2016, which was a record year. Perhaps more important, if you just count investments that both originated and closed in 2017 and exclude those that began in 2016, the value dropped 90 percent. These are significant numbers.

Interestingly, it appears this is not entirely due to the Trump administration. Much of the restraint is coming from China, where regulators have increased their scrutiny of outbound investments in an attempt to counter large-scale capital outflows to multiple destinations, not just the United States. At the same time, there is no question that the Trump administration has taken a dimmer of view of Chinese inward investment than its predecessors, as has Congress, where legislation is pending that would significantly expand the number of investments reviewed by the government. In fact, there are rumors that the administration may effectively preempt Congress by implementing some of the same changes without waiting for legislation. Whatever we end up doing will no doubt be considered another skirmish in the “trade war,” but it is clear the declining trend started earlier and came from China. Both sides may be on a course to disentangle themselves from each other.

Finally, in the spirit of Easter and resurrection I cannot resist a comment about the Trans-Pacific Partnership (TPP), which may be coming back from the dead. My general principle in reacting to our president is to pay no attention unless he says the same thing three times. He has now done that on TPP, so it at least merits some attention. Hopefully, he is looking into it because he realizes getting out of TPP was one of his biggest mistakes. Not only has he prevented Americans from getting the market access we won, but he torpedoed a major element of our strategy for maintaining our presence in the Pacific and countering Chinese influence and replaced it with…nothing. Unfortunately, only a day after he raised everybody’s hopes, he let most of the air out of the balloon by saying he wants a better deal than Barack Obama got. That, of course, is a fantasy. He will be very lucky to get the same one since the other 11 parties have already moved on to a somewhat more modest agreement. Even so, after weeks of tariffs and other bad news, we ought to grasp at the straw, give him the benefit of the doubt, and hope for the best. And if that turns out to be a mistake, I’ll be back with a mea culpa.

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

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