Today, no government sees defending liberal trade as its
first order of business. More urgent matters demand attention. But trade
is no sideshow. If governments fail to shape a stronger trade system, and
defend it to their voters, a reversal of globalisation is possible. That could
end up causing more long-term economic damage than any other consequence of the
coronavirus calamity.

The world’s leaders need to understand, first, why a
permanent retreat from liberal trade could indeed happen. They next need to see
just how dangerous such a development would be. Then, having belatedly grasped
how much is at stake, they should repair and improve the order that risks
coming apart — by realigning the politics of free trade, refurbishing the
global trade architecture and strengthening the domestic response to globalisation
and its discontents.

*****

At the turn of this century, the economic consensus in favour
of liberal trade had been fairly solid. In the time of Bill Clinton and Tony Blair, centre-left politicians subscribed to it as
much as pro-business conservatives did. Over a period of decades, lower tariffs
and lighter restrictions, together with technological progress in
transportation and communications, drove a massive expansion in global trade
volumes. From 2005 to 2014, for instance, world trade in goods nearly doubled, from about $10 trillion to $18.5 trillion.
 

Yet this expansion also ran alongside China’s rise as a new
economic power, which some found disturbing in its own right. In the US, the
domestic implications of a growing trade deficit with China were brutal.
More broadly, manufacturing output in advanced economies shrank (as a share of
the total, if not in absolute terms). Under the combined pressure of cheap
imports and automation, manufacturing jobs disappeared.

This shift, in turn, gave rise to the view that the benefits
of free trade had been exaggerated and
its costs too long ignored. In one way, this was puzzling: Nobody had ever
denied that liberal trade, like technological progress, causes economic
disruption. Even so, prevailing opinion shifted from “We all believe in free trade”
to “It’s complicated.”

Then came US President Donald Trump. Fixated on the idea
that trade is a battle that the US was losing, he set about wrecking the
system. Attesting to the wider shift in thinking, his political opponents
criticised him only tepidly, if at all, for this new direction. The country’s
immune system was compromised: American politics had lost the antibodies it
needed to reject protectionism.

And that was before Covid-19. The pandemic caused critical
shortages of essential equipment and materials, exposing the fragility of finely tuned, geographically extended
supply chains. Suddenly liberal trade was not just a destroyer of jobs, but a
killer as well, leaving countries bereft of life-saving supplies. The
implication seemed clear: Rather than worshipping the false god of free trade,
countries should be thinking more about safety and self-sufficiency.

It would be hard to overstate the damage this thinking
might do if it tightens its grip on Western politics. Of late, the remaining
support for liberal trade has been powered more by popular opinion than by expert consensus or political
leadership. (Guided by mere common sense, people object to tariffs that raise
prices and lower their standard of living.) The rigors of Covid-19 and its
aftermath, especially if it involves persistently high unemployment, might
change this, recruiting broader opinion to the anti-trade cause. The retreat
from globalisation might then accelerate.

Downplaying some of the costs of liberal trade was
wrong, but ignoring the benefits is certainly no smarter. Over the years, these
have been enormous for rich and poor countries alike. They go
far beyond the classical gains due to specialisation and economies of scale.
Trade strengthens competition, which erodes monopoly profits while promoting
innovation and efficiency. It spreads knowledge and capital. And it expands the
variety of goods available — an effect that’s difficult to measure and often
ignored, but which raises living standards greatly in its own right.

Recoiling against globalisation doesn’t just involve
forgoing those benefits, serious as that would be. It also means incurring the
costs of dismantling existing economic networks and scrapping the associated
investments. It would pile another set of shocks on the stresses that economies
already face. It would make a bad situation much, much worse.

Recognising this danger is the first step toward a political
and intellectual realignment that restores the commitment to liberal trade.
This restoration is essential, but by itself it won’t be enough.

*****

The purpose of the World Trade Organisation, established in
1995, was to extend and underpin the liberal trading order. The US and its
allies used its predecessor, the General Agreement on Tariffs and Trade, to
superb effect from 1948 onward, lowering trade barriers and building a globally
integrated economy through successive rounds of wide-ranging talks. But since
the turn of the millennium, they’ve let the WTO fade
into irrelevance
.

The most recent round of multilateral negotiations is a case
in point. After years of getting nowhere, it eventually collapsed altogether.
Progress toward freer trade, such as it is, has moved to regional agreements
such as the European Union and the Comprehensive and Progressive Agreement for
Trans-Pacific Partnership — a second-best approach, because it lets barriers
between insiders and outsiders persist. The WTO’s dispute-settlement mechanism,
flawed to begin with, now stands crippled thanks to a US policy of aggressive non-cooperation. And just this week, it was
reported that the organisation’s head, Roberto Azevedo, is stepping down before the end of his second term.

In effect, the WTO no longer exists. It needs to be
reinvented.

Of all the factors serving to undermine the WTO, the
challenge posed by China might be the greatest. When the WTO’s members allowed
China to join in 2001, the US and others were . They believed that
China was moving toward a market-based economic model, and that membership
would sustain and accelerate that shift, to everybody’s advantage.

In part the bet came off, because China’s integration into
the world economy has undoubtedly, on balance, benefited its trading partners
as well as China itself. Its supply of cheap exports has materially lowered the
cost of living in the US and other advanced economies, boosting real incomes
for the great majority of households. In part, though, the gamble failed,
because an increasingly self-confident China regards its non-Western economic
model as not merely viable indefinitely, but better.

China is not a market
economy
 in the sense envisaged back in 2001, and it evidently has no
intention of becoming one. Its government retains a commanding role in the
economy through a variety of direct and indirect channels. That’s a problem
because the WTO was designed as a forum for cooperation among market-based
economies; it lacks the rules and instruments to cope with Chinese
characteristics.

Take subsidies, for instance. Subsidies granted by
governments and “public bodies” fall under WTO
disciplines. Unsubsidised firms can’t be expected to compete in
international trade with producers receiving payments from their governments.
WTO members are allowed to impose tariffs (called “countervailing duties”)
on subsidised imports. But China’s government provides subsidies through
channels that it doesn’t necessarily regard as “public bodies” — in
the form of below-market interest rates on loans issued by state-owned banks,
or cheap inputs from suppliers that might be part-owned or otherwise influenced
by the state. The WTO’s rules don’t unambiguously forbid such practices.

China is far from unique in exploiting these and other grey
areas in WTO understandings. But China’s sheer size, the extent of its explicit
and implicit government direction and its evident determination to defend its
methods as successful and legitimate parts of its development model do pose
uniquely threatening challenge to the liberal trading
order.

Exasperation with the WTO’s impotence in the face of this
challenge was building long before Trump took office in 2017 — but Trump
and his advisers decided enough was enough and chose trade war as the answer.
With so much at stake, this course of action was reckless from the outset. The
coronavirus emergency adds to the risk, because it imperils worldwide economic
growth.

There’s little sign, as yet, that the US will win its trade war,
not least because it has so thoroughly alienated its principal would-be allies.
Continued reluctant accommodation of a broken system would surely have been
preferable to the self-defeating exchange of trade sanctions that followed.
Better than both would be a US-led effort to revive the WTO as a global forum
for negotiating issues and settling disputes.

Admittedly, even a competent US administration would find
this difficult, with no guarantee of success. The WTO’s rulebook and procedures
need substantial reform — not just to encompass China’s model, but also to
extend the body’s competence over new areas of international commerce such as
trade in services, intellectual property and the digital economy. The
protracted failure of the Doha Round offers little encouragement. Nonetheless,
in trade as in foreign policy, jaw, jaw is usually preferable to war, war.

It’s impossible to imagine Trump supplying the
leadership necessary to take on this reinvention. Conceivably, though, the next
US president might try. If that happens, the agenda should extend beyond the
issues highlighted by US-China trade relations. Post-coronavirus, closer
cooperation in fighting pandemics and other global emergencies (such as climate
change) would be desirable — and, in light of experience, might also be
possible. These tasks have obvious trade-centric aspects.

The coronavirus emergency exposed the fragility of
cross-border supply chains. Governments engaged in zero-sum competition to
source essential supplies, and imposed unilateral export controls at their
partners’ expense. One kind of response to this failure would be to build
national reserves and buffer-stocks so that any shortages next time won’t be so
acute. But those preparations could go hand-in-hand with institution-building
under the WTO umbrella. There could be undertakings not to impose emergency
export controls unilaterally, and plans for coordinating supplies among trading
partners. Governments have learned, one hopes, to take global emergency
management more seriously. A refurbished WTO would be the right place to house
its trade-policy components.

*****

An intellectual awakening and a fit-for-purpose WTO would
certainly help the prospects. But, especially in the US, there is a third and
indispensable element: domestic policy innovation. Policy makers need to recognise
and, so far as possible, remedy the disruption caused by trade and other
forces.

By advanced-economy standards, the US has strikingly meagre
protections for workers facing unemployment because of foreign competition and
technological change. Employer-provided health insurance is still the norm, so
when you lose your job, you lose your coverage. Unemployment benefits,
administered by states, are ungenerous and short-lived by European standards.
Unions are weaker, so employment contracts expose workers to more risk.

Aspects of this American model have certain advantages. The US
labour market is famously “flexible,” matching workers to new demands
more quickly. This flexibility makes the economy more productive — hence
capable, in principle, of supporting higher pay and living standards. Also, US
unemployment is typically lower over the course of the business cycle than in
Europe. But in other ways, the US gets the worst of both worlds — combining
heightened vulnerability for workers in industries under pressure with
proliferating rules and other frictions that limit the movement of workers from
place to place or occupation to occupation.

The coronavirus shock to employment has been abrupt and
extreme, and it might be slower to fade than first hoped. A strong economic
revival — one that, among other things, keeps trade channels open and promotes
technological change — will call for reform of all these arrangements.
Post-coronavirus, the political will for such reform might conceivably be
found. 

A stronger safety net would start with the assurance that
serious illness needn’t mean financial ruin. By degrees, the US needs to
detach health insurance from employers. Unemployment benefits need to provide a
better cushion for people who lose their jobs. The administration of all kinds
of income support needs to promote occupational and geographical mobility.
Moving to another state, where job opportunities might be better, shouldn’t
jeopardise your benefits; workers in industries facing dislocation because of
trade or technology should get generous help with retraining; state licensing
rules shouldn’t make it pointlessly harder for plumbers, hairdressers, nurses
and other skilled people to relocate; and so forth.

The pandemic is exposing weaknesses and avoidable cruelties
in the way America’s economy works. To be sure, repairing those defects should
be an end in itself. But the benefits will be all the greater, and the
post-pandemic recovery all the stronger, if those reforms also restore the idea
of international trade as an engine of progress and mutual advantage.

In this way, thinking on trade, the viability of
international cooperation and the strength of America’s social protections
are all bound up together. Covid-19 has put each of them under terrible
pressure. To succeed, fixing two out of three won’t do.

* Clive Crook is a Bloomberg columnist. Views expressed are his own. 

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