Fragile institutional foundations of global trade

Yes and no. 

While trade will go on, finding a way to do so as easily as it has done for decades could be a false assumption.  The institutional foundation that have allowed trade to go on as smoothly as it has through inflation, devaluations, recessions, and changing leadership is not as strong as it appears.  In fact, it may now be under serious attack from the most important trading partner in the system.

The decision of President Donald Trump to withdraw the United States from the Trans-Pacific Partnership (TPP) trade agreement and begin renegotiation of the North American Free Trade Agreement (NAFTA) with Mexico and Canada may seem like issues that concern only the United States and the other countries directly involved. 

Instead, these can be seen as symbols of his intention to reshape trade policy entirely.  While we may think the institutional foundations for global trade are strong, they are not.  The system as a whole may not be able to withstand repeated blows from one of the most powerful players in the system.

The damage to TPP and NAFTA, while important, are just parts of the problem.  Trump and his team are apparently willing to consider other moves with potentially greater impact.  For example, the administration and the Republican party in Congress have been promoting the idea of a border adjustment tax. 

This tax will fall on all products imported into the United States and is intended, backers say, to address the “unfair” imbalance that comes from using different tax schemes instead of a VAT like nearly every other country around the globe.  [A later post will delve into the tax issue in more detail.] 

Whether the proposal ultimately lives on or dies, note that it flies directly into the face of key principles that underlies the entire global trading system:  non-discrimination.  The US solution to a perceived tax “situation” is to treat imported products differently than locally-produced products.

The fact that such a policy is even under consideration at the highest levels in the United States should be viewed with alarm.

Gabriel Duque, currently serving as Colombia’s Ambassador to Japan, used an excellent analogy in a speech at the IP Academy last week in Singapore to describe trade agreements.  Trade agreements, he said, are like bridges.  These bridges can be narrow or wide, depending on how they are negotiated. 

Most of global trade, I would argue, takes place on a bridge so wide we don’t even realize it is a bridge any more.  The General Agreement on Tariffs and Trade (GATT) and now the World Trade Organization (WTO) has been around since the end of WWII, quietly structuring the rules of the game for trade for a larger and larger set of countries. 

This trade "bridge" has been built up over time, using support piles that now consist of 164 different member countries and the legally binding commitments they have made to one another over the years.  Each member is important, but the most critical support structures are the ones closest to the deepest part of the channel.  These support piles hold the greatest share of the weight of the largest bridge span.

It is important to note that the countries, like the United States, that represent these critical supports bear the most weight of the system.  They hold abnormally large burdens compared to member state support columns that stand in shallower waters. 

But the larger members that carry the heaviest loads do not do this task for purely altruistic purposes.  If they did not cooperate with the other members, the bridge would not be built.  The needs of the largest would not be met and the body of water would not be crossed by anyone without cooperation from all parties. 

In the case of the GATT/WTO, the bridge would never have grown so wide or spanned across so much water if so many countries had not agreed to work together cooperatively for the collective good.

The GATT/WTO bridge is even more critically important to us all since this one piece of infrastructure holds up nearly every other trade bridge as well.  All other trade “bridges” like Free Trade Agreements, customs unions and the like, depend on GATT/WTO rules to serve as the anchor for new bridges. 

The 2007 Global Financial Crisis led many countries to reconsider their support for the bridge.  No one knocked over or pulled up their own support piling entirely, but many countries allowed erosion to take place in their own foundations by putting in place more protectionist measures. 

Once the bigger, more systemically important countries start to discuss allowing trade discrimination and consider implementation of illegal practices, the damage could flow rapidly.

Now the bridge may face the largest challenge of all.  Donald Trump believes that other countries are getting more benefits than the Americans receive.  In his quest to remedy this situation, he and his team seem willing to overturn decades of policy.

The assumption seems to be that the system itself will hold.  But the system rests on a shaky bridge.  The support piling represented by the United States is critically important to the overall structure.  If it gets knocked out, the entire bridge will start to fall.

This view sounds alarmist, of course.  Surely, many people will argue, the system is stronger than just one country?  A system that benefits so many will be defended.  Someone, somewhere, will rise up and prevent disaster.

Let us hope so.  But if the bridge analogy holds, time is a problem.  Given enough time, another support piling could be built or a sufficient shoring might take place to carry the load around the unstable support structure. 

Yet at the moment, the US seems content to keep tossing rocks (or worse) at the foundation.  No one else seems ready or willing to step forward and carry the load.  Equally alarming, once the US starts to question its commitment to the system, other countries could follow suit.   Other bridge support pilings might fall as well. 

We have all gotten comfortable with the idea that the system will simply endure.  “Trade is like life itself.”

Perhaps.  But the supporting institutions are fragile.  Tearing them down is much, much easier than building them up again.