Seeing Past US Hegemony: A Liberal Global Trading System Without the United States

Seeing Past US Hegemony: A Liberal Global Trading System Without the United States

photo: Bridget Coila

Can the global liberal international trading system survive without the participation of the United States? Given the probability of Donald Trump taking office as US President on 20 January 2017 (crisis of legitimacy and Russian interference in US elections notwithstanding), the question must be asked and answered. The world’s nations, transnational firms, and civil society organizations need to begin to imagine a global trading system from which the USA has withdrawn not only as surviving, but indeed succeeding. It is a challenging vision but far from impossible.

Trump’s anti-trade screeds throughout the campaign and transition period point to a real risk of his pulling the US out of the World Trade Organization, NAFTA, APEC and other trade agreements that underpin liberal trade worldwide, even with the caveat that nothing Trump says can be considered reliable based on his own record of self-contradiction and acting contrary to his prior positions. Trump’s declared trade policy would consist of attempting to negotiate bilateral ‘deals’ that would somehow result magically in US trading partners making numerous unreciprocated concessions that they were not willing to make previously. In the absence of such concessions Trump would impose punitive tariffs (such as the oft-threatened 35 percent on China and Mexico) and non-tariff barriers on imports, not to mention his promised draconian limitations on the cross-border movement of persons upon which liberal trade in services depends.

Today the United States accounts for slightly less than 25 percent of global GDP and around 20 percent of international trade (depending upon how trade is measured). Hence a US withdrawal initially would appear to strike a mortal blow to the international trading system and the liberal rules that support it, as enforced by the WTO and numerous regional and bilateral trade agreements. Yet the reality of global economic growth is that the US share of global GDP has declined significantly from over 30 percent as recently as 2000. Economic power has continued to be redistributed globally: to China, whose mid-single digits growth rate is still the envy of most developed world economies; to the BRICS countries and other big emerging markets; to smaller ‘frontier’ emerging markets states in regions like sub-Saharan Africa. The US may remain the largest economy in nominal GDP for a few more years until China overtakes it (China is already largest when relative prices are taken into account), but a US withdrawal from global trade will hasten China’s rise relative to the United States.

There is an historical precedent for liberal international trade operating and even flourishing with a significant minority segment of the global economy choosing not to participate. The Soviet bloc during the Cold War, which comprised some 20 percent of global economic activity, traded primarily amongst themselves and relatively little with the US-led, GATT-based liberal international trading system over four decades. The lesson learned during the Cold War was that, whilst liberal trade flourished for GATT member states, Soviet bloc members fell increasingly behind in relative terms.

An effort to preserve the global trading system in the face of US intransigence or opposition will need to be a truly multilateral effort built around the WTO rather than a mega-regional or inter-regional one along the lines of recent trade agreements. The core relationship on which liberal trade will depend must be the European Union and China. The EU and China are the two largest exporters in the world (the US is third) and the largest consumer markets aside from the USA. The EU is the largest and most successful example of trade liberalization and economic integration in human history. China is the largest state by population, 50 percent larger than its nearest competitor, and already by some measures the world’s largest economy. However, the EU-China relationship will need to be supported by major global commodity producers like Canada, Australia, and South Africa, major developed country consumer markets like Japan and Korea, major agricultural producers like Brazil, major services producers like India, and major energy producers like Iran, Nigeria, and Saudi Arabia.

Such a renewed multilateral system will require the World Trade Organization not only to continue to function but to be reformed and revitalized. In recent years redistribution of power in the global trading system has left the WTO hamstrung by an inability to conduct trade diplomacy and pursue its mission of trade liberalization using its traditional legislative approach, multilateral negotiating rounds. The last multilateral round to be completed, the Uruguay Round, was concluded in 1994. The most recent multilateral round, the Doha Development Agenda, was launched in 2001 and has yet to finish, making it the first multilateral round in the history of the WTO and its predecessor, the GATT, to fail in this way. At the WTO’s Bali ministerial meeting in 2015, member governments took the decision to pursue more limited gains from within the round’s agenda rather than seeking a comprehensive concluding agreement.

Increasingly, trade diplomacy at the WTO is conducted through the WTO’s Dispute Settlement Mechanism, which either forces countries in dispute to resolve their conflicts on a case by case basis through direct diplomatic negotiation or else adjudicates the dispute through its judicial apparatus. Such ‘legislating from the bench’ can enforce existing rules effectively, but it is inefficient as a mechanism for rules that need to be amended, eliminated, or created for the first time. This ‘judicialization’ of trade diplomacy leaves the WTO trade rule book brittle and vulnerable to changing trade conditions and shifting distributions of global political and economic power.

As I have argued in my book Trade Diplomacy Transformed: Why Trade Matters for Global Prosperity, 2nd edn. (Lulu Press, 2016), the WTO is in need of institutional reforms to bring its legislative and judicial functions back into balance if it is to fulfil its unique mission as a venue for multilateral trade diplomacy. The sort of institutional structure needed to facilitate a trade diplomacy that recognizes the competing demands of national sovereignty, popular legitimacy, and policy effectiveness has already been developed over time by the European Union. The EU, the world’s first true supranational polity, depends simultaneously (if not always entirely successfully) upon direct diplomacy between its sovereign member states at its Council, democratic legitimacy conferred by its elected representatives in its Parliament, technocratic legislative and regulatory capacity in its Commission, and adjudication of disputes through its Court of Justice.

A reimagined institutional structure for the WTO would see its Secretariat become a Global Trade Commission charged not only with existing monitoring and rule enforcement functions but with crafting reforms to WTO rules through day-to-day diplomacy instead of multilateral rounds. The Commission would share this latter mandate with a World Trade Parliament, comprised ideally of legislators from WTO member states and civil society organizations, which should help to give global trade policy making the popular legitimacy its critics charge that it lacks today. The WTO’s Council would be empowered to enact reform legislation proposed by the Commission and Parliament through a mechanism of qualified majority voting crafted to take account of size, population, region and other differentiating factors between WTO member states.

Many will argue that the prospects of a global international trading system functioning without US participation will be hobbled by the US dollar’s continued rôle as a key currency in the international monetary system. Yet a US significantly withdrawn from global trade will reduce substantially the desire of non-Americans to hold greenbacks either for trade or investment purposes. The uncertainty about US foreign policy and trade policy implied by Trump’s capricious sallies even before taking office suggest a level of dollar volatility going forward substantially in excess of that facing the euro, yen, Swiss franc, or even the renminbi. An EU-China agreement to commit to a revitalized WTO could include a commitment to price oil and other strategic traded commodities in euro or some basket of currencies including the euro and the renminbi.

Given the US merchandise trade deficit and the United States’ dependence on continued foreign funding of the US federal budget deficit, the impact of Trump’s trade policies upon the US economy is likely to be serious and negative, domestically and globally. But would be a mistake to assume that, because a Trump-led United States chooses to withdraw from global economic leadership, there is insufficient concentration of economic power and will to lead in the international system for an alternative to survive and even thrive.   When the United States refused to lead in the 1920s and 30s – remember the Smoot-Hawley Tariff? – the results were ruinous: global economic depression, rival trading blocs, and the rise of fascist governments with imperial ambitions. But power in the global economy is distributed differently today. Leaders in Beijing and Brussels, Ottawa, Canberra, Tokyo, New Delhi, Pretoria, Brasilia and other world capitals need to take up the challenge seriously and with confidence. The alternative is too horrific to contemplate.