by Francis Maindl
The election of Donald Trump on November 8th of 2016 might be an indicator that the world is changing. Not because of his plan to build a wall at the Mexico border. Not because of his travel ban bill. Not because of his plan to increase military spending. Rather, the world is changing around the economic approach the new President Donald Trump is ready to take in reaction to the emergence of China as a new superpower.
If one agrees that what matters is where the money is, then the American-Chinese bilateral relationship occupies the ‘center stage’ of international affairs and surely shapes the beginning of a new world structure. Together, the two giants account for more than 36% of the world economy and the trading relationship that binds them together is the most important in the world. However, the arrival of Trump and his recurrent criticism of China’s economic policies indicates that this relationship will evolve in a manner that will lead the world into a protectionist downward spiral.
The Old World and the Growth of China
After the Second World War, the United States along with its allies pushed for a world order based on the ideology of free-market global capitalism, as an opposition to communism. While the General Agreement on Tariffs and Trade (GATT) could be seen as one of the starting-point institution of global capitalism, the creation of the World Trade Organization (WTO) creation embodies its victory against the other side of the Iron Curtain.
The WTO to this day acts as a platform that encourages its member countries to implement free-trade mechanism and that can potentially allow ‘punishment’ on countries pushing forward any form of protectionist measures such as government subsidies to industry, import taxes, competitive devaluations, non-tariff trade barriers, etc. Its mandate very clearly advocates for progressively reducing the interference of governments in the economy in order to maximize growth across nations.
China joined the WTO in 2001 and greatly benefited from it as it became the ‘world factory’, attracting in the process a massive inflow of foreign investment and having its GDP and volume of trade increasing by nearly 8 times. China emerged as the ‘winner’ of its trading relationships with the outside world, reaching as of 2015 more than 3 trillion $US in foreign reserves, the highest amount by far held by any country in the world.
Its accession to the organization was accompanied by high hopes that China would become a liberal market economy. When it joined the WTO in 2001, there was an agreement that gave China 15 years to become a market economy and divert away from a planned economy structure. Last December, those 15 years came to a term and the United States decided not to grant China a Market Economy Status (MES). Although China went through a process of liberalization in some sectors of its economy, the government is still highly present in many sectors of the market. China’s political structure is built on the ideology of the need for a strong government that has an important influence on the direction of its economy. Whether it is with its planned currency policy, its State-Owned Enterprises (SOEs), its influence on wages, production or on the allocation of resources, the government in China is still much more present in its national economy than its American or European counterparts.
Douglas Bulloch for Forbes argues that even though China liberalized some sectors to a certain extent, it never really got out of its protectionist structure: ”[They use] other forms of protectionism [that]include direct subsidy, exchange rate controls and administrative barriers of one kind and another, etc. Because of this lack of progress in easing trade, the extended period of currency manipulation, the lack of observance of TRIPS [intellectual property rights] and the sheer administrative resistance exporters face when trying to get their products into China, we now face of world of highly unbalanced trade, and rising mistrust. And it is this that is leading to rising protectionism; the simple fact that it never went away”.
That aspect made China’s economic relationship with the other world’s big players rather precarious and the test of the 2008 economic crisis proved that to be true.
The 2008 Economic Crisis and the Rise of Protectionism
Trump isn’t the cause for the rise of protectionism, but rather one of its inevitable symptom, just like the recent anti-globalism political movements that emerged in the last years in Europe.
The moment at which the foundation of globalization was challenged came when the economic crisis of 2008 struck the entire globe. James A. Dorne explains in a CATO Institute publication that China started implemented more protectionist measures after the global crisis: “When the global financial crisis threatened China’s strong growth record, there was increasing pressure to strengthen large SOEs in pillar industries. As the global economy weakened and SOEs grew larger, China’s overcapacity in steel and other state-supported industries became evident”.
The World Trade Organization reported a booming spiral of protectionist policies being implemented not only by China, but also by the United States and the European Union. The WTO said that between October 2008 and May 2014 it had recorded 1,185 new trade restrictions of which only 251 had been removed, leaving almost 1,000 still in place covering 5.2 per cent of G20 imports. “It is clear that the coat of trade restrictions has grown a bit thicker over this period,” said Roberto Azevêdo, the WTO’s director-general.
But the situation might be even more critical according to Global Trade Alert’s Simon Evenett who believes some protectionist measures are becoming harder to identify: “Lots of protectionism these days is murky and, unlike transparent tariff increases for example, takes time to document,” Mr Evenett said. For that reason, the world needed a “more rigorous” monitoring mechanism, he added.
The Global Trade Alert (GTA) is an organization that monitors trade policy measures that have been implemented by more than 140 countries since the end of 2008, including tariffs, trade defense measures and technical barriers to trade, as well as state aid and bailout measures. The three most recent GTA reports conclude with rather negative assessments of trade policy since the financial crisis: “They suggest that protectionist pressures are “mounting”, and that governments have not honored their pledges to refrain from erecting trade barriers, as there has been a steady stream of newly implemented trade-restrictive measures since 2008”.
In times of crises, as it was the case during the Great Depression in the 1930s, countries are seduced by the idea of adopting protectionist measures that benefit them on the short-term. But as soon as other countries retaliate, the temporary effect is lost and ends up becoming mutually destructive. An analogy of a group of people, each pulling for their side of the blanket, can be used here to describe what seems to be happening in the recent years. Protectionism works for those who start pulling first, before others realize it, but as others start pulling as well, the blanket eventually ends up tearing apart.
A New World Order?
If the previous world order was characterized by increasing trade flows and free-trade agreements, the next one might simply be the beginning of a process of ‘de-globalization’. In his book The Collapse of Globalism, John Ralston Saul suggests that the theory of globalism was wrong in believing that nations states would be increasingly irrelevant in the analysis of economics and politics and that it would change all dictatorships in democracies.
As thing have been unfolding in the last years, it would be hard to argue otherwise. We are seeing right now countries progressively turning their back on the world and putting their national interest at the top of the agenda. The most obvious example would be America with the arrival of Trump, who has been pushing for protectionist measures, travel bans, threats of defunding and leaving international organizations, etc.
Typically cited in political writings that depict grand theories of international politics, Francis Fukuyama’s End of History concept argued that after the Cold War, the victory of the global capitalist axis represented the endpoint of humanity’s sociocultural evolution. However, what we are seeing right could well be the beginning of something that challenges that vision of the world. Maybe it is the beginning of something new.