Although trade has played an important role in advancing economic growth, it has since lost its dynamism. Asian economies, however, have continued to liberalise its markets. Asia will now serve as the backbone of stability amidst the growing clamour for protectionism around the globe.
The past year has been marked by key events affirming the growing prevalence of populism. In June 2016, Britain voted to leave the European Union, providing the momentum for populist movements around the globe. A few months later, Donald Trump was catapulted to the Presidency on an “America First” campaign. Although trade has played an important role in advancing economic growth, it has since lost its dynamism. Asian economies, however, have sung a different tune. While the rising backlash against globalisation have spurred protectionist policies in the West, emerging powers in Asia have continued to liberalise its markets. This marks the end of a Western-led trade.
The Global Trade Disorder
Trade literature is dominated by studies showing how lower trade barriers have helped improve productivity and growth. Two decades after Bretton Woods, tariffs have fallen below 5% and world trade has outpaced economic growth by 3 percentage points. Proponents for freer trade argue that restricting the flow of goods limits the range of choices available, adversely affecting consumers and industries.
During global recessions, global trade typically stalls for a period of time. However, years after the 2008 financial crisis, growth in world trade has still remained flat, marking the longest period of postwar trade stagnation. The World Trade Organization (WTO) has forecasted trade to grow at 1.8% to 3.1% in 2017, down from its initial forecast of 3.6%. The downward revision was attributed to the slower recovery in merchandise trade volumes. Meanwhile, global GDP growth is expected to recover to 3.4% this year from 3.1% in 2016. On average, trade has grown 1.5 times faster than GDP, but this ratio has dipped below 1.0 in recent years.[ms-protect-content id=”5662″]
In an atmosphere of skepticism towards trade liberalisation, reaching the pre-crisis average global trade growth of 6% is unlikely. A report by the Peterson Institute for International Economics (PIIE) noted that following the General Agreement on Tariffs and Trade (GATT) talks in 1947, reduction in trade barriers have lapsed over longer time periods, partly due to developing countries’ refusal to lower trade barriers even further to protect their local industries. The standstill in multilateral trade negotiations has encouraged countries to turn to plurilateral negotiations instead. However, these have not led to significant progress in goods and services liberalisation.
The 2016 World Economic Outlook diagnoses that trade growth has slowed primarily because of weaker economic activity. The report adds that the slower pace of trade liberalisation and a surge in protectionist policies have also dampened trade growth. The slowdown of global trade amidst growing protectionist sentiments is particularly alarming. Despite the supposed merits of trade, its benefits have not been inclusive.
In the aftermath of the Great Depression in the 1930s, the US raised its import tariffs, only to face retaliation from other countries. This only worsened the recession and slashed more than half of global trade. Although nowhere near the protectionist measures imposed decades ago, today’s Western leaders are treading on a dangerous route by introducing restrictive trade measures. In Asia, increasing protectionism poses a huge threat to its trade growth. The number of antidumping cases filed against the region’s exporters has risen by over 50% in the last 5 years. Protectionism can harm smaller countries – particularly those with export-oriented economies – who have limited resources to cushion against external shocks.
A Rethink in the Rules of Global Trade?
The rise of populism is perhaps a testament that the current system is no longer working. There are growing calls for a more moderate form of globalisation, arguing that today’s volatile politics is partly rooted in excessive globalisation. Dani Rodrik, a Harvard economist, asserts that democracy, national determination, and economic globalisation cannot be pursued simultaneously.
Countries who have experienced the greatest growth never fully embraced the free-market ideology imposed by the US and other multilateral institutions. Citing China, South Korea and Japan as examples, Rodrik noted how these countries have engaged with the global market, while protecting its domestic industries. By enforcing import barriers, nascent industries were given enough room to develop its own capacities. By controlling capital flows and manipulating currencies, local firms gained an edge over their foreign competitors.
However, this vision might be better suited for smaller countries trying to gain economic traction. It would be catastrophic for advanced economies to impose the same measures. Instead of reverting back to protectionist policies, larger countries should implement strategies to ensure that trade’s benefit is more inclusive, such as strengthening social safety nets to help out those who have lost out on trade.
Shift in Trade Patterns
The political climate in Western countries have made it impossible to push for more trade liberalisation. In contrast, Asian economies tell a different narrative. In the Philippines, President Duterte, who amassed widespread support for his anti-elite stance, has so far maintained his predecessor’s liberal macroeconomic policies. The Asian Development Bank (ADB) reports that although trade growth in the region has decelerated due to slower global growth, intraregional trade continued to strengthen.
Xi Jinping, the first Chinese leader participating in the World Economic Forum, delivered a speech in defence of globalisation. He echoed a vision typically espoused by Western leaders, remarking that, “We should adapt to and guide economic globalisation, cushion its negative impacts and deliver its benefits for all countries.” He cautioned that no one will emerge victorious in a trade war. This is a stark contrast to the anti-trade rhetoric embraced by the new US government. Historically, America has championed trade liberalisation, encouraging developing countries to open their economies and reduce trade barriers. It has since reversed its tone under the Trump administration.
In his first week in office, Trump has issued two trade-focussed Executive Orders in fulfilment of his campaign promise. He has withdrawn his country’s involvement in the Trans-Pacific Partnership (TPP), ending an era of multilateral trade deals that have been a hallmark of globalisation, and has also sought a renegotiation of the North American Free Trade Agreement (NAFTA). To add salt to the wound, he threatened to impose tariffs on goods produced in Mexico and China. Should Trump pursue border taxes, global supply chains will be disrupted and trade wars will ensue as affected countries will most likely retaliate. These policies are unsound and would undermine trade reforms implemented over the past decades.
With the US retreating from the global stage, China looks poised to fill in the leadership vacuum. The TPP’s demise will allow China to expand its economic clout in Asia through the Regional Comprehensive Economic Partnership (RCEP). Traditional American allies in the region have already hedged towards Beijing. The Philippines, for instance, has reoriented its foreign policy, setting aside its tussle with China over the West Philippine Sea in favour of stronger economic ties.
However, for China to become a credible leader in global trade, it should be willing to open its markets further and abide by international trade standards. As it stands, it has stalled from implementing significant reforms after its accession to the WTO in 2001. Its regulatory environment is unpredictable, transparency challenges unresolved, and barriers to its services markets remain in place. China itself is also one of the main targets of protectionist policies. Although China has shown geopolitical assertiveness, it faces numerous constraints in assuming global leadership. For now, it seems unlikely that a dependable leader will take the helm in shaping the rules of the global economy. What is clear, however, is that Asia will now serve as the backbone of stability amidst the growing clamor for protectionism.
Featured image: President Rodrigo Roa Duterte listens to Trade and Industry Secretary Ramon Lopez as he discusses matters during the courtesy call of People’s Republic of China Minister of Commerce Zhong Shan to the President in Malacañang Palace on March 7, 2017.
Photo Courtesy: Rolando Mailo/Presidential Photo[/ms-protect-content]
About the Author
Professor Victor Andres “Dindo” C. Manhit is the Founder and Managing Director of the Stratbase Group and President of its policy think-tank, the Albert del Rosario Institute for Strategic and International Studies (ADRi). He also serves as Managing Director for BowerGroupAsia (BGA) in the Philippines.