Make no mistake, the global trade landscape is fracturing
Western companies and governments are put off by Beijing’s trade model
President Trump addresses the media before signing Section 232 proclamations on steel and aluminum imports in the Roosevelt Room of the White House on March 8, 2018. (MANDEL NGAN/AFP/Getty Images)
On a recent visit to China, Canadian Prime Minister Justin Trudeau was assailed by Beijing's state-controlled media for making comments about the importance of “Fair Trade.” His remarks were part of a wider discussion about a possible free trade agreement between Canada and China--but, in fact, they exposed glaring differences between the value-systems of China and the West, and how these differences are fracturing the global trade landscape.
Beijing’s response to the prime minister was clear: China has no intention of being lectured to and will not play by someone else’s rules when it comes to international trade.
Fast-forward to March, 2018 and Trump’s America.
With the announcement of new duties on steel and duties on aluminum, the Trump administration has rolled out the most sweeping protectionist tariffs in decades. Trump’s advisors have been agitating for trade wars and they are going to get their wish. They are working hard to dismantle America’s free trade agreements, such as the NAFTA and the U.S.-Korea FTA. Peter Navarro, Trump’s chief trade advisor--who is now being considered as the replacement for the outgoing Gary Cohn, Trump’s chief economic adviser--has even called into question U.S. membership in the WTO.
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What is happening to the international trading system?
Consider yet another major trade development. March 8, 2018, witnessed the signing of Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”). By moving ahead with CPTPP, the remaining eleven members of the original TPP have firmly embraced a values system and a framework of rules that puts fair trade, free markets and multilateralism at its core.
Make no mistake, the global trade landscape is fracturing . Three trading models are emerging: (1) the China Inc. model; (2) The Fair Trade model; and (3) the Unilateralist model. These are evolving hybrids and are based as much on ideology as they are on geopolitics and historic trading relationships.
The coastal city of Lianyungang -- a key intersection in China's Beijing Belt and Road initiative. (Zhang Peng/LightRocket via Getty Images)
The China Inc. trade model
As Beijing builds, paves and spends its way across Asia, it’s rapidly extending its geopolitical influence and trade model. China’s bureaucrats micro-manage every facet of this system, and carry out their policies through state owned enterprises and surrogates, across all key sectors.
The China Inc. trade model subsidizes Chinese companies and has presided over a coercive technology transfer apparatus that has systematically deprived intellectual property from foreign firms operating in China. In all instances, the Beijing Inc. model aims to create an uneven playing field that favors Chinese interests.
As Trump’s America retrenches, Beijing is driving globalization on its own terms. Another mega trade agreement--although it’s still a long way from being finalized--is the Regional Comprehensive Economic Partnership (“RCEP), and has been called China’s alternative to the TPP.
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The RCEP, unlike the CPTPP, lacks robust provisions that require SOEs to adhere to fair play rules. It’s unlikely that there will be provisions to guarantee IP protection, data privacy and security, despite an increasingly digitized global trade landscape.
As China pursues its Belt and Road initiative, Chinese firms will be selected to build the soft infrastructure along the routes. This means that Beijing’s autocratic position on data localization, net neutrality and control of telecommunications technologies will grant vast powers to Beijing’s central planners. The result could be a “big brother” styled trade block of Asia’s emerging economies, dominated by the Chinese.
Not surprisingly, Western companies and governments are put off by Beijing’s trade model . The recent move by President Xi Jinping to abolish presidential term limits represents a historical tipping point and the beginning of a Western backlash to Beijing Inc.’s practices.
President Xi Jinping looks set to remain in office indefinitely. (Xinhua/Liu Weibing via Getty Images)
The fair trade model
Trudeau’s message in Beijing was clear: a modern FTA needs to have strong transparency and ethical standards baked into the agreement . This includes labor standards, and environmental benchmarks, as well as guarantees of data privacy and security.
The CPTPP contains a host of fair trade provisions that are anathema to autocracies, dictatorships and economic nationalists. The model depends on functioning multilateral institutions such as the WTO and on the free flow of information between key stake holders such as governments, businesses, trade associations and NGOs.
This fair trade model remains attractive to trading nations and emerging markets that want to pursue open, collaborative free market principles--which would explain why a post-Brexit Britain has expressed interest in joining the CPTPP. Others will soon follow.
The unilateralist model
Trump’s “America First” populist movement represents a return to a pre-WTO world, where unilateral, opportunistic trade policies ruled the day. Viewing trade through the prism of national security and economic nationalism will invite similar behavior from other opportunistic actors and could threaten an already marginalized WTO.
How far will the Trump administration take its new trade war policies and how many other countries will follow suit? The answer to this question will play out in the coming months.
One thing is certain, Trump’s trade policies have upended the post-World War II trading landscape, and a new, uncertain era of trade has arrived.
Alex Capri is a senior fellow at the National University of Singapore, where he teaches in the business school and in the Lee Kuan Yew School of Public Policy.