At the end of their terrible year, globalists clung to one small hope: maybe Theresa May and Donald Trump weren’t serious?
The new British Prime Minister had said little about how she would quit the European Union, so perhaps a “soft” Brexit was possible?
In America, the president-elect occasionally tweeted and said things that didn’t sound totally insane to the men and women who frequent the annual gathering of global elites in Davos, Switzerland. Stock markets surged to records, as traders discounted the threat that Trump represented to the global order that Wall Street had exploited so effectively to enrich itself.
Recent events have crushed those hopes. May declared that she would pursue a clean break from the EU, and told her European counterparts that she would make their lives difficult by slashing British tax rates if they didn’t offer her a good deal.
Trump’s inauguration speech left no room for preserving the current system of international commerce. “We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs,” he said. Trump used his first full day of work at the White House to abandon the Trans-Pacific Partnership and start the process to renegotiate the North American Free Trade Agreement.
Bottom line: Globalization is officially in retreat.
“There is no turning back the tide,” said Eric Miller, a Washington-based trade consultant who previously held senior positions at Canada’s industry department and at the Inter-American Development Bank, which uses contributions from its member countries to underwrite projects aimed at reducing poverty in Latin America.
How high might that protectionist tide rise? To what extent will the world change? Globalization might be unpopular now, but the more-the-merrier approach to trade that characterized the pre-Trump era was hardly a failure: The world was relatively peaceful and more than 1 billion people were delivered from extreme poverty between 1990 and 2015.
May and Trump insist they are free traders, but they want to negotiate with other countries one-on-one. That is great if you are the world’s biggest economy, or home to the world’s leading financial centre. What will it mean for smaller economies, such as Canada or Australia, which tend to do better in bigger trading arrangements?
If anyone offers definitive answers to any of those questions, he or she has an exaggerated sense of his or her powers of foresight, especially when it comes to predicting the path of US economic policy.
“There is simply too much noise and contradiction in President Trump’s public utterances to have any degree of confidence regarding his likely actions,” said James Haley, a former Canadian finance official who until recently was Canada’s representative at the International Monetary Fund. “This problem of uncertainty is compounded by uncertainty regarding how others will respond.”
It seems likely that the immediate future will be dominated by high-stakes negotiations, whether it is Trump’s promise to overhaul NAFTA, or the difficult work of disentangling the UK from the EU. This compounds the uncertainty because it is difficult to separate conviction from posturing.
Trump has filled his administration with corporate titans and military men who excelled in worlds where tactics are more important than ideology.
Philip Delves Broughton, the author of What They Teach You at Harvard Business School, wrote in the Financial Times that the new US president’s rhetoric about trade could be mere gamesmanship.
He noted that Wilbur Ross, the billionaire turnaround artist who is Trump’s nominee to run the commerce department, said as much during his confirmation hearing. “When you start out with your adversary understanding that he or she is going to have to make concessions, that’s a pretty good background to begin,” Ross told a Senate committee.
The British prime minister may have been doing the same thing with her warning that she could undermine the EU’s competitiveness by turning her country into a European version of Singapore, which separated itself from its Asian neighbours with low corporate taxes and an array of free-trade agreements.
That is how it was received by Germany’s finance minister, who was unmoved. “I can’t really imagine that the UK, this great nation, could compare itself with Singapore, so I am not going to be shocked,” Wolfgang Schäuble said at the World Economic Forum in Davos.
Still, if business needs stability to thrive, there is nothing comforting about the world’s most important economies lining up to reset the terms of global commerce.
Miller, who was a senior adviser at the Business Council of Canada, an association of chief executives of the country’s biggest companies, before starting his own consultancy last year, predicts a return of “19th century ‘Great Power’ politics,” which is essentially what leaders were trying to dilute when they created institutions such as the IMF and committed to multilateral trade at the end of the Second World War.
Miller said he thinks the Trump administration’s preoccupation could be China. That also could be said of Barack Obama, who began his tenure in the White House as a trade skeptic, and then embraced the TPP as a means of countering China’s growing influence in Asia.
The indirect approach favoured by Obama had the advantage of avoiding a trade war between the world’s two economic giants. But it may also have let China get away with a little too much.
Trump’s rhetoric notwithstanding, there may be no better statement on the state of globalization than the effort to anoint Chinese President Xi Jinping as its new champion.
Xi made his first trip to the annual Davos gathering of the global elite this year, telling his audience that protectionism was akin to “locking oneself in a dark room.” That’s all fine, except a growing body of research suggests Chinese imports are responsible for wiping out large swaths of Western industry.
Brad Setser, a former treasury official in the Obama administration who now is a senior fellow at the Council on Foreign Relations in New York, calculates that China exports three times as much as it imports. That’s not what was supposed to happen when China was granted entry into the World Trade Organization.
The country balked at opening its borders as widely as others did for it, forcing international companies that wanted to do business in China to form joint ventures with local partners. By taking advantage of the West’s eagerness to do business with an emerging economic superpower, China helped undermine the system that supported its rise.
Now Xi must contend with an openly antagonistic administration in Washington, which already has irritated Beijing by engaging Taiwan. Xi, who is trying to consolidate power ahead of the Communist Party’s next twice-a-decade congress later this year, has every incentive to match bellicosity with bellicosity. “The danger is that you may be forced to follow through on a reckless threat that is harmful to you and your opponent,” Haley said.
To borrow a term from economics, the immediate future looks “suboptimal.” Trade that was effectively free looks like it will be replaced by trade that is essentially managed by the US or China, who, spurred by rivalry, will dictate the terms of access to their vast markets.
There could be resistance. Australian Prime Minister Malcolm Turnbull this week said he still wants to implement the TPP, and even suggested that China would be invited to replace the US as the anchor economy. Australia would suggest that, as China is its main trading partner. How close can Canada, for instance, get to China without risking a backlash from the Trump administration in the NAFTA negotiations?
Conservatives will shudder, but for the foreseeable future, the global economy will be shaped by lawyers. That’s because every country and every industry will be seeking to shape all these new trade agreements to their advantage. “It will be a gold rush for lobbyists,” said Miller.
So much for draining the swamp.
This article first appeared in the Financial Post