Talking Trade blog
The paradigm shift in trade: business is not as usual anymore
Published 21 September 2018
Washington, DC: Philosopher Thomas Kuhn wrote about something he called a “paradigm shift” in 1962. He was trying to describe what happens in science when repeated evidence no longer can be convincingly fit inside the existing theoretical structure. For a long time, the system struggles to adapt but, at a certain point, an entirely new model of thought replaces the old.
Washington and the rest of the trading world seems to be witnessing a Kuhnian paradigm shift right now when the comforting models of the past no longer work.
Trump’s tariff policies are the immediate trigger for this shift, but the larger forces have been building up for some time.
The change is disconcerting. It was described by one participant as a “culture shock,” which makes sense. All of a sudden, the basic structure of the world feels upside down and disoriented.
Trade lanes that have been open and frictionless for decades are closing with barely any advanced warning. Supply chains that have evolved in complex and organic ways are getting broken apart. Years or even decades of time spent nurturing relationships with key stakeholders seems to make little difference in understanding what might happen next.
At first, the trade challenges appeared to be centered on Trump’s highly unusual and deeply wrongheaded views on global trade. Hence, the original sense has been that if his time in office could be weathered, the system would revert to “normal.”
But in a paradigm shift, the old model no longer applies. There is no “normal” to return to, nor is Trump the primary problem (even if he presents a convenient scapegoat).
The basic problem, boiled down very simply, is that the global trading system that currently exists was built for a world with economies structured much like the UK and the United States and where developing countries were largely smaller players. The handful of bigger countries were sufficient powerful to be willing to bear the burden of keeping up the trading system.
Against a backdrop of larger strategic interests, the United States, in particular, was fine with a certain amount of free riding from others. Of course, the system also brought significant benefits to US companies that became globally dominant.
One key assumption baked into the system was that all economies, including developing countries, would continue to evolve in the direction of becoming more like the UK and US. Development would spread and more countries would take up the burden of maintaining the system over time.
But this is not quite what has happened. Again, with gross simplification, the overwhelming dominance of the United States after WWII has diminished. Countries have not all evolved in the same way. Most, in fact, have not. This was not a particular problem until China’s impressive rise. China’s economy is not structured like the United States and it shows few signs of wanting to do so.
Hence the paradigm shift problem. For a long time, “China” was shoved into an old model by many—it would eventually evolve. It would join the World Trade Organization (WTO) and change its economic structure. It would get richer and change. It would respond to demands from a rising middle class and restructure. And so forth.
But it has not done so and shows no clear signs of doing so. In fact, Chinese leaders have made no bones about their intention to become the global leader in next generation technologies.
Other developing countries, while not presenting quite the same structural challenge perhaps as China, have also not played the same role in the global system as originally anticipated. The WTO now has 164 members and most are developing countries. It is not possible for the developed countries to dictate the negotiating agenda. Yet getting an agreement that effectively meets the needs of a very divergent membership on anything is increasingly impossible.
The center of gravity has moved from the original “Quad” of the United States, the EU, Japan and Canada to a much more diverse set of countries. The rapid rise of Asia in growth and population suggests that it should play a much more prominent role in the future.
The global trading system is no longer fit for purpose. The sense of culture shock in Washington stems from a growing recognition that the new paradigm must include a diminished role for the United States. This is deeply disorienting.
The new paradigm has not been established yet. Kuhn describes a protracted battle that takes place during times of shift as the crisis plays out over what ought to replace the discredited old model.
Trump has fired the starting gun on the battle for the future of the global trading system. In his world, the US will draw up the gates and manage with only those favored few bilateral partners that share similar perspectives.
The European Union just presented a plan to save the current WTO. But because they have not yet recognized the extent to which we are standing on the precipice of the shift, the plan has already been derided as weak. It tweaks around the edges of the existing system.
Canada is holding a conference of “middle powers” next month to brainstorm new ideas. They will need to be bold. In designing a way forward, officials need to recognize that whatever comes in the future will—of necessity—be radically different that the system that we have been comfortable with for more than seven decades.
The culture shock is just beginning.
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