Global trading system poised for a new normal

The tale of two events at two different points of time demonstrate unusual commonalities. One occurred in 2001, and another is about to take place on January 15. While the first event happened against the backdrop of the 9/11 terrorist attacks and the impending Iraq war, the second is about to unfold amidst escalating US-Iran tensions. In both events, the dramatis personae are the same: the US and China, the world’s two largest economies.

Unsurprisingly, protracted negotiations preceded the final outcomes in the two events. The US paved the way for China to join the World Trade Organisation (WTO) in 2001, after extracting a significant price by forcing Beijing to slash its tariffs on industrial and agricultural products to levels that industrialised countries took more than 200 years to bring down. China had also committed to reduce subsidies and other trade-promoting measures for industry and agriculture.

Beijing had agreed to reduce its de minimis support for agriculture producers below what was allowed for developing countries. For almost 15 years, anti-dumping investigations against Chinese products were punitively high as they were treated as products originating from non-market economy. China chose to pay the price to establish its presence in the global trading system.

Ironically, after almost 19 years, China again decided pay another price because of its exalted status, as it transformed into the world’s industrial hub.

Unlike its predecessors, the Donald Trump administration launched a naked trade war against China for the past three years. Washington justified the trade war with China in particular, and others in general, on grounds that the US’ trade deficit had shot up to more hundreds of billions of dollars because of allegedly illegal practices adopted by its competitors.

Under the banner of “America First” trade policy, the Trump administration has justified its trade war against China on several grounds. They include rising trade surpluses, particularly since 2001 when China joined the WTO, to its latest “Made in China 2025” industrial policies that are made possible because of “government intervention and substantial government financial and other support.”

US’ allegations

The US says China aggressively promotes 10 advanced manufacturing industries domestically “to replace foreign products with Chinese companies’ products in the China market through a variety of fair and unfair means, including through the extraction of foreign technologies,” according to a 2017 report to the US Congress by the Office of the US Trade Representative in January 2018.

Therefore, the continued ballooning of the US trade deficit which touched $648 billion in manufactured goods last year and the loss of five million jobs during the last 16 years demonstrates that multilateral, regional, and even bilateral trade agreements with Korea and others, have only brought de-industrialisation and destruction.

In short, the US argues that ever increasing trade deficits are an offshoot of the manner in which it was duped, cheated, and deceived by its trade partners who refused to play by the rules governing the so-called “fair and free trade”.

The two sides are now poised to sign a “phase one” bilateral trade deal that would establish a new transactional normal in the global trade. The deal involves purchase of tens of billions of dollars of American farm products that include soyabeans and pork, among others, by China. It would spell out modest reforms in the Chinese intellectual provisions, including changes in the so-called forced transfer of technology. It would also include some preliminary enforcement provisions for proper implementation. Much of the harder issues will be shifted to the “phase-two” negotiations. There are no guarantees yet on whether the US establishment, which has declared an all out war against China’s hi-tech companies, will remove all the barriers. Nor whether this deal would improve the prospects for Chinese students to enter the best of American universities.

More importantly, the new Sino-US normal attempts to cock a snook at the global trading system based on rules and comparative advantage. So, the trade war between the two largest economies in the world has almost paved the way for managed trade in which countries compete not on the basis of their comparative trading strengths but on sheer market and power-based equations. There will be several collateral causalities in the global trade because of this new normal. Countries like Australia, Brazil, Argentina, and other major farm producers will take a hit once orders from China dry up because of the purchase of American farm products.

However, there is no guarantee that trade relations between the two major powers will dramatically improve. Indeed, the trade war could continue for a considerable period of time. “It is essentially a battle over who is going to be the hegemon and who is going to lead the fourth industrial revolution,” former South African trade minister Rob Davies told this columnist.

Source: The Hindu Business Line