Trade
Trade, deglobalisation and the new mercantilism
Author: Razeen Sally, NUS
The COVID-19 pandemic is accelerating changes underway since the global financial crisis (GFC) in 2008. It is ushering in a new era of deglobalisation and protectionism — a new mercantilist world order. Three global shifts will likely shape international trade beyond the immediate crisis and into the ‘post-vaccine’ future.
The first is an accelerated shift from market to state: more government interventions will further restrict markets. The second is to national unilateralism — governments acting on their own, often against each other — at the expense of global cooperation. The third is to more contested and unstable geopolitics, centred on US–China rivalry. Together, they herald a new mercantilism, whose worst modern precedent is the interwar period in the first half of the 20th century.
Mercantilism is the exercise of state power to control markets domestically and internationally. Malign mercantilism governed the decades preceding 1945. It shattered domestic economies, shrunk individual freedom, destroyed the world economy and poisoned international politics culminating in a global war. Today’s emerging mercantilism is far from that reality but risks heading in that direction.
Three eras of international trade preceded the present pandemic. The quarter-century leading up to the GFC was an era of unprecedented liberalisation and globalisation. The decade after the GFC saw globalisation stall and trade growth stagnate alongside ‘creeping’ protectionism. Starting in early 2017, the final era was triggered by US President Donald Trump in retaliation to increasing Chinese protectionism. This rippled into copycatting protectionism by other countries. Protectionism went from creeping to galloping.
This pandemic has triggered the worst deglobalisation since 1945. International trade may shrink by up to a third, foreign direct investment by up to 40 per cent and international remittances by 20 per cent in 2020.
The trade outlook is worse than it was during the GFC in two ways. Economic contraction is now synchronised around the world. During and after the GFC, fast growth in emerging markets — led by China — cushioned the fall in trade and enabled a recovery. Now, services trade is suffering more than goods trade — travel and tourism have collapsed. The GFC hit goods trade hard but services trade was more resilient, especially travel and tourism. There are signs of a protectionist upsurge, like export bans on medical equipment, with new restrictions on foreign ownership in the pipeline.
What is the medium-term post-vaccine trade outlook?
First, protectionism is likely to increase as a spillover of domestic state interventions — particularly industrial-policy — that will last beyond the present crisis. Crisis-induced subsidies will be difficult to reverse and will have trade-discriminating effects. New screening requirements might decrease foreign investment. These and other interventions to protect domestic sectors have a home-production bias. The list of ‘strategic’ sectors to protect on ‘national security’ grounds against foreign competition will likely expand. There will probably be more restrictions on migration and the cross-border movement of workers.
Second, national unilateralism will likely expand and make effective regional and global policy cooperation difficult. This bodes ill for the WTO, APEC, the G20 and regional organisations like ASEAN. It will also cramp the liberalising effects of stronger preferential trade agreements. This increases the prospect of tit-for-tat retaliation and copycatting protectionism.
Third, the reorientation of global value chains will accelerate. Western multinationals will relocate parts of their production from China to other countries on cost grounds, as they have been doing, and increasingly on political-risk and security grounds. There will be a combination of onshoring, near-shoring and regionalisation of value chains, varying by sector. But the overall effect will be to raise costs for producers and consumers.
Fourth, international trade will be hit harder by a more fractured and conflictual geopolitical environment like the US–China rivalry, and an inward-looking and divided European Union.
This points to a new mercantilist trade order that might be more malign than benign, echoing the ‘new protectionism’ of the 1970s and early 1980s, or more worryingly, the 1920s and 1930s.
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Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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