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In an era of disorder, open trade is at risk

We are now in a third era in the history of the post-war global economic order† The first went from the late 1940s to the 1970s and was marked by liberalization, mainly in the high-income countries closely allied to the US in the context of the Cold War. Beginning in the 1980s and especially after the fall of the Soviet Union, more radical forms of economic liberalism known as “neoliberalism” spread around the world. The creation of the World Trade Organization in 1995 and the accession of China in 2001 were flood marks of this second era.

We are now entering a new era of world disorder, marked by domestic errors and global friction. Domestically, especially in the US, there has been a failure to adopt policies that accommodate the adjustment to economic changes and provide security and opportunity to those affected. The rhetorical tricks of nationalism and xenophobia have instead directed anger at “unfair” competitors, especially China. In the US, the idea of ​​strategic competition with China has also become more and more ambiguous, while China itself has become more repressive and inward-looking. With the war in Ukraine, these divisions have widened.

How can a liberal trade order be maintained in such a world? “With great difficulty” is the answer. Yet for so many there is so much at stake that anyone with influence should try.

Fortunately, many less powerful countries understand what is at stake. They must be willing, as far as possible, to take the initiative, regardless of what the warring powers decide to do. In this regard, even the limited successes of the WTO ministerial meeting in Geneva are significant. At least they kept the machine working.

However, it is more important to clarify and then address the more fundamental challenges to the liberal trading system. Here are five.

First, durability. Managing the global commons has become humanity’s foremost collective challenge. Trade rules should be fully aligned with this objective. The WTO is an obvious forum to tackle destructive subsidies, especially for fisheries. More generally, it should be compatible with informed policies, such as carbon pricing. Border price adjustments, which are necessary to avoid moving production to locations without appropriate pricing, are both an incentive and a penalty. These must be combined with large-scale aid to developing countries in the climate transition.

Second, safety. Here one has to distinguish between the economic and the more strategic and the things that business can handle from the things that governments have to deal with. For example, supply chains have shown a lack of robustness and resilience. Companies need to diversify more. But this is also expensive. Governments can help by monitoring supply chains at sector level† But they cannot manage such complex systems.

Governments have a legitimate interest in whether their economies are too dependent on imports from potential enemies, as Europe is on gas from Russia. Likewise, they should engage in technological development, especially in areas relevant to national security. One way to do this is to negatively list products and activities that are considered collateral, exempt them from standard trading or investment rules, but otherwise keep them.

Third, blocks† US Treasury Secretary Janet Yellen recommended “friend hearing” as a partial answer to security concerns. Others recommend regional blocks. Neither makes sense. The first assumes that “friends” are forever and would exclude most developing countries, including strategically vital ones: is Vietnam friend, foe, or neither? It would also create uncertainty and incur high costs. Likewise, the regionalization of world trade would be expensive. Above all, it would shut down North America and Europe outside of Asia, the most populous and economically dynamic region in the world, essentially leaving it to China. This idea is an economic and strategic nonsense.

Bar chart of exports of goods, as % of GDP, 2021 shows that high-income countries trade much more with each other than with China

Fourth, standards† Debates over standards have become a central element in trade negotiations, too often by imposing the interests of high-income countries on others. A controversial example is intellectual property, in which the interests of a limited number of Western companies are decisive. Another is labor standards. However, there are also areas where standards are essential. In particular, as the digital economy develops, shared data standards will be needed. Without their absence, global trade will be significantly thwarted by incompatible requirements. In fact, this was why the EU’s single market required the substantial regulatory harmonization that Brexiters hated.

Line chart of the trade balance between China and the US, as a percentage of the respective GDP, showing that China's surplus with the US has shrunk relative to GDP

Finally, domestic policy† Maintaining an open trading system will be impossible without better domestic institutions and policies aimed at educating the public about the costs of protection and helping all those adversely affected by major economic changes. In their absence, misinformed nationalism will inevitably sever the trade links that have brought such benefits to the world.

This new era of the world presents enormous challenges. It is possible—maybe even probable—that the world system will disintegrate. In such a world, billions of people will lose hope for a better future and shared global challenges will remain unfulfilled. World trade is only one element in this picture. But it is an important one. The idea of ​​liberal trade subject to multilateral rules was noble. It must not be lost. If the US can’t help, others should.

martin.wolf@ft.com

Follow Martin Wolf with myFT and further Twitter

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