Global Trade Is Broken. Here Are Five Ways to Rebuild It.

Op-Ed for the World Economic Forum

U.S.-China trade showdown.

A worker unloads bags of chemicals at a port in Zhangjiagang in China's eastern Jiangsu province. China's trade surplus with the United States eased in July, when President Donald Trump imposed stiff tariffs on billions of dollars worth of Chinese goods in a showdown between the world's two biggest economies.

This is an excerpt from an op-ed that was originally published by the World Economic Forum as part of its "Annual Meeting of the New Champions."

Tension, angst and mistrust pervade today’s global trade landscape. The multilateral trading system that has governed the international flow of commerce over the past 70 years is being tested in ways that threaten its relevance and continued existence. Most striking of all, the United States, the traditional guardian of the system, is the one shaking things up. Through raising tariffs, blocking the appointment of new judges on the World Trade Organization’s (WTO) appellate body and asking countries to “manage” trade by buying more and exporting less, the Trump administration has made it clear it’s not business as usual. 

Some say that we just need to get through this administration and then things will get back to normal. With a new White House, they contend, the US will get back in the trade game –and that the admittedly imperfect rules-based system as embodied in the WTO will continue to prevail. They are misreading the situation.

The system, created in the aftermath of the Second World War with the General Agreement on Tariffs and Trade (GATT) – which was succeeded by the WTO in 1995 – has done wonders in expanding worldwide economic prosperity and opportunity, lifting millions out of poverty and contributing to global stability.

But over time it has faced serious and growing challenges that are now reaching a head. In short, the rules haven’t kept up with important global developments, such as the emergence of new major trading countries, advances in technology and the proliferation of new types of trade barriers.

The last global round of trade negotiations concluded 25 years ago, and, since then the WTO has chalked up few negotiating successes. The bilateral and group deals that have followed have made some important inroads but haven’t successfully dealt with these challenges.

Moreover, a growing number of citizens around the world feel disenfranchised by this system, which they hold largely responsible for growing income inequality and the loss of well-paying jobs. While this sentiment is most acutely felt in parts of the US and Europe, it’s only a matter of time before it takes hold in other countries. 

Traditionally, the US has been looked to for leadership in moments like this. The Trump administration, however, couldn’t be clearer that it is not interested in playing that role. 

We are now at a juncture where a fresh look at the current trading system is warranted and overdue. Reforms are needed if the rules-based trading system is to remain viable and relevant. The magnitude of such change remains an open question. The Trump team advocates a fundamental overhaul and rebalancing of the system; others prefer adjustments on the margin, leaving the current system largely intact. 

Is there a third path that can get the trading system back on track while putting trade wars on the back burner? And if so, what would that path look like?

Here are five suggestions for a third path, all offered in the spirit of capturing the benefits of trade and maintaining a rules-based system while addressing the plethora of concerns expressed on many sides of this debate. 

1. Shape rules for state-led economies. The current US-China trade dispute has highlighted that rather than converging, the economic systems of the two largest economies in the world are growing further apart in many respects. It’s time to accept this reality and develop a co-existence pact. Instead of pushing for the dismantling of China’s state-led economic system, negotiations should focus on ensuring that the enterprises, products and services of state-led economies don’t distort international trade and don’t harm others in the system. This involves establishing more detailed disciplines in such areas as industrial subsidies and other financial assistance, the operation of state-owned enterprises and overcapacity. The EU, Japan and the US made a good start in identifying a way forward on these issues in their May Joint Statement. Their paper should serve as a basis for working with China and other key trading partners to urgently develop new rules in these areas. 

For Wendy's suggestions 2-5, please read the full article.