The Need for a Global Trade Makeover

A healthy and sustainable world trade regime would be one of «peaceful economic coexistence,» in which different economic systems prosper side by side. A column by Dani Rodrik.

Dani Rodrik
«There is no inherent conflict between trade rules that are more sensitive to developed countries’ social, environmental, and equity concerns and economic growth in developing countries.»

US President Donald Trump’s on-and-off trade war against China added ominous clouds of uncertainty to the world economy in 2019, raising the prospect of a significant global economic downturn. His erratic and bombastic style made a bad situation worse, but the US-China trade war is a symptom of a problem that runs much deeper than Trump’s atavistic trade policies.

Today’s impasse between these two economic giants is rooted in the faulty paradigm that I call «hyper-globalism,» under which the priorities of the global economy receive precedence over the priorities of the home economy. According to this model for the international system, countries must maximally open their economies to foreign trade and investment, regardless of the consequences for their growth strategies or social models.

This requires that national economic models – the domestic rules governing markets – converge considerably. Without such convergence, national regulations and standards will appear to impede market access. They are treated as «non-tariff trade barriers» in the language of trade economists and lawyers. China’s admission to the World Trade Organization was predicated on the assumption that China would become a market economy similar to Western models.

Consequences of hyper-globalism

This has clearly not happened. Meanwhile, in the United States and many other advanced economies, hyper-globalism has left behind communities devastated by offshoring and imports – creating fertile ground for nativist political demagogues to thrive. US trade policy has long been shaped by corporate and financial interests, enriching those groups while contributing to the erosion of middle-class earnings. It is now clear that we need a new narrative on trade, one that recognizes globalization is a means to national prosperity, not an end in itself.

Fortunately, Democratic candidates in the US presidential race have begun to produce good ideas on which a new trade edifice can be built. In particular, Senator Elizabeth Warren’s trade plan solidifies her credentials as the Democratic candidate with the best policy ideas. Her plan represents a radical reimagining of trade policy in the interests of society at large.

We live in a world where import tariffs are, for the most part, already quite low. Trade negotiators spend most of their time arguing not about import tariffs and other barriers at the border, but about behind-the-border regulations such as intellectual property rules, health regulations, industrial policies, and the like. Trade agreements that target these areas can foster higher levels of international trade and investment, but they also encroach more on domestic social bargains. They constrain countries’ tax and regulatory policies and their ability to uphold their own social and labor standards. Unsurprisingly, major multinational enterprises such as pharmaceutical companies and financial firms seek access to foreign markets at the expense of the needs of labor or the middle classes.

Raising the standards

A key plank of Warren’s plan is to establish prerequisites before the US signs deep-integration agreements. Any country with which the US negotiates a trade agreement must recognize and enforce internationally recognized labor standards and human rights. It must be a signatory to the Paris climate agreement and international conventions against corruption and tax evasion. Of course, on labor and the environment, the US itself falls short of meeting some of these preconditions, and Warren has committed to fixing these «shameful» shortcomings.

This approach is vastly superior to the current practice of assuming trade partners will raise their standards once a trade agreement is signed. In reality, side agreements in labor and environment have proved quite ineffective. The only way to ensure that such issues are treated on par with questions of market access is to restrict trade agreements to countries that are already committed to high standards.

Moreover, some of the most harmful elements in trade agreements should be removed or weakened. Warren rightly proposes eliminating investor-state dispute settlement (ISDS) – the controversial practice of allowing foreign corporations to sue governments. She also seeks to limit the scope of monopoly rights in intellectual property, pledging never to push another country to extend exclusivity periods for prescription drugs.

More transparency needed

The transparency of trade negotiations needs to be dramatically increased as well. Currently, draft agreements are kept secret until presented for a vote by Congress. Under Warren’s proposal, drafts would be open to public scrutiny and comment. Secrecy, combined with the requirement of an up-or-down legislative vote, may have facilitated trade liberalization – on the shallow integration model – in the past. But since the 1990s, they have served to empower corporate lobbies and produced unbalanced deals.

Warren is also ready to impose a «border carbon adjustment,» to ensure domestic companies that pay the full social cost of carbon are not disadvantaged by foreign companies that do not. Furthermore, trade agreements would be evaluated not only by their national effects, but also by their regional consequences. Warren would seek congressional approval only after regional, labor, consumer, and rural advisory committees all give their assent.

Focusing on the US, Warren has little to say about the multilateral trade regime and how to reform it. Another (former) Democratic presidential candidate, Beto O’Rourke, has taken this task head-on. He proposes updating WTO agreements to tackle new issues such as currency manipulation, to adopt enforceable labor standards, to revise dispute settlement procedures, and to make «sustainable development» an explicit goal of the multilateral trade regime.

Poorer countries not at a disadvantage

One criticism of Democrats’ tougher line on trade is that it will have adverse effects on poorer countries’ growth prospects. But there is no inherent conflict between trade rules that are more sensitive to developed countries’ social, environmental, and equity concerns and economic growth in developing countries. Nothing in the historical record suggests that poor countries require very low or zero barriers in advanced economies in order to benefit greatly from globalization. In fact, the most impressive export-oriented economic take-offs to date – Japan, South Korea, Taiwan, and even China – all occurred when import tariffs in the US and Europe were at moderate levels, and higher than they are today.

But it is not just the US and other advanced economies that need more policy space. China and other countries should not be encumbered by global trade rules in deploying their own growth-promoting structural diversification policies. Ultimately, a healthy and sustainable world trade regime would be one of «peaceful economic coexistence,» in which different economic systems prosper side by side rather than being pressured to conform to a single mold favored by international corporations.

Copyright: Project Syndicate.