World trade’s new Wild, Wild West

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After the dry, desperate beggar-thy-neighbour days of the 1930s and the fight-to-the-death shooting wars of the 1940s, common folk — farmers, schoolmarms, preachers, ink-stained wretches, everybody — all came to understand the world needed a sheriff to keep the peace in international trade. It got one in the form of the United States, then producer of half the planet’s GDP. The U.S. and 22 other countries got together in peaceful places in Europe — Geneva, Switzerland; Annecy, France; Torquay, England — and hammered together new laws for world trade: a General Agreement on Tariffs and Trade (GATT). Four decades later, the 23, since joined by 100 more countries, institutionalized it all in a new World Trade Organization (WTO), with more ambitious rules reflecting the recent triumph of capitalism, or at least quasi-capitalism, over communism. The rule of GATT/WTO laws thus kept the peace for half a century.

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But now the world’s trade sheriff produces only a quarter of global GDP, and a rival, China, threatens its supremacy — even if the average Chinese still earns only $24,380 a year, compared with the average American’s $82,190, and our own $60,700, all quoted in “purchasing power parity” U.S. dollars. (Without PPP adjustments, Americans on average make six times what Chinese do and almost 50 per cent more than us).

That China, home to almost one in every six humans, finally emerged from the self-inflicted dementia of Maoism and joined the world economy is almost unalloyed good news for humanity. Almost. For various reasons, the incumbent sheriff, the U.S., feels diminished by the new challenger. It also argues the newcomer has consistently broken the WTO’s rules since being accepted as a member in 2001 — even if stretching the rules in your favour is part of most justice systems, frontier or otherwise.

In protest, the Trump administration declined to approve new appointments to the WTO’s Appellate Body, the organization’s court of final appeal in cases member-nations bring against each other. (U.S. Democrats want to pack their own Supreme Court but acquiesced in Trump’s practice of letting the Appellate Body membership go to zero, which is where it now is.) Canada, the EU and others have jerry-rigged arrangements in which retired WTO adjudicators decide cases for them. But makeshift courthouses are no substitute for the real thing.

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And now we’ve got Wild-West-style tariff anarchy, with the West itself going wild. Canada and the U.S. don’t like the smell of new Chinese electric vehicles, even ones that could help save the planet from supposedly looming extinction, so — pow! — hit them with a 100 per cent tariff, plus 25 per cent on steel and aluminum for good measure. China blasts back — bang! — with as yet unspecified but sure to be high tariffs on canola. And it presumably has a long target list of other critical items in reserve.

The WTO has recourse if you think a trading partner is subsidizing its exports unfairly — which we claim China is doing for their EVs. But now everyone is shooting first, asking questions later. Ready! Fire! Aim!

Meanwhile, Donald Trump is planning tariffs on all imports, no matter what, no matter where from. “Bwoom!” is the onomatopoeia the internet recommends for major artillery going off. It offers no suggestions for nuke sounds. Trade law experts argue an across-the-board tariff increase will lose in court, since only Congress has the power to regulate trade. Richard Nixon did impose a 10 per cent tariff hike in 1971 as part of an emergency package of balance-of-payments measures. But Congress delegates time-limited exceptions for such crises. (Canada was not exempted even though our dollar had been floating for more than a year and presumably was in appropriate balance with the U.S. dollar. But Nixon liked Pierre Trudeau even less than Trump likes his son.)

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The first Cold War, with the Soviet Union, had little effect on the world trading system. Only in their final days did the Soviets begin the economic reforms that eventually might have enabled them to sell something more than raw materials and joke-butt Lada cars to the West. But a cold war with China makes adversaries of the two major players in a still highly-integrated world economy. And it makes the former sheriff into a lawbreaker, too.

Action movies can be thrilling. Living through one, not so much. There’s a little xenophobe in each and every one of us. Popping off at nefarious foreigners is always self-righteously satisfying, especially since they can’t vote in our elections — or at least aren’t supposed to, even if that doesn’t seem to stop some countries.

But global trade wars create lots of collateral damage. The biggest players — the U.S., EU and China — have internal markets large enough to support competitive enterprise in a wide range of activities. We smaller fry can’t produce everything. We rely on trade to get access to the cornucopia of goods now available on world markets — and to reach the economies of scale and scope that allow us to export at competitive prices. A Wild, Wild West in trade is a very dangerous place for us.

Financial Post

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