When it comes to the trade environment, is uncertainty the only certainty? That was the question posed by Edward Alden at a recent conference, "What's on the Horizon for International Trade?" hosted by the University of Nebraska-Lincoln's Clayton Yeutter Institute for International Trade and Finance and the Nebraska Farm Bureau.
"If the answer to that question is yes, the implications for business, for agriculture, and I would say for world politics are enormous and discouraging," says Alden, Ross distinguished professor in business and economics at Western Washington University and senior fellow with the Council on Foreign Relations.
Alden outlined several possible scenarios for international trade moving forward.
But first, how did we get here? The post-World War II global trade system involved efforts to mitigate economic nationalism and create rules to bring more certainty for international trade.
It started with the General Agreement on Tariffs and Trade (GATT), with reciprocal tariff reductions starting in the late 1940s and drawing more countries over the years — until the World Trade Organization (WTO) took its place in the 1990s and created a set of binding rules for resolving trade disputes.
"By any reasonable set of measures, the post-World War II effort to minimize uncertainty in trade was extraordinarily successful," Alden says. "World trade grew tenfold between 1950 and 1980 and then grew by an astonishing 35 times between 1980 and 2010. From 1980 to 2016, the total stock of foreign direct investment grew from about $700 billion to more than $25 trillion."
Despite this track record, Alden notes these efforts have seen a backlash.
And it started before President Donald Trump took office, Alden says. Many WTO panel rulings took too long, and over time, large countries such as the U.S. and China neglected to comply with WTO rulings.
However, things have escalated since 2017. On his third day in office, Trump withdrew the U.S. from the Trans-Pacific Partnership (TPP). The U.S. imposed tariffs on steel and aluminum imports from allies under the pretext of U.S. national security. Those countries responded with retaliatory tariffs on U.S. farm exports.
Perhaps most notably, the U.S. has imposed tariffs on China under Section 301, covering all but about one-third of China's $500 billion in annual exports to the U.S. China retaliated with tariffs on U.S. farm exports.
Three possible scenarios
What's next? Alden outlined three possible scenarios.
The first, what Alden calls the "most worrying possibility," is a deepening trade war. He believes the idea that U.S. tariffs will be lifted once agreements are reached with major trading partners — especially China — is overly optimistic.
"We are more than a year into the trade war with China and there has been little progress toward an agreement," Alden says. "The issues on the table go to the heart of China's economic model. The Chinese have not shown a willingness to offer much more than some modest concessions on market access, particularly in terms of foreign products and in intellectual property protection — and a little bit on access for U.S. financial services companies."
Alden's remarks came before it was announced that China may purchase $40 billion to $50 billion worth of U.S. ag products, what has been called part of a "phase one" of a trade deal with China that also would involve a pause in tariff escalation.
And, if Trump is reelected in 2020, Alden notes he likely will double down on trade wars.
"The result of that is companies are going to have to build in costly cushions in production and sourcing to deal with the high level of uncertainty," Alden says. "I don't think any of this changes if a Democrat is elected. Elizabeth Warren … has staked out an equally hawkish position on trade with China."
The second scenario involves trade peace under a revitalized WTO.
"Under this scenario, the Trump years prove to be an anomaly on trade," Alden says. "I think this is most likely if Joe Biden were to become the U.S. president in 2021, and there might be an effort to revert to something close to the pre-2017 status quo of trading. That would include the United States seeking to rejoin the TPP, and some revised version of the USMCA with Canada and Mexico.
"I think the odds against this are very large. The Trump years have been so head-spinning that it's easy to forget that the trade system was in a lot of trouble before he ever set foot in the Oval Office. The WTO is largely gridlocked with only minor successes in updating rules over the past two decades. Even if the dispute settlement system can be tweaked successfully, it's going to become less and less relevant unless the underlying rules can be updated."
The final scenario, which Alden says is both plausible and optimistic, involves going back to a pre-WTO era, in which there were rules and norms for trade, but enforcement essentially was optional.
"Under the GATT system, countries could complain when they felt rules had been violated and the panels would issue decisions, but member states, even if they were found to have broken the rules, were free either to abide by those decisions or to ignore them as they saw fit," Alden says.
"Unilateral action was largely accepted and countries would try to negotiate creative compromises that recognize those political realities. The prime example being the U.S. did a series of deals with Japan over the 1970s and 1980s in which Japan agreed to voluntarily restrain its exports of steel, autos, television sets and other products to the United States."
The question is, is reaching this third and more preferential scenario possible?
Alden says the U.S. and the rest of the world likely will reach this middle ground, but it won't be easy.
"Bigger countries have the constant temptation of thinking that they can do better by throwing their weight around," Alden says. "But the only way that such systems can be stable is if the great powers would refrain from using their power to pursue only these kinds of short-term gains. Compromise takes a significant degree of trust among countries."