Now is Not the Time to Give Up on Trade Rules
Rachel Thrasher and Tim Hirschel-Burns on why there are no winners in a free-for-all.
April 2nd has been hailed by the Trump administration as “Liberation Day” – a day when the US will ostensibly be “freed” from the unfair trade practices of its trading partners. This is the latest in a series of tariff threats which may or may not materialize and which seem calculated to force trading partners to the negotiating table on a myriad of issues. Many tariffs have been “paused” or removed quickly after their introduction, while a few have remained – those imposed on all steel and aluminum imports as well as additional selected import tariffs on Mexican and Canadian goods. President Trump also recently announced new tariffs on automobile imports.
Many experts have voiced concerns that the introduction of new tariffs will cause inflation within the US and undermine efficient producers outside of the US, especially in developing countries. Others have voiced concerns that the unpredictability and haphazard nature of the current tariff policy will result in negative economic spillovers. Other experts believe those dire predictions are overblown.
However, to focus on the tariffs’ short-term economic effects is to miss their long-term damage to the global trading system. Perhaps the most lasting and consequential impact of these aggressive tariff policies is a signal of the overall disintegration of the set of global rules that have governed international trade for almost 80 years. It is striking that, through these new tariffs, the Trump administration is blatantly violating the United States-Mexico-Canada Agreement (USMCA) that President Trump negotiated himself during his first term.
These rules have long needed to evolve. But what is so damaging about the Trump administration’s tariff escalation is the implication that the international trading system does not need trade rules at all.
The Historical Basics
The General Agreement on Tariffs and Trade (GATT) emerged on the heels of two devastating world wars. It provided a framework for countries to gradually lower barriers to trade while preserving the right to regulate in the public interest within their borders. Many of the countries that developed in the next few decades utilized export-oriented strategies that depended in part on the lower tariffs to increase access to foreign markets.
The formation of the World Trade Organization (WTO) in 1994 took trade liberalization further. At the same time, Mexico, Canada and the US negotiated an even more comprehensive trade agreement. That agreement, the North American Free Trade Agreement (NAFTA), has been the bedrock of North American economic relations for the past 30 years. The agreement bound tariffs between the three countries to near zero across all products and decreased barriers to cross-border services as well. Additionally, it introduced special protections and remedies for foreign investors that went beyond what was available at the WTO.
Under these agreements, any tariffs applied to imported products above what the US committed to at the WTO (for WTO members) or under NAFTA and its successor agreement, the USMCA (for Mexico and Canada), violates the terms of those agreements.
There are legitimate critiques of the global trading system
Both the WTO and the NAFTA/USMCA have faced criticism for the ways that the rules exacerbate inequalities between countries and kick away the ladder for developing countries seeking to engage in economic structural transformation.
A major critique of these agreements is that they did not bring about the levels of growth nor the decrease in inequality between nations that were promised for those countries. Mexico’s growth after NAFTA increased slightly but the effects were mostly felt only by a small subset of industries along the border. After 30 years under the WTO governing authority, the gap between the Global North and Global South continues to grow.
Another major concern about both NAFTA and WTO agreements is that they constrained the regulatory freedom (“policy space”) of countries to pursue their own development and policy priorities. The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), for example, immediately raised the global standard for protecting intellectual property rights (IPRs) and made it so that developing countries could no longer adjust their own IPR standards according to their health needs and priorities. Even domestic policy efforts to face the HIV/AIDS crisis, arguably consistent with global rules, were challenged by pharmaceutical firms and Global North countries alike. Although there have been modest reforms, they have not fully addressed the underlying problems presented by the TRIPS Agreement.
NAFTA and other modern free trade agreements (FTAs), which go beyond the WTO in terms of their country-party commitments, add to the policy constraints. By driving tariff barriers even lower than what is bound at the WTO, FTAs limit some countries’ ability to earn much needed revenue and expand fiscal space. By prohibiting certain investment performance requirements, FTAs keep countries from deploying policies historically used to harness foreign direct investment for national development. Other policies deployed to manage capital flight, sovereign debt distress, and environmental and climate priorities are likewise subject to legal challenges by private firms through investor-state dispute settlement. What is more, the rules leave fairly unconstrained policy priorities of the Global North, like agriculture and domestic production subsidies.
Way forward
Ironically, the US’ current tariff threats and policies seem largely in line with these historical critiques – that these treaties are not fit for purpose for a country that needs to build productive capabilities. Indeed, by echoing concerns made by its developing country trading partners over the past 80 years, the US could be effectively creating de facto policy space for countries in need of that space. At the same time, however, the danger of such a move is that countries move away from a rules-based system and backwards toward the power-based trading system the world had at the beginning of the 20th century. Those power-based trading relations exposed the most vulnerable of the world’s countries to even greater economic destabilization and ultimately contributed to global financial instability. The fading away of trade rules would leave countries like the US and Uganda equally free to impose tariffs, but they would not experience a tariff war equally.
The initial goal laid out in the GATT, which eventually became the backbone of the WTO, was to raise standards of living and economic growth through rules-based trading. The US and the rest of the WTO members made commitments, progressively over time, to lower tariffs (and to make other changes), on a reciprocal basis, for the well-being of all. That arrangement has never been perfect, but the absence of such an arrangement may well be worse.
Recent experts have highlighted how WTO leadership and other WTO members could leverage the re-negotiation flexibilities present in GATT Article XVIII to build up the institution in response to the US’ policy rather than tear it down. Instead of flouting or disregarding the global trade rules, it is clear that the rules need to preserve adequate regulatory space for all member states to have equal opportunity to invest in productive development. A future that advances development, promotes peace and is resilient to climate change relies on it.
Rachel Thrasher is a legal expert and Researcher with the Global Economic Governance Initiative at the Boston University Global Development Policy Center.
Tim Hirschel-Burns is the Policy Liaison with the Global Economic Governance Initiative at the Boston University Global Development Policy Center.
Photo by Pixabay
