Changing the discourse on trade policy: from international to national

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Author: Ken Heydon, LSE

The multilateral trading system and the liberal order on which it is based are under immense strain. A toxic mix of populist calls for protectionism and invocation of national security concerns is disrupting and weakening the global value chains that have supported the growth of international trade since the 1970s.

The temptation to resort to such policies is reinforced by a particularly difficult international economic environment. Four elements are dominant in the creation of this challenge. First, there is the prospect of persistent global macroeconomic imbalances – including Asia’s growing stock of savings – creating current account concerns. Second, growing income disparities within advanced economies fuel anti-globalization sentiments. Third, there is a fiscal burden imposed by aging populations in many countries. Finally, the continued “dollarization” of the global economy increases the weight of trade and financial sanctions imposed by the United States, impacting highly unstable geopolitical configurations and tensions.

In these circumstances, there is a need to address the two interrelated policy failures that have fueled populism in trade policy, including Brexit. First, it has not been explained that trade is not the main cause of widening income gaps or the source of a race to the bottom in social and environmental standards. Second, there has been a failure, however, to help those who lose from trade openness, with its concentrated and immediate costs and its dispersed and often deferred gains.

Addressing these failures will require trade policy and market opening to fit more firmly into the overall framework of domestic policy. Trade policy is not just a matter of international diplomacy.

The benefits of a liberal trade regime will only be fully guaranteed on the basis of national economic policies that facilitate the mobility of workers and the entry and exit of firms. These policies must allow labor and capital to move from areas of declining activity to areas of expanding activity. This means adopting a policy framework with appropriate macroeconomic parameters, microeconomic policies for efficient labor markets and an education system that enables skills to meet changing needs.

Putting trade more firmly in its domestic policy context still requires negotiation at the international level. Indeed, within the framework of Robert Putnam’s two-tiered game, placing trade policy in the context of sound national economic management would widen the national winning sets open to governments, thus increasing the chances of reaching an agreement at the international level. .

The WTO has a lot to do. US concerns about China’s state-run system are justified, but the answer is not to impose unilateral sanctions outside of WTO disciplinary action. Instead, the WTO has the opportunity to strengthen multilateral rules on industrial subsidies, address violations of the Agreement on Trade-Related Aspects of Intellectual Property Rights, and clarify the economy status of China’s market under GATT Article VI.

Another pressing issue on the WTO agenda is to address the digital transition by striking the right balance between data privacy and data availability and between structural and behavioral approaches to bilateral platform regulation. And there is a key environmental role for the WTO in liberalizing trade in environmental goods and services and limiting fossil fuel subsidies.

The change of mindset suggested here—opening trade in the context of sound management of the domestic economy—may sound optimistic. But without this change, it is high-level advocacy for liberalization that will be divorced from political realities. Instead, the tendency to use trade restrictions as a brutal instrument to achieve other non-trade goals will continue to grow.

Australia has a central and credible role to play as a defender of the liberal order. The Hawke-Keating era demonstrated that an open trade regime must be based on strong domestic policies.

An effective Australian contribution to the current policy debate will need to be based on key assumptions and rigorous assessments.

First, that there is a shared responsibility for current trade distortions. This is notably due to US unilateralism, Chinese state interventionism and the EU’s decision to take into account alleged social and environmental violations when deciding on anti-dumping measures. Other trade distortions include substantial tariff hikes in India, growing distortion of agriculture in Indonesia, and tighter controls on foreign direct investment flows in Japan.

Second, the United States is unlikely to re-emerge as guardians of the liberal trade order, and China is equally unlikely to take its place.

Third, there are limits to what can be achieved by preferential trade agreements and while there can be complementarity between multilateral and preferential agreements, this will only happen if the multilateral system is itself robust.

Finally, that the most promising approach for the revival of multilateral trade cooperation will be through the appeal to the national interest, based on the implementation of national policies that put trade in context. Contrary to mercantilist thinking, the main benefits of trade for a country do not come from exports, but rather from the improvements in resource allocation and domestic productivity that import competition brings. And that is why, as the Trump administration is now making clear, a tax on imports is actually a tax on exports.

In a foreign policy speech earlier this year, Australian Prime Minister Scott Morrison quoted an observation by George Kennan that “if our purposes and undertakings here at home are decent…the pursuit of our national interest can never fail to ‘to be conducive to a better world’. ‘. These words have never sounded so true when placed in the context of a trade policy that effectively recognizes and defends the benefits of open markets for both imports and exports.

Ken Heydon is a visiting scholar at the London School of Economics (LSE). He is a former Australian trade official, deputy director general of the Australian Office for National Assessments and a senior member of the OECD Secretariat. This article is taken from his latest book The Political Economy of International Trade: Putting Trade in Context (Politics, 2019).

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