Strategic Reglobalization: How Great Power Rivalry is Impacting the Multilateral Trading System

Abstract

Among economists and historians, there is virtual consensus that the General Agreement on Tariffs and Trade and the World Trade Organization contributed significantly to the superlative global economic growth experienced over the past 75 years. What is less frequently considered is that the inception and evolution of the multilateral trading system were made possible because those developments were widely perceived among the US political establishment as serving the foreign policy and national security interests of the United States. In challenging US preeminence, the rise of China—which was vastly accelerated by the WTO benefits afforded its economy—has significantly eroded that once bedrock belief in Washington that the rules-based trading system enhances US security and is worth preserving. Indeed, national security and other strategic considerations are causing both Washington and Beijing to deprioritize commitments to non-discriminatory trade policy, which threatens the very foundations of the trading system.

This essay is an abridged version of Mr. Ikenson’s paper published by the Hinrich Foundation in October 2022.

Introduction

There are two kinds of observers of the international trade policy landscape: those who see the multilateral trading system in existential peril and those who need new glasses. Over the past few years, the ranks of the former have grown, but there is little consensus regarding the nature of that peril or what, if anything, to do about it.

Many see the problem as institutional sclerosis, evidenced in part by the paucity of agreements negotiated at the World Trade Organization (WTO) during its nearly 28-year history. Some point to an untenable imbalance of obligations among WTO members or endemic overreaching by its now dysfunctional Dispute Settlement Body (DSB). Others consider US subversion of the WTO’s Appellate Body (AB), its unwillingness to engage meaningfully in discussion about potential WTO reforms, and its recurring preference for unilateralist protectionism the greatest threats to the system.

Those are all legitimate concerns, but they are only symptomatic of a larger problem. The problem is that the broader conditions necessary to sustain a rules-based multilateral trading system predicated on the principles of “most-favored nation” and “national treatment” no longer exist. The two largest economies in the WTO have committed to courses of action that blatantly disregard these principles and systemically subordinate the trade rules to their hegemonic priorities.

China’s change of course from a path of market liberalization to a retrogressive embrace of state capitalism and associated policy tools has generated cascading economic, political, and social externalities around the world, including the ringing of alarm bells in the United States. The economic and strategic competition that has emerged between the United States and China has produced an atmosphere of intense rivalry and growing distrust, elevating national security concerns and the objective of technological primacy above the economic benefits and greater certainty of rules-based trade (Fig. 1).

Fig. 1

Percentage of people who say it is more important for their nation to have economic ties with the US than China

For a half century, the General Agreement on Tariffs and Trade (GATT), an accord reached by 23 governments in 1947 to reduce barriers to international commerce, was aligned with foreign policy goals and perceived at the highest levels of the US government to be in the security interests of the United States. That is no longer the case. A strong bipartisan consensus that the WTO rules undermine national security because they are too permissive of China’s policies and too restraining of US responses has ossified in the executive and legislative branches of the US government. In the name of attaining technological preeminence and protecting expansive definitions of national security, Washington and Beijing have concluded that the trade rules impede execution of what each believes to be its optimal policy choices. Each has taken unilateral policy actions that violate the letter and spirit of the WTO agreements because the perceived costs of adhering to the rules exceed the perceived benefits.

To complicate matters further, the United States, the European Union, and others have chosen to supplement their complaints about Chinese state capitalism with their own versions of industrial policy, which include domestic production subsidies and other incentives, as well as protectionist tariffs. That WTO officials and member governments continue to convene in Geneva to try to advance prospects for reforms and new agreements despite this full-fledged mockery of the trade rules is at once depressing and inspiring, evoking Tennyson’s “The Charge of the Light Brigade,” in their pursuit of a noble but lost cause.

A central premise upon which the rules-based trading system was founded is that voluntary trade is not a zero-sum game, but a positive-sum game—a win–win exchange that mutually benefits the parties involved. This, of course, is still true, as is the fact that reducing barriers to trade enlarges markets and increases the scope for specialization and economies of scale, which are keys to raising global living standards. Successive US administrations and a wide swath of trading nations further argued that trade, and specifically the induction of China into the global trading order, extends beyond efficiencies, and is a conduit to globally shared values and stability.

That has changed. We no longer have the luxury of considering only the economic benefits and costs. Analysis must consider the strategic benefits and costs, as well. The case for freer trade, despite the insistence of many fellow free traders, cannot be made in a vacuum that seals off the geopolitical impact. Rules derived from that bifurcation of commercial and strategic objectives are not sustainable in a world where hegemonic competition can incentivize the pursuit of negative-sum economic outcomes.

Sustainable trade rules require and reinforce a balance of economic, social, and national security outcomes. The current system is in disequilibrium because it is premised on outdated conditions. Interdependence is less likely to be regarded as a buffer against conflagration and more likely to be a source of anxiety about overreliance on unfriendly or undependable nations. Accounting for all these variables may render “less efficient but more secure” trading relationships or supply chains the optimal choice.

A simple “win–win” gains-from-trade analysis outcome is no longer sufficient support for trade liberalization and economic integration. The externalities and the strategic benefits and costs must be taken into account. What if what really matters to policymakers is which party benefits more? What if the guiding principles were to engage in trade when it is estimated to benefit the domestic party more than the foreign party or, going one step further, to counsel self-destructive protectionist measures so long as they hurt the foreign party more?

This is not a merely philosophical exercise. US tariffs on imports from China originally imposed in 2018 remain in place today despite the economic costs to US businesses and consumers. Why? The Biden administration must believe China will suffer more, over the medium-to-long term, through loss of export market share, disinvestment, supply chain relocation, and other adjustments that carry economic, social, and strategic costs. This is distinctly a lose-lose proposition in absolute terms, but a US wins-China loses proposition in relative terms, if the judgment of the administration is accurate.

The multilateral trading system is in danger because the world’s largest economies are in a strategic competition where the winning tactics are perceived to require measures that violate the trade rules in both letter and spirit and reduce absolute trade levels. Under geopolitical conditions heavily influenced by climate change, public health crises, large-scale war, threats of new wars, food shortages, debt crises, inflation, economic recession, capital flight, balance of payments crises, technological rivalry, and cyberespionage, we should expect from the US, China, and the EU industrial policies that raise tariffs on certain imports, bestow subsidies on local firms, grant preferences to trade partners they favor, and penalize those they don’t.

Neither the conditions nor the perceptions that have brought us to this point are likely to change anytime soon. The multilateral trading system is under duress, the US–China battle for technological and hegemonic preeminence will continue, and national security will remain a higher priority than trade.

Sowing the Seeds of Strategic Reglobalization

After decades of trade liberalization, globalization, and prioritization of the commercial benefits of China’s reawakening, questions about the economic and national security implications of trade began to trickle then flood back into the US policy discourse in 2008.

The US economy had been waylaid by an epic financial crisis and a deep recession, which shook Americans’ confidence and exposed weaknesses in the US economic model. The Chinese economy, meanwhile, remained on its near‐double‐digit annual growth rate trajectory and, in the process, had surpassed the United States as the world’s largest manufacturer and exporter and was edging closer to becoming the world’s largest economy. Beijing had officially become the largest foreign holder of US public debt, giving it special leverage over US policymakers in the minds of many commentators.

Perceptions that the United States and China were trading places emboldened Chinese leaders to speak out publicly where they had been silent before, admonishing US policymakers for fiscal imprudence and digging in their heels over issues where they might have relented in the past. Triggered over a boat collision in 2010 in the South China Sea near a range of territorially disputed islets, Beijing turned its heft in the global commodity trade into a weapon of political leverage.¹ The tenor of the public rhetoric on both sides became more strident. Historically minor tiffs became flashpoints, and Americans’ angst became more palpable.

The situation prompted some deep soul searching in the United States. Many questioned whether America’s best days were behind her. Many wondered where the United States had gone wrong and what China had done right. Others concluded that US policy had been too permissive of China’s rise, prompting calls for greater enforcement of the trade rules and even emulation of China’s industrial policies.

Meanwhile, the US business community in China, which has long counseled against precipitous actions that could frustrate its plans in the Chinese market, began to register concerns and air grievances about proliferating Chinese protectionism. US companies issued warnings that China’s market liberalization—evident through the early part of the decade—had stopped and was beginning to reverse. An annual white paper published by the American Chamber of Commerce in China identified rising protectionism, lack of regulatory transparency, inconsistent enforcement, and favoritism toward local firms as big and growing problems in 2009.²

A document published by China’s State Council titled “The National Medium‐and Long‐Term Program for Science and Technology Development” (MLT Program) presented a road map for transforming the Chinese economy into a major innovation center by 2020 and an innovation leader by 2050.³ The blueprint included the goal of dramatically reducing China’s use of foreign technology by promoting “indigenous innovation,” which would be achieved through implementation of policies that gave preference to companies with products containing intellectual property registered in China, and by developing new technology standards.⁴

Publication of those reports and reactions to them inspired a change in sentiment within the US multinational community. Perceptions of threats to US business interests increased, as perceptions of opportunities diminished. Pessimism rose, optimism sunk, and enthusiasm waned among US multinationals for making the case for an accommodating, tolerant US policy. This produced a shift in the weighting of interests influencing US policy toward China in favor of those seeking a more strident approach, including more rigorous enforcement and more trade restrictions. It also meant that bilateral trade concerns no longer would be considered separate and apart from the broader geopolitical picture. Instead, trade disputes would be magnified by our geopolitical differences.

For many years, conventional wisdom in foreign capitals was that if Beijing wanted to support certain industries and subsidize global consumption in the process, the world should be sure to thank the Chinese for their beneficence. After all, the costs of top-down interventions would be borne in China in the form of malinvestment and slower economic growth, while the benefits of access to cheaper goods would accrue to the rest of the world.

As it turns out, such thinking was short-sighted. Beijing’s “direction” of the economy could be tolerated when the economy was smaller, and its leaders were committed to moving away from state control toward greater market orientation. But, today, China’s state-owned enterprises (SOEs) account for 4.5% of global GDP, making China’s SOEs equivalent to the fourth largest national economy in the world behind only the United States, Japan, and Germany.⁵

Down the National Security Rabbit Hole

Protecting national security is a legitimate responsibility of government and arguably its most important obligation. That may not have appeared to be the case during the halcyon days of globalization, when concerns about post-Cold War security threats seem to have been eclipsed by the promise of large commercial, financial, and developmental dividends.

The primacy of national security is enshrined within the modern, international trading system. Despite the imperative of rebuilding the global economy in the wake of World War II, and the centrality of free trade to that goal, the original 23 GATT signatories agreed that governments should be permitted to suspend their obligations (i.e., to reimpose tariffs) when deemed necessary to mitigate or neutralize threats to national security.

Accordingly, the agreement included Article XXI—the “National Security Exception”—which stipulates that any party to the agreement is permitted to undertake “any action which it considers necessary for the protection of its essential security interests,” including the imposition of trade restrictions.⁶ That article permits WTO members to raise trade barriers for purposes of protecting national security without obligating them to demonstrate that their rationale conforms to some agreed definition of what constitutes a national security threat.⁷ Implicit in the Article XXI exception is the presumption that only individual governments are in the position to judge what is vital to their countries’ security, and whether and how to safeguard it.⁸

By the same token, the parties to the agreement had committed to the principle of economic openness with the understanding that none would invoke the national security exception frivolously. In other words, unless governments are sufficiently certain that national security is at risk, they should refrain from imposing restrictions. Then, in 2017, along came President Donald Trump, who imposed tariffs, most of which are still in place, on imported steel and aluminum under the guise of protecting national security.

During the past five years, US policymakers have been sharpening other protectionist national security tools. Trump’s Commerce Department “blacklisted” certain Chinese technology companies and broadened the scope of technology exports to be restricted. The Biden administration added to both lists. During the Trump administration, Congress expanded and tightened the US export control regime and the inward investment review mechanism. Biden tightened both even further and is also seriously considering an outward investment review regime.⁹ In fits of extraterritorial posturing, Trump and Biden both promulgated rules forbidding certain foreign companies from selling semiconductors and other components to Chinese technology companies. Both administrations also pressed other governments to rid their telecommunications networks of Chinese made information and communications technology gear.

While protecting national security is of paramount importance, doing so comes at a cost. Beyond the financial costs of the resources consumed in the administration of any program intended to protect national security are the opportunity costs of impeded or foregone commerce, as well as the reputational costs of being seen by other countries as abandoning principles or shirking on global trade leadership responsibilities.

Policy choices are about trade-offs that require properly weighing the costs and benefits of the alternatives. Among the commonly discussed costs of restricting Chinese access to US technology are lower revenues and smaller market shares for US firms, a hastening of the pace of China’s pursuit of self-sufficiency, and a splintering of the global technology ecosystem. But that must be weighed against the security and economic benefits obtained by restricting China’s access to US technology. Moreover, we should ask ourselves whether Beijing’s enshrining of the goal of self-sufficiency in semiconductors and other technologies and its sanctifying of all the measures deployed in service to that goal didn’t commit China to the “decoupling” outcome long ago. In other words, we were already heading in this direction, so perhaps those outcomes should not be considered costs of the US policy response.

It’s hard to fault Beijing for its efforts. Being king of the technological hill confers all sorts of strategic advantages—commercial, cybersecurity, intelligence, and military—including, perhaps most importantly, a head start in the race to develop the next generation of technology including artificial intelligence, robotics, and quantum computing. For the same reasons, Washington shouldn’t be faulted for trying to thwart Beijing’s progress. Overtaking and staying ahead of China in the technology race has become a US national security imperative.

Trade Through the Lens of Geopolitics

In choosing to go rogue in recent years, the United States has suffered some reputational loss with the global community, which may impede US efforts to lead going forward. Who will be America’s allies in an emerging cold war that will impact many countries who believe this could have been avoided had the United States acted within the trade rules? Several governments accepted US trade leadership and expected the United States to reassert its commitment to the multilateral trading system before it was beyond saving. None wanted to make choices that upset Washington or Beijing.

The Trump administration committed its share of errors in the conduct of international economic policy, maybe none more significant than its disregard for the utility of soft power in advancing US interests. By pulling out of the Trans-Pacific Partnership, hitting most of the world with tariffs on steel and aluminum, proclaiming and tightly embracing the “America First” mantra and then starting a trade war with China, Trump’s blindness to the necessity of alliances and the utility of offering carrots rather than wielding sticks could not have been any more evident. The notion that cooperation from allies might be useful in compelling China to behave differently and that treating these allies as threats to national security might undermine that approach somehow eluded the Trump administration (Fig. 2).

Fig. 2

Percentage of people in the US who have an unfavorable view of China (2005–2022)

Some have suggested a better way to prevent the US–China relationship from descending into a full-fledged cold war is to sequester the technology battle from the rest of the relationship—cordon it off to prevent it from further infecting broader commercial ties. But it’s not clear how such an arrangement could be expected to work. If Beijing and Washington prioritize their technology competition and engage in measures to subvert each other’s progress, there will be diminishing scope for commercial relations in the rapidly evolving technology industries. That will hasten an already accelerating process of bifurcation—and splintering—of the technology ecosystem.

Then what’s the logic in stopping at technology? To the extent Beijing sees US sales of non-technology goods and services in China as benefiting the United States more than China, it will be inclined to prohibit those transactions. And it will work the same way in the other direction. It will no longer be about the fact that trade is mutually beneficial in absolute terms, but about the question of who is made relatively better off on a transactional or contractual basis. The uncertainty created by the constant threat of new restrictions in a climate of malice and distrust will raise the costs of transactions, deter ongoing collaboration and, ultimately, close each market to the other’s goods and services.

This loss of market access will hasten the quest for new suppliers and new customers—a competition to forge new partnerships and allegiances, which will color the landscape of the new cold war. This isn’t a pretty picture of strategic reglobalization, but an outcome for which policymakers and businesses around the world are preparing. In response to the rising costs and growing uncertainty over deteriorating US–China trade relations and Beijing’s rigid Covid-19 policies, some foreign companies have already started to divest and move out of China.¹⁰

Pledging to repair sullied relations with allies, the Biden administration thus far has engaged mostly in rhetorical change. Tariffs on China remain in place, as do tariffs on steel and aluminum from most countries, but this protectionism and broader aversion to trade agreements and disinterest in restoring the integrity of the WTO are now justified as “Worker Centric” policies, as opposed to “America First.” Meanwhile, the WTO-affronting “US–China Phase 1” deal, which gives US businesses preferences over other countries’ businesses in China and serves to drive wedges between the United States and its current and prospective allies, remains in place.¹¹

The Biden administration has shunned traditional trade agreements, shown a studied indifference to the fate of the WTO as a venue for trade liberalization or dispute adjudication, and has made clear its preference for forging alliances with “coalitions of the willing” on issues, such as digital trade, supply chain resilience, technology policy, climate, and labor standards. The US-led Indo-Pacific Economic Framework (IPEF) covers labor, environmental, and digital standards, as well as commitments to supply chain resilience, tax, and anti-corruption provisions. Critics cite the IPEF’s absence of US market access commitments, especially in light of its requirements that partners adhere to US standards, as a deal breaker. But trade economist Petros Mavroidis sees the requirement of adherence to US standards as the cost of maintaining existing access to the US market—an “insurance policy against market exclusion.”¹² In other words, the United States intends to use its market as both a dangling carrot and a heavy stick.

Whether or not that is true remains to be seen, but the approach would seem consistent with strategic reglobalization driven by hegemonic competition. Tools such as Beijing’s Belt and Road Initiative, its more recent Global Development Initiative, and Washington’s nascent “Build Back Better World” initiative are other examples of conduits for channeling benefits to compliant economies, or inflicting costs on noncompliant ones. Swaying Pacific Island governments into the US ambit with financial incentives is among the latest Biden administration policy that evokes Cold War tactics.

What Will Become of the WTO

Depending on whom you ask, the outcome from the 12th Ministerial Meeting of the World Trade Organization demonstrates either that the WTO remains a legitimate venue for negotiating trade deals or reinforces concerns that it is unfit for that purpose. The hopeful crowd points to the importance of the agreements reached in Geneva last June and the willingness of ministers, WTO officials, and their staffs to work hard and remain dedicated to the mission. The skeptics point to how little was actually agreed to, despite all the time and resources committed to the effort.

The better question is: Does it even matter? What is the point, really, of shoring up an institution whose rules its two largest members will violate whenever it serves their interests? What is the point of crafting new rules when enforcement of existing rules, which are broken with increasing frequency, is impossible because the Appellate Body has been rendered impotent? The whole effort seems little more than rearranging the Titanic’s deck furniture.

For an institution to endure, it must remain relevant. Can the WTO be relevant in a world where adherence to its principles and rules is no longer seen to be in the interests of its largest members? At a minimum, restoring respect for the WTO and its rules would require convincing China to rein in its distortionary model of state capitalism, which it routinely (and rightly) characterizes as consistent with its rights as a sovereign nation and claims to be evidence of America’s interest in containing China and suppressing her rise. Of course, China can choose its own domestic policies, but the externalities imposed on other countries by its choices make it a global matter. The most significant externality has been an erosion of faith in the rules-based trading system, especially and most importantly among US policymakers, as an institution that serves US strategic interests.

The “process” of the United States turning its back on the WTO began during the Obama administration with its identification of the Trans-Pacific Partnership as the economic linchpin of its foreign policy “Pivot to Asia.” Many thought the TPP was going to be the strategic response to China’s techno-mercantilism and general diversion from the path on which Beijing’s WTO commitments put China. According to President Obama, it was imperative that the United States beat China to writing the rules of twenty-first century trade. With new and more rigorous trade rules than the Regional Comprehensive Economic Partnership (RCEP) or the WTO, the TPP would tie many of China’s most important trade partners together in a modern, ambitious agreement. As a live agreement, the TPP would attract more partners, incentivizing an increasingly isolated China to consider undertaking the necessary reforms to join. Had it played out like this, the TPP could have been expanded to include other big countries, such as the EU and UK and Turkey, and eventually make the case for being folded into the WTO or replacing the WTO altogether.

It didn’t turn out that way. Instead, the Trump administration withdrew the United States from TPP, opted to impose unilateral tariffs and other sanctions on China, and tightened the US chokehold on the WTO Appellate Body, refusing to endorse any new jurists for the AB, thereby depriving it of a quorum to function.

Although the proximate cause of the United States’ disabling of the AB appears to have been perceptions of AB overreach in cases involving the EU, Canada, Japan, and other allies, the main reason is that the United States no longer sees it as in its interest to abide by the trade rules and subject itself to binding dispute resolution when doing so restricts its capacity to do whatever it deems necessary to counter the consequences of China’s state capitalism. Arguments highlighting the economic costs of shunning the WTO and engaging in unilateral protectionism have proven unpersuasive in Washington, where policymakers are more concerned about the strategic benefits that course is presumed to purchase. Many US policymakers from both major political parties no longer consider adherence to the rules-based system to be in the national security interest of the United States.

Perhaps the best we can do—in a world without a single hegemon is to have trade “guidelines” instead of enforceable rules that restrain the capacity of members to take actions they consider in their best interests. In some respects, this is similar to the GATT system, where there was much less pressure on members to come into compliance when their actions were deemed to be in violation of the agreements. Guidelines provide less certainty than rules and, thus, increase the overall costs of trade. But most governments know that protectionism punishes their own economies and that openness to trade is essential to their economic prospects and growth. Most WTO members maintain tariffs that are considerably lower than the rates they are bound to under the WTO agreements, knowing that access to lower priced inputs and goods reduces production costs and living expenses, helps attract foreign direct investment, and frees up resources to devote to other value-added endeavors. Most WTO members are aware of the importance of trade facilitation measures, such as expedited customs procedures and logistics infrastructure, and many have invested in improving these systems.

In other words, trade will continue to be an important driver of economic growth regardless of whether the WTO reaches new agreements, implements new reforms, or restores its adjudicative capacity. How important trade is as a catalyst for growth and peaceful relations will depend on the nature of the emerging reglobalization and whether it is motivated more by carrots or sticks.

Conclusion

The relevant conditions that enabled the birth and growth of the rules-based multilateral trading system no longer exist. Contrary to the America First presumption that the world owes the United States a debt of gratitude for its generous funding under the Marshall Plan, protection under America’s nuclear umbrella, and sponsorship of the multilateral institutions that helped provide post-war stability, these actions were not favors. It was distinctively in America’s interest to act as it did. The imperative of rebuilding a war-torn world, tapping into extraordinary demand for US goods and services, tamping down nationalism, and confronting the specter of communism and the menace of Soviet expansionism made it clear that a traditionally isolationist United States must embrace an internationalist agenda to serve its foreign policy and national security objectives.

What the America Firsters got right, if by accident, is the growing doubt that US national security objectives are still best served by adherence to the rules-based system, which has fostered the rise of illiberal rivals and restrains the United States from taking measures that may be more likely to preserve America’s station at the top of the heap.

Today, the world’s two largest economies have committed to courses of action that blatantly disregard the WTO’s bedrock principles of “most-favored nation” and “national treatment” and systemically subordinate the trade rules to their hegemonic priorities. Going forward, geopolitical and national security considerations will define what is possible—and permissible—in the realm of international trade and investment, and the determinants of those considerations will be fluid. Washington and Beijing will compete for the hearts and minds of third countries using policy carrots and sticks. Optimal trade choices will no longer be those which are most efficient, but those which incorporate considerations of security. That implies a smaller pool of prospective trading partners and higher costs of trade.

What can be done to mitigate these costs? Of course, the “solution” would be for Beijing to admit to the external problems caused by its state capitalist policies, agree to loosen its grip on the economy’s steering wheel, and return China to the reformist, market-liberal path it seemed to be pursuing when it joined the WTO in 2001. But, for now, that option is a non-starter given that the United States is committed to its own unilateralist policies and given how deep into the abyss bilateral relations have fallen over the past few years over non-trade issues, such as Hong Kong, human rights in Xinjiang, Covid-19, Taiwan, and the Russian war on Ukraine.