FA Media Call: Trump's Assault on the Global Trading System (August 21, 2019)

Trump's Assault on the Global Trading System

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Trade War

Ahead of this weekend's G-7 Summit in France, Foreign Affairs authors Bown and Irwin will discuss the Trump administration's trade war with China, its effects on the global economy, and the prospects for recession. 

Gideon Rose

Editor, Foreign Affairs and Peter G. Peterson Chair

Chad P. Bown

Senior Fellow, Peterson Institute for International Economics

Douglas A. Irwin

Robert E. Maxwell ’23 Professor of Arts and Sciences, Department of Economics, Dartmouth College

ROSE: Hi, everybody. Thank you, Operator. And welcome to what should be a really great call on global trade and what is happening to it, whether it’s dying, and if so whether it’s a murder or a suicide, or something else.

The speakers today, really we have some great heavy hitters for you. Chad Bown of the Peterson Institute for International Economics and Doug Irwin, professor of economics at Dartmouth. They are the authors of a wonderful new piece in FA called Trump’s Assault on the Global Trading System and Why Decoupling from China Will Change Everything. In terms of their credentials, without going on and on, I’ll just start with an old story that was told about Frank Lloyd Wright when he was called as a consultant in a case. And the judge swore him and said: Can you please identify yourself? He said, your honor, I’m—my name is Frank Lloyd Wright. I’m the world’s greatest living architect. And the judge looked at him and said, Mr. Wright, don’t you think that’s a bit immodest? And he looked at the judge and he said, your honor, I’m under oath. We have here two of the people who could legitimately considered among the group that, you know, could have that kind of ego when it comes to the economics of trade. And we’re very fortunate to be able to talk with them now about what’s going on.

Their piece, for those of you who haven’t read it, is pretty simple and straightforward. It basically—as I would summarize it, you know, very crudely and simple—trade is a mixed-motive, positive-sum game in which the players are cooperating with each other to grow the pie and competing with each other to take larger shares of it. And that kind of effort, both cooperative and conflictual, is the normal process of trade. And what the Trump administration basically is doing is they’ve dropped all the cooperative parts, or the notion that there’s any long-term, positive-sum project, and are just simply fighting every individual trade thing as if it’s a zero-sum game in which how much more they can get from the other guy is the key goal. And the result of that change in policy is what looks like the normal trade jockeying that used to happen, and that has always happened, this time is actually really dangerous because the entire system within which that jockeying usually occurred is slowly falling apart because the hegemon is not maintaining it. That’s us.

I think that’s what they’re saying. I’ll turn it over to Doug and Chad to basically, first, tell me if I got that right and generally then relate that to what you’re seeing in the news today. And then we’ll go quickly into a discussion with questions from the floor. Doug and Chad.

IRWIN: Chad, do you want to go first, or should I go first?

BOWN: No, you can go ahead, Doug.

IRWIN: OK. Well, first of all, Gideon provided a very eloquent summary of what we’re talking about in our Foreign Affairs article. We’re basically trying to parse out what have we learned about Trump trade policy over the past two, two-plus years, or so. What—you know, there was a lot of uncertainty initially when they came into office. There was this battle between sort of the globalists, the nationalists. They were sort of at loggerheads. And I think what we’ve seen is that the globalists have sort of left the administration. And so there’s sort of this three-part trade agenda that the president’s following.

The first is to reach a new trade agreement. So we’ve seen that with the renegotiation of NAFTA. And we’re critical of what the administration has done. NAFTA was—it didn’t need to be bad-mouthed. It was a perfectly fine agreement. And I think what’s been revealed in the administration’s approach is that there’s no different set of rules or a particular type of agreement that they disliked from the past that they want to change for the future. They don’t like the outcomes under NAFTA. So if you’d press the administration officials, what is it specifically about NAFTA you don’t like, they would say—they couldn’t argue about the provisions of NAFTA, which are sort of innocuous, equal for both sides in terms of zero tariffs. They’d say, well, we have a trade deficit and there’s been too much foreign investment in Mexico, or something like that. Well, those are outcomes that may or may not be related directly to NAFTA.

And so that contorts their view of what a good trade agreement is where, as Gideon said, there’s this sort of zero-sum nature to the process that they think about that most economists would reject, and that they try to twist the agreement to bring better benefits to the U.S. at the expense of other countries. And that’s sort of, A, not really the purpose of trade agreements and, B, is really tough to do because then you’re deviating from what the purpose of a trade agreement is, which is to equalize or lower barriers across both sides and open up the conduits of trade.

The same approach has been taken with the WTO. So the NAFTA renegotiation is now called USMCA. That’s a big behind us. The WTO has now been bad-mouthed by the president, saying it’s the worst trade agreement ever—something he used to say with NAFTA. And there, it’s sort of dying of neglect. So here’s this institution that the U.S. helped created. Unlike what the presidents said, where other countries are sort of ganging up on the U.S. and exploiting us, we helped create this system. And it’s dying of benign neglect. And Chad can go into more about the dispute settlement system.

And then finally the last sort of triad to the administration trade policy is China, where there once again there’s sort of this conflict between what is their objective, what are they trying to achieve? Is it just they want to reduce the bilateral trade deficit and get China to buy more stuff from us? Or is there something systematic in terms of the different economic system China has or the threat they pose to national security, and this mismatch between what their objective is—which is not clear—and the tools that they’re suing to address China. Once again, I think we are quite critical about the fact that we haven’t developed allies to address our problems with China. We have this sort of unilateralist, go it alone process that’s bypassing the WTO. And so the results, not unsurprisingly, have been we’re down to the harm of the U.S., in terms of retaliation against U.S. exports.

So those are the—

ROSE: Why would the administration—why would the administration to be doing this, then? If that’s what—if that’s what big-shot economists across the board think, why would you do the exact opposite?

IRWIN: The rejection, which I think you noted in your pages and in your public statements across the board on a range of foreign policy issues, we can do it alone. We have better leverage when we do things by ourselves. We don’t need European allies. In fact, our allies don’t really cooperate with us either in terms of defense spending or on other things. And so this suspicion of international institutions, this unwillingness to cooperate with others, they think they can go it alone. And that drives their approach. And I think it’s because they’re sort of locked into that approach, they’re not willing to think about the strategies that will most beneficially serve the U.S. interest and will achieve the objectives that they themselves set out for themselves.

ROSE: Got it. So let me ask you guys a question. And this is going to sound a little weird, but we have to ask. We’re in weird times. So there are some issues on the agenda, on the foreign policy agenda, in which the Trump administration has done something different than previous administrations, or just the last recent administration, and we have debate over it, but it’s essentially, you know, the normal course of foreign policy discussion back and forth. And there are some things that this administration does, or this president does, that literally strike people as sort of—they more expect it to come out of the Onion than the Washington Post or the New York Times. Like, for example, the decision to try to buy Greenland, and then cancel a state visit when that was politely rebuffed.

So my question to you is, is trade one of the issues that falls into, let’s say, there are legitimate people who disagree—and, so, you know, you’re making a big case about this. But, you know, not everybody who thinks this is crazy. Or are we in I want to buy Greenland territory, with sort of literally no actual legitimate rationale for what they’re doing, except the boss wants this?

BOWN: Maybe I’ll try to take that one on, and Doug you can correct me. So there are a number of areas—unlike the USMCA, unlike NAFTA—where the United States does have legitimate trade grievances that are kind of irrespective of the Trump administration. That is—you know, there is broad support for the trajectory in the U.S.-China relationship on trade, for example, was unsustainable, or was going to become more conflictual than had been the case. It’s not necessarily for the reasons that President Trump identified—you know, a large, bilateral trade deficit with China. But more in the area of China has not become as market oriented as was expected. It continues to prop up, you know, huge state-owned enterprises. It hasn’t improved to the extent that we would like its protection of intellectual property and its treatment of foreign investment within China. So multinationals—whether they be of American origin, or European, or Japanese origin.

And so there was a sense—and there are some legitimate concerns there with China. The big deviation the Trump administration has taken, though, is now to address those concerns, and to do it both through these—the use of tariffs, unilateral tariffs, not using the existing system that had been created to try to address those kinds of problems—the WTO, the World Trade Organization, that Doug had described. And then also not working with allies that have essentially identical concerns with how the Chinese economy has evolved. So the Europeans, whether they’re German manufacturing companies, or the Japanese have the same problem with how China has been heading as the United States. And yet, the Trump administration though, you know, whether it’s NATO or on trade, at various points in time has said, you know, the European Union is as big a problem for threatening the United States—(laughs)—as China is. And so it’s gone beyond not only working with allies, but also kind of confronting them in needlessly conflictual ways as well.

So I would argue that there are some underlying concerns there. But what’s very, very different is how the Trump administration has brought its active trade policy to bear on those problems and, as Doug mentioned, you know, chosen to both not only not utilize the existing institutions that we had created, but then to basically undermine their effectiveness, not only through neglect—but, I guess, the one piece of detail that I’ll add—by essentially eliminating the utility, the function of the WTO’s dispute settlement procedures.

And so what they’ve done specifically on this front is they’ve refused to allow the appointment of new judges in basically the court system. And they’ve held up that process. They’re not allowing any to be appointed. And so what that means is by December of this year—December of 2019—when two judges that are there will roll off—in any one of these cases, you need to have three judges effectively sitting there to be able to rule. By December, two of the three that are there currently, that are left—there’s usually seven—will have to roll off. In which case, the WTO won’t be able to adjudicate any new cases.

This is a system that’s been used for more than twenty years to effectively resolve disputes not only between the United States and China—and most of the cases that the United States has brought against China we have won. China has complied with. They’ve stopped doing what it was that they were accused of doing. But it’s a system that adjudicates cases for, you know, all the other traders out there in the world as well. And so the system not only is going to be eliminated between the U.S. and China, but between other countries. And so it’s going to lead to an additional flare up of conflict in other hot spots around the world. And so, you know, a very recent example of this is, you know, the Japan-South Korea conflict that’s going on right now on export controls, right? So that’s just an example of how the U.S. actions in this space can then spill over and actually harm third countries too.

ROSE: Chad, I’m so glad you actually wonked out on that, because the fact is that I think the WTO dispute resolution procedure is in fact probably among the most important obscure international bodies or regimes that nobody’s ever heard of that actually is crucial to, you know, keeping the world from falling apart into disaster. And so that is what is saving us from having, as Churchill said, dispute—you know, jaw-jaw is better than war-war. Having a neutral arbiter for—having built a system that can take the politics out of trade disputes, we are now—and, you know, therefore avoided the dangers that come from trade wars spilling into other kinds of conflicts. We’re now deliberately dismantling the very system that we successfully created—Republican and Democratic officials—over decades. Is that basically correct?

BOWN: That is exactly correct, yeah. And that, again, is a big concern. The Trump administration is dismantling this, but without proposing something new to replace it. And so we got no idea what comes next.

ROSE: There was an old partner at Goldman Sachs named Gus Levy who used to characterize the firm’s attitude as long-term greedy. This doesn’t strike me—it strikes me that the way you’d manage trade was—you should manage trade is long-term greedy. You create the whole system that you’re the biggest player from and can benefit. And this all strikes me as sort of very short-term greedy. We try to get everything we can in the next year or two, and, you know, no one cares about what happens when I’m gone. Is that basically what’s happening here?

IRWIN: Yeah, I think that would be right. And just to sort of draw a link between two of the issues we’ve talked about, sort of the administration’s push to NAFTA and the WTO are similar in this sense: They complain vociferously about both. They don’t like the outcomes from both. So they say, we don’t like the trade deficits from NAFTA. We don’t like the judgements that are reached by the dispute settlement system in the WTO. Therefore, we’re just going to kind of walk away or demand changes. But when you push them and say, well, what specifically in NAFTA, what specific changes would you want to make to the WTO, they don’t really have anything to say. So that’s where the destructive element comes into it. They were quite willing to blow up NAFTA. They were quite willing to, seemingly, blow up the WTO without saying, look, here are five things that we could change we’d be happy with. Here are concrete, positive suggestions for change.

And both are, in the case of NAFTA and in the case of the WTO, countries are willing to listen to the U.S. and make changes. Canada’s already moved ahead with some other partners, trying to think about reform of the dispute settlement system. So instead of walking away or blowing things up, if the administration made concrete, positive suggestions I think the world community would be open to those changes.

ROSE: What is the result going to be if continuing on the current course?

BOWN: So, for the WTO there won’t be an explosive death of the dispute settlement, because what will ultimately happen is while the dispute settlement body won’t be able to hear any new cases beginning after December, basically those three judges can stay on to adjudicate the existing case load that will take a while to work through the pipeline. So there won’t be a big fiery end on December whatever. It will—they’ll hang around into 2020. And my sense is that, you know, what’s happening is you’ll just have fewer and fewer new cases as other countries essentially just kind of wait out the administration, and see what happens in November 2020, and then have to make a decision at that point in time. So I—you know, I think it could be kind of a slow death. (Laughs.) Obviously, it will be a faster death if the Trump—President Trump is reelected in November 2020. You know, if somebody else wins that election, you know, maybe things could be salvaged at that point. But I think that’s going to be a key marker, obviously.

ROSE: OK. I think that’s a wonderful lead-in to a discussion with our audience of, well, various people. Everybody likes to play ask Mr. Wizard themselves, so I’ll let them have the fun of doing it.

Operator, can you explain how we’re going to work the Q&A?

OPERATOR: Thank you. At this time we will open the floor for questions.

(Gives queuing instructions.)

ROSE: And this is Gideon. When you do ask a question, please keep it short and concise, and identify yourself so we can know who you are and your affiliation. (Laughs.) OK, do we have any questions?

OPERATOR: All right. Our first question comes from Trudy Rubin with Philadelphia Inquirer.

Q: Hi. Thanks so much for doing this.

I wonder if you could talk a little bit more about what a rational president would have done beyond proposing concrete changes in the WTO mechanism and trying to work with other countries, because the problems with China are systemic, not just stealing technology but blocking markets with regulations. And I’ve been surprised at how angry AmCham has become over the years, which used to speak in anodyne tones. And the last time I was there, a year ago, was furious with the Chinese. So is there really any way to change, would there have been any way to change the Chinese way of doing trade and operating a state-sponsored industrial system?

BOWN: So maybe I’ll take a quick stab at that one. So I think the short answer is, we’ll never know, right? I think there are many legal experts who would say that if the United States had filed a trade dispute against China at the WTO over these issues and, you know, had it been supported by Japan, by Europe that are broadly of the same mindset, that there was a good chance that it could have won the case. In which in that instance—you know, as Gideon explained—it’s an international, you know, forum that kind of takes the politics out of it. You have that forum be the one to tell China, you know, in order for you to not face retaliation—so, the sanctions that are available, the penalties that are available in the WTO system are effectively tariffs.

So it’s like what we’re seeing today, but the difference is those would have been authorized by the rules-based trading system. In which case, you’re much more likely to have China say to itself, you know, this is the world saying that if I want to continue to engage in the rules-based system that benefit from open foreign markets, export-led growth, I’ve got to make these changes. I’ve got to get rid of some of these subsidies, rein in state-owned enterprises, change the way I treat foreign intellectual property. It’s much more palatable for China to be able to do something like that, arguably, politically if it’s the WTO saying it has to do that than if it’s just, you know, a president on Twitter saying that it has to do that. But the issue is, the United States wasn’t even willing to try. And I think that’s one of the big—the big unknowns. What would have happened if it had gone down that path?

IRWIN: And just to reiterate that point—oh, sorry. Go ahead.

Q: I was going to say, could I follow up on that? I mean, surely the U.S. has brought specific cases, but I’m talking about a more systemic problem. For example, when China delays the ten years repeated request to let U.S. credit card companies in and finally says, well, at a time when all Chinese already use Alipay or the other similar system and nobody uses credit cards anyway, isn’t this much bigger than individual cases on specific grievances?

BOWN: So let me just quickly answer on that case, and then I’ll turn it over to Doug. So you’re exactly right. I think the Chinese electronic payments case is sort of the one front and center example of where China didn’t actually comply with the WTO legal rulings that they had lost. But that being said, you know, when we look at the skeletons in the American closet, there are examples that fit that bill as well. There’s a number of instances in which we have refused to effectively comply with WTO rulings on issues that were politically sensitive—whether it’s agricultural subsidies or how we used anti-dumping. So it’s not to say that China is alone.

This is also not to say that there aren’t systemic problems with China. I’m not disagreeing with you on that major point. My big point is that the WTO toolbox in terms of using WTO dispute settlement had not been fully deployed to see if it could have handled the China problem before the Trump administration choose this alternative path.

Doug.

IRWIN: Yeah. And Chad opened by saying we don’t know. In some sense, this depends on China, how China wants to respond. And it could be that China says, look, we like our system. It doesn’t conform to your norms, but we’re going to keep our system regardless of what you do. I think what Chad is saying is that if we’d gone through the WTO process, if we’d filed those cases in early 2017 when the administration took over, we could have those tariffs in place—the same sort of tariffs today as retaliation that has gone through this process where it would not just be U.S. tariffs, but EU tariffs, Japan tariffs, others, boxing China in. And there’s a legitimacy to that process that China’s not accepting with this unilateral judgement on the part of the U.S.

The other thing, of course, the U.S. could have done to sort of box China out of the system, in some sense, is join the Trans-Pacific Partnership. And this is something the administration decided within the first week of taking office that we were going to pull out of the TPP. TPP has gone ahead without the U.S. So one of the broader issues facing the U.S. now is that U.S. is not participating in many, many other trade agreements. They’re moving forward by other countries, which means the U.S. exporters are being discriminated against in other markets, foreign markets, large markets, such as Japan, where other countries have a leg up. So you have to—against China, you have to play both offense and defense. I think the combination of the WTO and the TPP, working with allies, would have been a lot smarter and better approach, both for the U.S. economy and for the probability of success in bringing about some change in China.

ROSE: Next question.

OPERATOR: Thank you. Next question comes from Mark Bocchetti with Congressional Quarterly.

Q: Yes. Thank you.

I was curious why you referred to the WTO dispute settlement procedures as an effective remedy. If I recall correctly, you criticized the Trump administration for blocking the appointment of new judges, which eventually will basically bring down the dispute settlement system. And you said, you know, they’re basically putting an end to a system that has been effective, and not just for the U.S. but for other countries. And I’ve been covering the Airbus dispute, which was filed back in 2004, I think. And only now are we reaching the remedy phase. And McDonnell Douglas, which was the other large U.S. civil aircraft manufacturer, is long gone. And it’s clear to any observer that there is no way that the EU countries would ever allow Airbus to fail. They continue to subsidize them in very, very large volumes. And I would just point to the A380 aircraft, which has turned out to be a commercial failure. And I suspect that Airbus will not wind up in bankruptcy as a result of that. So given that one example, why do you see WTO dispute settlement as effective? And I would also bring in the Chinese case that my colleague raised.

My other question on the same topic—

ROSE: That’s enough of a long enough question. We got to have other people on the call. So how do you guys feel with that one?

BOWN: So my quick answer on that one would be, you know, the length of the dispute resolution isn’t only entirely on the WTO. It’s on the parties themselves. And they have the ability to drag out this process by, you know, when they submit their briefs, what they ask for, the length of the submissions. And I think that’s a huge part of the Airbus case. I think the other major aspect of Airbus is we can’t forget that there’s a—there’s a parallel case that the Europeans have brought against the United States that they have effectively won as well, in terms of the Americans subsidizing Boeing, just in different form.

So this is—again, this a dispute that probably shouldn’t have been brought to the WTO. It should have been negotiated out between the United States and Europe separately. The rules aren’t well-designed to deal with aircraft subsidies. They come in many different forms, whether it’s sort of spillovers from military and defense applications as we see in the United States case, or directly launch aid as we see in the European case. This may be an example where dispute settlement isn’t particularly effective. But I don’t think Boeing-Airbus is really the norm of the type of dispute that we actually see getting handled by the WTO. It’s much more of an outlier.

ROSE: Next question.

OPERATOR: Thank you. Our next question comes from Laura Winter with AlJazeera.com.

Q: Hi there. Thank you so much for making this call available prior to the G-7.

I have two questions, and they’re both somewhat related. The first one is a short one. A nod to dismantling institutions, which you guys spoke about before. While the G-7 is not a formal institution with a secretariat, could this administration blow up the G-7 as the U.S. is taking over the G-7 management for the next year?

ROSE: What’s the other question, and we’ll see if it’s related.

Q: OK. Well, sort of. OK, can the G-7 mount and manage an effective response to what the Chinese may do in Hong Kong? You know, in the past there has been a robust start—such as with Russia and the annexation of Crimea. There were sanctions, both the EU and the United States, et cetera, et cetera, and they remain in place. Beyond that, the energy to press on has petered out. Well, will they even attempt to, you know, mount a response to what’s happening in Hong Kong, or will—if the Chinese do send in their riot police that will affect, you know, trade and commerce and all kinds of things in East Asia as well.

ROSE: Got it. So what is the WTO’s role in this, and will Hong Kong affect trade stuff, guys?

IRWIN: Well, just in terms of whether the Trump administration could blow up the G-7, I guess. First of all, I don’t really know. But I would say that if the president doesn’t feel comfortable at these G-7 meetings—either because of the topics being discussed or he’s put in an uncomfortable position with other countries—I could see sort of taking a step back and not—the president not going to future meetings, or something like that. I’m not sure that would really blow up the G-7. I think it would just be—it would continue with the U.S. until we had a change of administration. In terms of what they could do vis-à-vis Hong Kong, with that—I really don’t have any expertise on that, so I’m not sure that they either would issue a strong statement or be able to do anything concrete to try to address the situation there.

ROSE: Well, Hong Kong—in general, in these I find that security disputes, or crises, or stuff like what’s happening in Hong Kong, does that play into the longer-term trade negotiations or do those have their own logic separate from short-term politics?

BOWN: So I think they have historically been separated and, you know, either so far under the Trump administration in terms of the dealings with China—whether it’s on Hong Kong most recently or, you know, the broader—China’s treatment of the Uighur minorities have largely not been tied to the trade talks. So we’ll see how this shakes out. I think it’s hard to predict how they might be linked under the Trump administration, given the Trump administration is doing everything so differently on trade. So it’s one of these wait and sees.

ROSE: Sounds good. Next question.

IRWIN: I think—just one quick thing on that—I do think that if China were to intervene in Hong Kong it would harden attitudes on both sides, in the sense that I think there’d be pressure in Congress and elsewhere to be tough with China, even tougher than the administration’s been. And then it would be tough—also difficult for China to sort of back down and try to accommodate on the trade side. That would just be my suspicion.

ROSE: Which is why one tries, if you’re smart, to insulate things like trade negotiations and long-term structures and regimes from the short-term day-to-day crises that can throw a wrench in the works, is that correct?

IRWIN: Well put.

ROSE: Got it. Next question.

OPERATOR: Thank you. Next question comes from Doyle McManus with Los Angeles Times.

Q: Thank you.

This is also a G-7-related question. Your article points out that Trump’s tariffs have harmed the U.S. economy. How strong is the evidence, if any, that his economic nationalism has helped weaken the global economy, which may or may not be on the edge of a recession in more than one country, including Germany. That’s part A. And part B, clearly related, to what extent does Trump’s economic nationalism strip the G-7 of what had been its original purpose, for those of us whose memories go all the way back, which was to prolong periods of expansion and stave off potential recessions?

BOWN: Well, in terms of the macroeconomic impact or the global impact of the Trump trade policy and tariffs on the global economy, I think both the International Monetary Fund has certainly shaved its growth forecast for this year and next year. You know, obviously forecasting macroeconomic growth is a difficult thing to do, but in their judgement—and I think a lot of other U.S. forecasters would agree with this—there has been an increased uncertainty, which has held back business investment as a result of the trade disputes. And that’s partly responsible for the softening of the economy. People can judge or debate what magnitude you want to put on that. So I think that there is a consensus that the world economy is a bit softer because of the trade disputes, and that uncertainty acting on business investment and holding it back is one of the major channels by which that is taking effect.

ROSE: And do you want to take the question?

IRWIN: One of—one of the—quickly. You know, past G-7, G-10 meetings have—or, G-20 meetings routinely would sort of have boilerplate language about resisting protectionist pressures. In the Trump administration, since they won, is really resistant of putting that language in. And so relying on your historical memory, if the G-7 was set up to sort of keep recessions at bay and keep expansions going, to the extent that they’re—the administration is willing to walk back previous language on preventing protectionism, I think that puts a damper on world economic activity.

Q: Got it.

ROSE: Next question.

OPERATOR: Thank you. Our next question comes from Robert Samuelson with the Washington Post.

Q: Can you provide a little historic perspective here? Where do you feel the Trump global system—at this juncture, where is the global trading system compared to some of the other major changes? Are we likely to have a permanent major change? And exactly what possibilities do you sort of consider likely?

IRWIN: So if you look at the last page or two of our article, we end on a rather pessimistic, dour note about the future of the world trading system. And I’ll just point out two ways in which we see that One is with respect to China. And once again, some of the questions have sort of raised that there can be a debate about what exactly our strategy should be in terms of dealing with China. Obviously there are very important systemic issues there—whether we do the WTO or unilaterally.

Setting that aside, there is this sort of decoupling or separation between the U.S. and China going on. It goes beyond trade to investment, to students, to all sorts of other ways in which the countries interact. That I think is—we suggest it’s going to be difficult to reverse, even in the new pro-trade administration, should one be elected in 2020 or beyond. That is, we tend to think that the world economy may be at this juncture where there is this bifurcation between China and the rest of the world—certainly the U.S. So that is sort of a movement away from sort of a global integrated economy that we’ve seen really from China joining the WTO in 2001. You might want to take it before that.

The second sort of historical parallel, I think, is that in the past, people in the 1970s, there was a sense that the world trading system was eroding, that the rules weren’t being adhered to, that countries were bypassing what was known as the GATT, the General Agreement on Tariffs and Trade, edicts on trade. So there was a proliferation of voluntary export restraints and special trade deals that would not limit trade. And what we’re seeing is a creep of that in the form of a returning of voluntary export restraints, a return to managed trade, a return to invoking national security to limit trade, regardless of whether that’s the underlying case or not.

So I think, combined with Chad’s points about the WTO dispute settlement system, the number of judges, I think there’s this tendency and what we see in the system where countries are just sort of ignoring the rules. And I think that erosion or corrosion of the system is—you know, doesn’t portend well for the future. And in the past, it’s taken U.S. leadership to sort of correct course and remind countries of their responsibilities. And this administration certainly is sort of leading us down the road of corrosion, rather than trying to keep the system intact.

BOWN: These voluntary export constraints. This is really the preferred outcome of the Trump administration in the steel case, for example. So, you know, when they were asking if various countries wanted to get out from getting hit with tariffs, the countries that came forward or that agreed to do it—Brazil, South Korea, Argentina—you know, they agreed to voluntarily restrain their exports. When the USMCA agreement was signed, in order to kind of push it forward to Congress, Congress told the Trump administration: You have to get Canada and Mexico to stop retaliating against American agricultural exports or we won’t consider USMCA ratification. Canada and Mexico said we won’t do that until you lift the steel tariffs, the aluminum tariffs.

And so that eventual deal, even with Canada and Mexico, was largely written to make sure that Canada and Mexico didn’t start shipping too much steel to the United States. So there, arguably, is a managed trade kind of outcome as well. And that’s very much what the Trump administration seems to be pushing in these cases.

ROSE: Next question.

OPERATOR: Thank you.

(Give queuing instructions.)

Our next question comes from Mehmet Mehda (ph) with Bernanum (ph).

Q: Hi. Thank you for this lovely conversation.

I am covering the European Union. And I just heard one of the speakers talk about President Trump’s pullout on the TPP. Now, on the other hand, we had this Brexit thing going on. It’s a very nasty thing, I must say. But there are also reports that Boris Johnson, the new prime minister, is trying to enter some kind of grand, Atlantic trade agreement with the USA. So how does it fit in with President Trump’s aversion to multilateralism or even to very big agreements involving huge partners?

BOWN: So I think—let me give a quick response to the kind of Brexit and the potential for a U.S.-U.K. trade deal anytime soon. And I—you know, I think despite what both Boris Johnson and President Trump might say or tweet, it’s incredibly unlikely. I mean, the first thing, as an America, I can’t negotiate with the U.K. until I know what competencies they have. You know, and so it’s essentially—the Brexit question has to be resolved first before we can even begin talking. I have to understand how much of what they’re going to have control over is going to, you know, be in the U.K., versus where it currently is now, which is in Brussels.

But then the second is so much of the U.S. and U.K. trade relationship doesn’t simply have to do with the old-school trade in goods. It’s all about—you know, the future is services trade. The U.K.’s economy is largely a service-based economy. The American economy is, you know, a lot of financial services. Negotiating over those types of issues are incredibly difficult, much more difficult than just cutting tariffs. So while it sounds like it’s a great idea, I think once they would actually sit down and start negotiating they would realize it would be much, much more complicated than they had anticipated.

ROSE: OK. Next question.

OPERATOR: Thank you. Our next question comes from Steven Liesman with CNBC.

Q: Hey, thanks for doing the call.

I’m sure you know U.S. companies do a good amount of business in China. The latest foreign affiliate sales number, I guess in 2016, had over $240 billion. What’s the possibility that China might retaliate against U.S. companies in China that are doing business there? We heard a story that CISCO was told not to bid. Are there other stories? Are there other possibilities that that could be a way that China retaliates? Thanks.

IRWIN: I think they’ve already retaliated against a lot of U.S. firms. And I think it’s these little stories that don’t necessarily make the headlines, but all of a sudden your customer base dries up if there’s any ties to the government. All of a sudden there’s checks on your factory, audit, investigation. So I think there’s a lot of harassment of U.S. firms, and that’s picked up in recent years and is one reason why the business community is—you know, has gone from being neutral to supporting taking some action against China.

BOWN: Yeah, I would agree with that. I think that, as Doug mentioned, it was exactly what kind of exacerbated sort of the change in American business sentiment. I think to the question of has it been ramping up during the trade war, you know, I think, yes, we have seen anecdotal examples, but I don’t think that we have seen the big change happen yet. China certainly could all of those things. They could send inspectors out to, you know, American factories, to, you know, Starbucks, or McDonalds, or the Walmart stores that are there. You know, they could do this. But they largely haven’t yet.

And I think part of the reason why is that it would entirely be feeding into the Trump administration’s narrative on China, which is, you know, this attempt to decouple the American and the Chinese economy. As soon as China makes life even more difficult for multinational companies in China, that’s going to force them to leave and exit even more quickly. And I think China is—you know, as it’s going through this trade war, it’s trying to figure out how to manage this, and how to cost-minimize. And so if you actually look at how they’ve been responding during the trade war, they haven’t emptied their full artillery, their full arsenal of retaliatory tariffs, even. They could retaliate a lot more if they wanted to.

They have been holding back, I think partly because they realize that tariffs are costly. They impose harm on themselves. And so at some level, yes, they’re retaliating, and they may be doing some of this for political purposes. But they’re also very wary of the cost to themselves of going in certain directions down this path.

ROSE: Next question.

OPERATOR: Thank you. Our next question comes from Alan (sp), Alex (sp), and Rob (sp) with University of Toronto.

Q: Hello. I wanted to raise with you, you mentioned it, the question of essentially ad hoc—an ad hoc system of arbitration that the EU and Canada have proposed under Article 25, and whether at least in the interim and during this rather difficult period that this is not a partial solution, and just adding the point that, you know, the business about appointing arbitrators to the AB, this was started by the Obama administration. It wasn’t started by the Trump administration.

BOWN: Yeah, so maybe I’ll take that, and try to respond very quickly, and just explain a little bit of the details. So, first of all, when Doug mentioned that, you know, Canada and the European are trying to make constructive proposals here, what he meant was basically in two different tacks. The first is, as he indicated, that because this system is going to expire December—you know, in December, we need to have something provision in place to deal with new disputes that might come up. And so there is a proposal that’s being called Article 25, which is to say, OK, until we get a new system in place, you know, how do we deal with some of the ongoing cases? And what the Canadians and the Europeans are potentially proposing is to set up an appellate body, or a set of judges, that are basically like the existing judges, but that countries would voluntarily submit their cases to.

So this might—so this might work for all the countries out there in the world that want the existing systems. But obviously the Americans don’t want the existing system. And so the Americans are not going to voluntarily subject themselves to this new system. So it could resolve some of the problems, but I won’t lead to any cases involving the United States being adjudicated successfully. To the broader issue of Doug’s other point, which was, you know, there are other countries that agree with some of the U.S. concerns. You mentioned the Obama administration had not liked some of the appellate bodies, such as these judges that other countries had submitted.

And you’re exactly right, they had refused to allow the appointment of certain judges. The difference between the Obama administration’s approach and the Trump administration’s approach is there wasn’t a carte blanche refusal to accept judges. It was just on a case-by-case basis. And so the specific example was with Korea—South Korea. They proposed a judge the Obama administration didn’t like. They refused to allow that one to go forward. But then South Korea appointed another judge, and the Obama administration allowed that one to go forward. So the Trump administration is saying no, no, no, no. I don’t care who you put forward. We’re not going to allow any judges to get appointed. And I think that’s a very different sort of approach.

ROSE: Is that because they’re trying—this is Gideon—is that because they’re deliberately trying to kill the system?

BOWN: That’s one interpretation of it. And I think given that Ambassador Lighthizer in public statements has stated an affinity for the old system, the system that predated the WTO under the GATT, the General Agreement on Tariffs and Trade, which did not have this binding system of dispute resolution—that’s an interpretation. He wants to go back to that old system and would effectively end the one that we now have in place.

ROSE: Got it.

Next question.

OPERATOR: Thank you. Our next question comes from Jim Dingeman with Pacifica Radio.

Q: Yes, hi. Thank you so much for your time today.

I just wanted to ask the panel, well, how do they feel that these ideas of unilateral economic strategy that Trump has been arguing through the campaign and now as he’s in office—how is that operationalized in our domestic politics, and particularly the presidential race? Thank you.

IRWIN: I’m not sure how—exactly how to answer that question in terms of how it’s operationalized.

Q: How much has Trump rhetoric now become the standard rhetoric that both parties are drawing on in order to tap into grievances among voters?

IRWIN: I see. Well, this is what’s interesting, is that Trump’s administration obviously has defined itself on trade significantly. The American public, in all sorts of polls—Gallup polls, a recent NBC/Wall Street Journal poll show increasing support for free trade. And yet the Democrats, in some sense, haven’t embraced that so much. They were very anti-TPP in the previous election. And many of the candidates are trying to one-up Trump and be even tougher on trade. You know, historically, going back to the pre-Trump Republican Party, they tend to be the party of trade liberalization, trade agreements. And the Democrats were much more skeptical, much more worried about imports and their consequences. And we now see both parties in some sense worried about trade.

So it’s not as though we’re getting a flip in the political positions as a little bit of a clustering. I do think there’s an opening for a candidate who would say, look, these tariffs have demonstrably softened and weakened the U.S. economy, hurt our international reputation and our standing in the world. And the American public wants trade agreements and freer trade. But very few candidates, except for Joe Biden, have stepped up to take that position.

ROSE: Next question.

BOWN: I think the only—

ROSE: Oh, sorry. Go ahead.

BOWN: Let me just make one point—one quick addendum to Doug’s point. I think what we have seen also in maybe some of the Pew polling is a flip of the voter in terms of their positions towards trade, where you have—historically the Republican voters have been more pro-trade. Since President Trump has been elected, they have been less pro-trade. And it’s flipped on the Democratic side. More of the Democratic voters. So there is this misalignment in some respects. If you look at the rest of the Republican leadership in Congress, for example, that is much more pro-trade than necessarily the president is, there does seem to be this misalignment right now between the American voters in the two parties and who their elected representatives are. And so I think it will be very interesting to see how this plays out in the 2020 election. As Doug mentioned, you know, if you look at some of the plans of some of the candidates, there are these elements of economic nationalism in them that, you know, do sound very Trumpian in many respects.

ROSE: One last question. Who’s the lucky questioner?

OPERATOR: Thank you. Our last question comes from Mark Bocchetti with Congressional Quarterly.

Q: I’ve already had my shot, so if anyone else has not had a chance, I will gladly give up my—the last question.

ROSE: Is there someone in the queue behind him?

OPERATOR: He is the las question in the queue at this time.

ROSE: OK, then I will—Mark you can get the last one, for sticking on.

Q: OK. Very specific, very short.

You had indicated that you did not think the Trump administration was being especially constructive at the WTO in terms of finding—reforming the dispute settlement system. And I read an intervention by the U.S. ambassador to the WTO where he talked about, you know, variously specific objections we had. Do you view the U.S. proposal that he laid out as not being realistic or responsive or reasonable? Or is there another aspect of the Trump administration position that you don’t think is being constructive? Thank you.

BOWN: So let me ask what proposal you’re referring to? Because he’s made—this is Ambassador Shea. He’s laid out a number of complaints and problems with the appellate body in particular, this dispute settlement procedure, but no proposals on how it is the Trump administration would actually like to fix it. So I am not sure what you’re referring to.

Q: I’m referring to an intervention I read that was relatively recent, perhaps only two months old. And maybe that’s your answer, that all we’re doing is complaining and we’re proposing specific changes.

BOWN: Yeah, that would be my answer, is that they have made a lot of complaints. And I think maybe complaints—some of the complaints are shared by other WTO members. The Canadians in particular are—you know, many of them are onboard with some of the rulings that have been made, the expansiveness of something they call judicial overreach, and obiter dictum, the legal terms, going too far. But what’s different is the Trump administration has not actually made any concrete proposals, at least to my knowledge, about how to fix this, and what they would find an acceptable way of addressing the problems that they’ve raised.

ROSE: Thank you very much Chad and Doug. Thanks to all our participants. I promise next call will be lighter. We’re going to discuss puppies and kittens, hopefully. Thanks all of you. And until then, the next Foreign Affairs call, keep things going. Thank you.

(END)

 

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