Wed, Sep 11, 2019 - Page 9 News List

The true toll of the trade war

Behind the escalating global conflict over trade and technology is a larger breakdown of the postwar rules-based order, which was based on a belief that any country’s growth benefits all. Support for the system that made that possible has disappeared

By Raghuram Rajan

Illustration: Mountain People

Another day, another attack on trade. Why is it that every dispute — whether over intellectual property (IP), immigration, environmental damage or war reparations — now produces new threats to trade?

For much of the last century, the US managed and protected the rules-based trading system it created at the end of World War II.

That system required a fundamental break from the pre-war environment of mutual suspicion between competing powers. The US urged everyone to see that growth and development for one country could benefit all countries through increased trade and investment.

Under the new dispensation, rules were enacted to constrain selfish behavior and coercive threats by the economically powerful. The US served as a benevolent hegemon, administering the occasional rap on the knuckles to those acting in bad faith.

Meanwhile, the system’s multilateral institutions, especially the IMF, helped countries in dire need of funds, provided they followed the rules.

The US’ power stemmed from its control over votes in multilateral institutions, both directly and through its influence over countries in the G7. It also had tremendous economic muscle of its own.

Importantly, though, most countries trusted the US would not misuse its power to further its national interests, at least not excessively.

The US had little reason to betray that trust. No country approached its economic productivity, while its only military rival, the Soviet Union, was largely outside the global trading system.

The expansion of rules-based trade and investment opened up lucrative new markets for US firms, and because it could afford to be magnanimous, the US granted some countries access to its markets without demanding the same level of access to theirs.

If policymakers from an emerging-market economy expressed concerns about the potential effects of more open trade on some of their workers, economists were quick to reassure them that any local pain would be outweighed by the long-term gains. All they needed to do was redistribute the gains from trade to the groups left behind.

This would turn out to be easier said than done. Still, in these nascent democracies, protests by those left behind were regarded as an acceptable cost, given the overall benefits, and were easily contained.

In fact, emerging-market economies became so good at capitalizing on new technologies and lower-cost transportation and communication that they managed to take over large swaths of manufacturing from the industrialized countries.

Again, trade affected domestic workers unequally, but now moderately educated workers in developed countries — particularly small towns — bore the brunt of the pain, while higher-skilled workers in urban service-sector industries flourished.

Unlike in emerging markets, where democracy had not yet sunk deep roots, disaffection among a growing cohort of these countries’ workers could not be ignored. Policymakers in advanced economies thus reacted to the backlash against trade in two ways.

First, they tried to impose their labor and environmental standards on other countries through trade and financing agreements.

Second, they pushed for far stricter enforcement of IP, much of which is owned by Western corporations.

Neither approach was particularly effective at slowing job losses, but it would take something much bigger to upset the old order: The rise of China.

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