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

Like Japan and the East Asian Tigers, China grew on the back of manufacturing export, but, unlike those countries, it is now threatening to compete directly with the West in both services and frontier technologies.

Resisting outside pressure, China has adopted labor and environmental standards and expropriated IP according to its own needs. It is now close enough to the technological frontier in areas like robotics and artificial intelligence that its own scientists can probably close the gap in the event that it is denied access to inputs it now imports.

Most alarming to the developed world, China’s burgeoning tech sector is enhancing its military prowess. Unlike the Soviet Union, China is fully integrated into the world trading system.

The central premise of the rules-based trading order — that each country’s growth benefits others — is now breaking down. Advanced economies find that the higher regulatory structures and standards that they adopted during their own development now put them at a competitive disadvantage vis-a-vis differently regulated, relatively poor, but efficient emerging-market countries.

These countries resent external attempts to impose standards they did not choose democratically, such as a high minimum wage or ending the use of coal, especially as today’s rich countries did not have these standards when they were developing.

Equally problematic, emerging economies, including China, have delayed opening their domestic markets to the industrial world. Developed country firms are especially eager for unfettered access to the attractive Chinese market, and have been pushing their governments to secure it for them.

Most problematic, though, with China challenging the US both economically and militarily, the old hegemon no longer views China’s growth as an unmitigated blessing. It has little incentive to benevolently guide the system that enables the emergence of a strategic rival.

No wonder the system is collapsing.

Where do we go from here? China can be slowed, but cannot be stopped. Instead, a powerful China must see value in new rules, even becoming a guardian of these rules.

For that to happen, it must have a role in setting them. Otherwise, the world could break up into two or more mutually suspicious, disconnected blocs, stopping the flows of people, production, and finance that link them today.

Not only would that be economically calamitous; it would increase misunderstanding and the possibility of military conflict.

Unfortunately, there can be no going back in time. Once broken, trust cannot be magically restored. China and the US will, one hopes, avoid opening up any new fronts in the trade and technology war, while acknowledging the need for negotiations.

Ideally, they would conclude a temporary bilateral patch-up. Then, all major countries would come together to negotiate a new world order, which accommodates multiple powers or blocs rather than a single hegemon, with rules that ensure that everyone — regardless of their political or economic system and state of development — behaves responsibly.

It took a depression, a world war and a superpower to make the world see sense the last time. Can this time be different?

Raghuram Rajan, governor of the Reserve Bank of India from 2013 to 2016, is a professor of finance at the University of Chicago Booth School of Business.

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