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Trade: Deal with the Fundamentals

Trade: Deal with the Fundamentals


Can Japan and the EU together save the world trade order from destruction at the hands of Donald Trump, who seems intent on wrecking it in pursuit of America's national interest? Their recent agreement to sign what would be the world's biggest trade deal might appear to suggest so.

But the truth is that attempts by Japan's prime minister Shinzo Abe and EU presidents Donald Tusk and Jean-Claude Juncker to present themselves as champions of multilateral trade are really little more than political posturing in the face of deeper challenges to the global economic order.

Their agreement to create a trade pact covering around one third of global GDP certainly sounds enlightened at a time when Trump has pulled the United States out of the Trans Pacific Partnership and is threatening to walk away from the North American Free Trade Agreement.

Abe meanwhile has managed to keep a scaled-down version of the TPP on the road among eleven of the original dozen members. This plus the Japan-EU agreement makes the Japanese leader look good at a time when China's president Xi Jinping is also billing himself as a champion of free trade.

Yet things are by no means so simple. Trump's attempts to restore balance in US trade by levying tariffs on imports from key trading partners appear crude and inward looking by comparison. However, the global trade system was in trouble even before the American president weighed in.

In recent years trade has been used increasingly as a strategic weapon, not least in Asia where the TPP, for example, its goals broader than facilitating trade, aimed at bringing together countries that subscribed to similar views on how their economic and political systems should be organized.

Meanwhile, increasing trade within and between such blocs has come at the cost of unemployment for certain groups of workers in advanced economies, thus contributing to income inequality and social stresses. In turn this helps foster popular resentment against free markets.

Trump came to office largely because he recognized and exploited this fact. Populist politicians elsewhere may ride to power on his coattails. Simply deploring this fact or rushing to create new trade blocs as counters to Trumpian protectionism will not solve the problem.

The Japan-EU agreement may look good but it adds to a proliferation of trade blocs that in Asia alone are taking on baffling complexity. Japan is already a member of the revised TPP (now known as the CPTPP) and will join the Regional Comprehensive Economic Partnership (RCEP) which includes China.

There are wider Asian free trade schemes planned too, forming only part of a growing spider's web of such accords globally. Within these dense networks with their often conflicting rules of origin governing tariff treatment, highly complex manufacturing supply chains have evolved.

Rather than a spaghetti bowl of overlapping accords, it is more a dog's breakfast. Just one of many problems is that the interests of business have often overshadowed those of labor.

Obviously what is needed if the forces of dissatisfaction driving populism and trade protectionism are not to become even more powerful and disruptive is some rationalization of this largely ungoverned process. There is a need to get back to basics.

For decades during the postwar period, the General Agreement on Tariffs and Trade (later subsumed within the World Trade Organization) sought to further world trade through a series of negotiating rounds that ended in the failure of the so-called Doha Round.

One reason it failed (apart from the sensitivity of trade in areas such as agriculture and services) was the complexity of dealing with all the problems that go with free trade, especially when attempts are made to apply the principle on a global basis.

Instead of grappling with these problems at that time, a number of advanced economies opted to walk away from the multilateral process and to focus instead on bilateral and regional free trade and investment agreements that were billed as building blocks for global free trade.

The building blocks are of such varying design, however, that they cannot easily form part of a global free trade architecture; they are not designed with the best interests of the ultimate structure in mind. The best brains and policies have not been deployed in their design. Only a return to the multilateral approach (via the WTO or some new and comprehensive organization) is likely to solve the current problems of the global trade order. And that means looking not only at trade but also at the domestic economic factors that contribute to trade imbalances.

The system needs a thorough overhaul rather than quick fix, but instead the United States is applying voodoo economics. As the IMF noted in a recent report, "protectionist policies should be avoided as they are likely to have significant deleterious effects on domestic and global growth [with] limited impact on external imbalances." 

Surplus and deficit countries alike, the IMF concluded, “should work toward reviving liberal- ization efforts and strengthening the multilateral trading system—particularly to promote trade in services, where gains from trade are substantial but barriers remain high."
Trump is seen as the villain of the piece in all this but equally Japan and the EU are not serving the cause of good international policy by trying to present their (also rather simplistic) policies as being antidotes to a much more fundamental economic malaise.

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Anthony Rowley is a former Business Editor and International Finance Editor of the Hong Kong-based Far Eastern Economic Review and has spent some 40 years writing on Asian affairs from Singapore, Hong Kong and Tokyo. He currently writes for the Singapore Business Times, among other publications. 

Published in: August 2018

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