Trade War Series: Will the US-China trade war change the rules-based trading order?

Our speaker Jonathan Coppel looks at the long-term effect the trade war may have on the global rules-based trading order and the efficacy and architecture of its core institution, the World Trade Organisation – and calls on Australia to continue to defend free trade and the rules-based system that it requires.


In Donald Trump’s inaugural address, he declared; “We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs”. His words were followed through with decisions that left few doubting his bravado. Over the past two years we have witnessed the fastest escalation in protectionist measures ever seen in the era of the rules-based trading order. If the announced measures are followed through, the average bilateral tariff between the US and China will stand close to 25 per cent by the end of the year, a seven-fold increase. Not surprisingly, higher tariffs have slowed growth in global trade, and policy uncertainty is deferring investment decisions. These effects will likely unwind once the US-China trade stoush is resolved, but will this period permanently change the rules-based trading order itself?


Prima facie, it is hard to see otherwise. After all, it is a major concern when countries not only begin to flout the rules-based trading order but take deliberate steps, such as disrupting the dispute settlement system, to weaken it. Some fear this could ultimately lead to a breakdown of the rules-based multilateral system which the United States has led and championed since the end of the Second World War in favour of ‘managed’ trade. However, I think it would be a mistake to read too much into the ongoing trade war. Equally, it is hard to see how the trade fracas of the last two years could leave the system unchanged.


The rules-based trading order and the spirit of multilateralism more generally, have reached a fork in the road. The trade war is a symptom of a broader malaise, extending to the core of the rules-based trading order – the World Trade Organisation (WTO). No broad multilateral agreement has been concluded since 1994. The body of rules and procedures of the organisation has not kept pace with the changing nature of trade, notably the rise of global supply chains and digital trade. Nor has it kept pace with new issues, like forced technology transfer or the internationalisation of State-owned enterprises. And the timely compliance with transparency procedures is slipping. In short, the WTO’s authority and credibility are taking a hiding. Yet in every crisis, there’s opportunity.


The opportunity must lie with changing the system we have for the better, together – not breaking it apart. Australia has a strong incentive to follow this path, as we and other middle-sized economies have the most to lose from a weakening of the rules-based trading order. The single most important policy-setting for Australia is to keep our own borders open to trade and investment and to continue working towards freer markets. There is ample scope for the Australian government to remove ‘nuisance’ tariffs, lower non-tariff barriers, simplify rules of origin and avoid anti-dumping duties. Australia should also continue to work with other countries to build consensus on how to resolve long-standing and escalating challenges facing the WTO. In this regard, it is encouraging that Australia and other countries are striving within the WTO and in other fora – the Regional Comprehensive Economic Partnership being the latest example – to improve and update our trading system.


The importance of strengthening in an even-handed manner the rules-based system that governs international trade – which has underpinned the growth in world trade, boosted living standards and prevented a relapse into protectionism for the past 70 years – cannot be underestimated.

 


 

Jonathan Coppel was reappointed as a full-time Commissioner in July 2016. Jonathan is an economist with extensive international and domestic experience advising governments on macroeconomic, investment, energy, social, environmental and regulatory policy.


Prior to his appointment, Jonathan was Head of the OECD G20 Sherpa office. During his OECD career he held senior roles as Counsellor to the Chief Economist, Executive Manager of the NEPAD-OECD Africa Investment Initiative, Head of the EU and UK Desks and analyst at the International Energy Agency. In Australia he has held senior management positions at the Reserve Bank and started his career at the Commonwealth Treasury.

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