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Opinion CLOs
International trading systems were broken before Trump started smashing them up
by Lisa Lee
Lisa Lee
Deputy editor
Creditflux
China entered the WTO in 2001 on terms suited to a developing economy
President Donald Trump has ushered in an era of multi-front trade wars, weeks into his second term in office. Whether he succeeds in using economic might to assert US authority in the world, Trump will be brandishing the weapon of tariffs in an already fragile international trading system.
Financial markets gyrated as Trump unilaterally imposed tariffs on Canada, Mexico and China. Though he backed off, at least for a while, on Canada and Mexico, the world should be braced for more to come. No country is immune.
Thus, investors should be anticipating a period of growing economic uncertainty and greater market volatility, and most are. For certain, China will retaliate, as will almost any trading partner that has tariffs set on it.
Outraged and worried as US trading partners are — countries in the European Union and the UK are unlikely to escape unscathed either — there are few voices in support of the global trading order. No calls for the new round of trade negotiations to advance economic ties, fix problem areas, or improve the flow of goods and services.
Trading issues linger from 1994
The world is relying on a trading system that is unfit for purpose, unable to unify and to counter any real threat of a trade war. The last comprehensive international agreement was in 1994. Dubbed the Uruguay Round, the negotiations set up the World Trade Organization (WTO), with many lingering issues left to be resolved later. But the vast majority never were — for more than 30 years, the story of free trade has been of one failure after another. Trump only underscores its brokenness, and weakens it further.
The first big wake-up call against free trade, a critical leg of the economic order that the winning powers established after World War II, came in Seattle, Washington, in 1999. Ministers and delegates from around 160 nations descended on the rainy city with an agenda to kick off the next set of trade negotiations.
They were greeted by thousands of activists who had also come to Seattle. Street protests, vandalism and chaos ensued. Ministers also bickered among themselves. Seattle became an utter failure for international trade, and a huge win for anti-globalisation proponents. The last multi-lateral attempt, the Doha Round, then failed in 2011 after a decade of talks.
Your columnist and managing editor once worked on international trade matters for the US Congress, for the powerful Senate Finance Committee that has oversight over trade negotiations, tariffs and the US trade representative office. There, simmering under the surface but busted wide open now, I saw that the consensus for international trade was fraying.
The slow rise of protectionism
US labour, which once wanted to lift up less economically privileged brethren around the world by opening the US market, now sought protections for lost jobs going abroad. Farmers — even those eyeing foreign buyers — wanted protection from the flood of international goods. Manufacturers from textile firms to machinery shops asked for protection from products made with cheaper hands in poorer countries.
But perhaps nothing destabilised the trading order more than the economic rise of China. The country entered the WTO in 2001 on terms suited to a small, developing economy, and stressed an already beleaguered system. Since there’s been no truly successful multilateral trade negotiation since that time, the global order has yet to address this issue in a material way.
Most in Wall Street, the City of London and other financial centres worldwide, find tariffs and trade wars senseless and defeating. Indeed, tariffs at core are taxes, and will likely fan inflation and exacerbate cost of living issues, which hit low-income workers the hardest. But unless the international order finds supporters, there will be little to counter an impending trade war.
