Trade order battered but not beaten

The world trade system is under great and growing strain. Global trade negotiations under the auspices of the World Trade Organization have stalled and are considered dead. Regional trade initiatives, stimulated by the failures of the WTO, are being undermined by political developments. The United States, under President-elect Donald Trump, is flagging in its commitment, not only to continued liberalization, but even to deals that it has already made.

Yet this environment also offers an opportunity for governments that have traditionally been passive about such negotiations to shed their hesitance and assume leadership. This is a moment for Japan to step up and demonstrate its commitment to free and fair trade. And, while it is anathema for many to say it, Tokyo and Beijing could work together on regional trade initiatives that advance the goal of trade liberalization and promote cooperation among Asia’s two largest economies.

For the last several decades, global negotiations have been the engine of trade liberalization. Unfortunately, however, the Doha Development Round of WTO talks, launched in 2001, has foundered. Its failure is reflective of larger troubles that dog governments and politics today: Designed to spread the gains of trade more widely, developed nations torpedoed the talks precisely because they could not convince their publics of the desirability of negotiations that delivered more benefits to the developing world than to themselves.

In the wake of that failure, governments pressed ahead with regional talks, such as the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership (RCEP) in Asia and the Trans-Atlantic Trade and Investment Partnership (TTIP) among the U.S. and Europe. While such agreements are invariably suboptimal compared with global deals, they nevertheless promote liberalization and can yield competitive liberalization (although that is not assured).

The TPP was concluded and the RCEP looks set to wrap up in the next few months. The fate of the TPP is anything but assured in the wake of the 2016 U.S. presidential campaign, however, with Trump pledging to withdraw from the deal on the first day of his administration. His attitude has also spiked prospects for the TTIP. Worse, Trump appears ready to rip up existing trade deals: He promised to renegotiate the North American Free Trade Agreement, which he calls the worst trade deal the U.S. ever negotiated. More worrisome still, he has talked about imposing sanctions and other penalties on countries he considers unfair traders, China topping that list. Such moves could spark a trade war that would hurt the entire world.

While the portents are not good, they may mean less than they appear to be. Trump has shown no understanding of international economics, nor the realities of trade agreements. He is a showman who demonstrated considerable sleight of hand during his campaign. Trump craves success and that impulse, along with the need to satisfy his supporters, could mean that appearing tough matters more than substance. In short, he could tweak existing deals and call that “victory.”

That is the most optimistic scenario. More realistically, the world should expect confusion from the new U.S. administration and a vacuum in leadership on trade issues. That does, however, prove an opportunity for countries like Japan. Japan has historically been seen as a begrudging participant in trade liberalization, more a beneficiary of such efforts than a moving force. That should change. As Prime Minister Shinzo Abe explained at the Asia-Pacific Economic Cooperation summit in Peru last week, free trade is a source of global economic growth. Abe knows that trade is essential to Japan’s well-being and that of its neighbors, that reforms demanded by such talks help overcome barriers to change at home and that aggressive attempts to push that agenda remind the world Tokyo can be an international leader.

That demonstration assumes renewed urgency as China takes the same approach. At the APEC meeting, President Xi Jinping promised that “China will not shut its door to the outside world but open more,” pledging to lead on trade issues if the U.S. does not. That would appear to set the stage for a competition between Tokyo and Beijing on trade leadership. That is not necessarily a bad thing. A shared commitment to economic and trade liberalization by the region’s two biggest players provides a platform for cooperation between two governments that should be leading regional integration and modernization efforts. A joint effort could offer real substance to the desire of both to improve bilateral relations.

As a start, Japan and China should take concrete steps to affirm the APEC leaders’ pledge “to keep our markets open and to fight against all forms of protectionism.” As members of the RCEP negotiations, they should press forward with that deal, while Japan, as a part of the TPP talks, should help Trump declare victory and rescue that agreement. If that proves impossible, then one idea might be for Tokyo to consider changing the terms of the TPP to allow it to go forward without the U.S. and, once concluded, open the deal to other countries — the U.S. and China among them.

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