Donald Trump’s election win on the slogan “Making America Great Again” presents some fundamental challenges to the cooperative, law-based international trading system. Merely preserving some of the accomplishments of the last century of international diplomacy and negotiation may be challenging.
However, these challenges also present opportunities for countries willing to assume leadership roles in protecting and strengthening global rule of law.
The new US president’s rejection of the Trans-Pacific Partnership (TPP) by executive order creates an opening for China to lead the development of a pan-Asian trading system, although his promise to withdraw from the North American Free Trade Agreement (NAFTA) and his claim that the World Trade Organization (WTO) is “a disaster” foreshadow escalating trade tensions.
The world’s middle powers need to avoid being collateral damage in this anti-globalization agenda, and step forward to create coalitions and leverage existing partnerships to continue the process of international cooperation, advancing the rule of law through a progressive trade agenda.
Two leaders of middle powers will have a unique chance in 2018 to set the international economic agenda: Argentina’s President Mauricio Macri, who will welcome world leaders to Buenos Aires for the Group of Twenty (G20) Summit, and Prime Minister Justin Trudeau, who will host the leaders of the Group of Seven (G7).
Their task is perilous. One suspects that as a businessman recently turned leader of the free world, Trump may view political facts as business propositions and adopt a tough, take-no-prisoners negotiating stance in circumstances that might benefit from a more diplomatic approach — that he will see making America great again by putting “America first” as a zero-sum game that requires him to win by overpowering all rivals.
Trump’s pronouncements on trade and defence cooperation suggest he believes that the United States has lost ground as China has advanced, that Beijing cannot afford prolonged economic confrontation with the United States, that the European Union and Japan are unfairly competing with US products and services because they are free-riding on Washington’s defence expenditures, and that the United States would become “great again” by weakening all of them. A clash of great powers looms, although how Russia figures in his thinking remains veiled in uncertainty and innuendo.
The White House may count on weaknesses in Beijing’s centrally planned capitalism — excessive investment, a private sector overburdened with debt, uncompetitive state-owned enterprises, an economic slowdown and the corresponding erosion of the legitimacy of a political system based on delivering fast growth — as making China vulnerable to economic collapse. It will be interesting to see how China reacts to US withdrawal from the TPP, which had been conceived by former president Barack Obama as a strategy to contain China’s economic and political advance.
A similar business-inspired analysis might lead Trump to view Brexit as an opportunity to break its other great competitor, the European Union. He may embark on a strategy of divide and conquer by negotiating a mutually convenient free trade agreement (FTA) with the United Kingdom, in the hope that other EU members will be tempted to desert the European Union to obtain attractive FTAs with the United States and the United Kingdom.
Trump surely knows that trade-restrictive measures come at a cost, but he seems ready to afford them. Some manufacturing firms will move production back to the United States, creating new jobs, but probably less than have been lost over the last 30 years of globalization and computerization. The United States will of course be breaching the rules it helped to create, and this may be part of the plan. The United States would be sued at the WTO and likely lose. But this takes time. Meanwhile, the United States will be enjoying the short-term advantages gained by actions not compliant with WTO rules. If after WTO dispute settlement the US government does not abide by the expected adverse rulings, and the claimant country retaliates, Trump could choose to walk out of the WTO. He may believe (possibly correctly) that the next day, trade ministers will be lining up in Washington to negotiate bilateral FTAs, ready to accept US terms, thus handing him another victory.
In such a scenario, the US president may envision that his country would stand tall and strong whereas its competitors would emerge weakened. Of course, this non-cooperative scenario would have consequences for the US economy: a drop in real salaries and total-factor productivity, a slowdown in growth and investment and perhaps some inflation and higher interest rates — plus an appreciated dollar. This strategy would also harm innovation industries that depend on exploitation of intellectual property rights because they may become attractive targets for retaliation from exporter states hit by US protectionist measures. Big US exporters such as Boeing may also suffer from the global backlash against this trade policy, but this pain could be felt primarily in the US states where presidential candidate Trump was unsuccessful in winning the popular vote.
The potential impact on the world economy of Trump’s gamble with the international trading system is daunting. China´s centrally planned capitalism has many weaknesses but its government is hardly defenceless and will respond to serious threats to its economy. China may use its market leverage to secure FTAs with several of its trading partners. It may also impose stricter controls on capital outflows and condition “preferential” access to its attractive domestic market by using trade-related investment measures. Last but certainly not least, China’s government may also galvanize internal public opinion by inflaming nationalist sentiment.
Unravelling the European Union could also bring many undesirable consequences. Beyond the economic hardship that would certainly depress international demand, nationalism could flourish, with far-reaching consequences for liberal democratic values and peace and security in the region. The reputation of the United States may also be adversely affected. If Washington´s foreign policy looks like raw power politics, it will be increasingly difficult to distinguish America from its competing superpowers. Economic confrontation could compound geopolitical frictions, and if these frictions are handled in the same undiplomatic fashion, the consequences could be grim.
What can middle-power countries do to shore up the rules-based trading system and international peace and security, considering these policy risks engendered by the new US president? Staying on the sidelines and waiting for events to unfold would be an inadequate strategy.
Given they are not on the front line of the foreseeable confrontation, Argentina and Canada are in a good position as the G20 and G7 chairs to broker solutions to contain the damage.
Certainly, Trudeau should seek the opportunity to exert some positive influence and encourage ongoing trade cooperation between key states.
As a nation that is highly dependent on trade and that benefits disproportionately from a rules-based system of international governance, Canada cannot afford to be a bystander as the global trading system is dismantled.
Canada already has strong relations with both its NAFTA partners, and has not been targeted by Trump’s nationalist rhetoric — although this might not last once NAFTA is reopened. Negotiations for the EU-Canada Comprehensive Economic and Trade Agreement (CETA) were successfully concluded with a reformed approach to foreign investment and investor-state dispute settlement. Notably, Ottawa and Beijing are discussing opening negotiations for a new bilateral trade agreement. Trudeau is also highly regarded worldwide and has asserted that Canada is back as a progressive force on the international scene.
Macri may also have an opportunity to encourage international economic cooperation when his country chairs the G20. Macri has done much to rehabilitate Argentina’s international image, normalizing relations with the United States and strengthening relations with China and the European Union. If Argentina and Canada coordinated their actions, they could try to prevent confrontation, or at least de-escalate economic retaliation and counter-retaliation.
The international financial institutions and the WTO may play a role with such middle powers in applying external pressure on the United States to continue to work within the global trading system. Having the domestic support of American businesses that benefit from an integrated trading system would also help the new US administration better assess and calibrate policies.
More optimistically, responding to these new challenges could provide an opportunity for middle powers to reshape the international trading system to incorporate lessons from the past 30 years. There should be greater emphasis on understanding and addressing both the positive and the negative impacts of trade, and on ensuring that it is as inclusive as possible so that micro, small and medium-sized enterprises can participate without unnecessary impediments and disincentives.
International trade and investment rules could be reshaped to support the UN Sustainable Development Goals, and to provide greater scope for measures in support of the environment and climate action, labour, gender equality and human rights — with more accountability of multinational enterprises for their conduct around the world. Investor-state dispute settlement could be reformed, deepening and elaborating the new directions suggested by the CETA investment tribunal, possibly moving to a fully international investment tribunal. Canada’s anticipated negotiations with China for a bilateral FTA could lead to enhanced cooperation on important issues of energy and climate change. Similarly, renegotiation of NAFTA might offer opportunities to emphasize the greening and integration of North American energy sectors and carbon markets.
These are momentous times for the future of the international trading system. The challenges presented by the keenness of the US president to use trade-restrictive measures provide opportunities for middle powers to exercise cooperative leadership in constructively addressing the criticisms levelled at international trade and investment law, thereby creating a more inclusive and progressive global rule of law.
Oonagh Fitzgerald is director of CIGI’s International Law Research Program, overseeing the research direction of the program and related activities. She has extensive experience as a senior executive of various departments of the federal government, including with the Department of Justice and Department of National Defence.
Hector Torres is a member of the Executive Board of the International Monetary Fund, and also worked in senior roles at the World Trade Organization. He is a trained lawyer and a professional diplomat with post-graduate studies in international economic law and has several publications on international economic matters with extensive experience in dispute adjudication. The opinions expressed here are his own, and do not necessarily reflect the views of the IMF Executive Board.