Death of the World Trade Organization?

Ichiro Suzuki

In the second quarter of the 21st century, wholesale changes are in progress in the system that has been in place since the end of World War Two. Signs of the system’s fatigue have been rampant over the past few decades and changes were taking place rather slowly. Then, they have gathered momentum. Back in the White House, Donald Trump is wasting no time attacking the global system while promoting his America First agenda. Security arrangements are under intense pressure to depart from the status quo as the U.S. is showing little interest in defending democracy from aggressors. External affairs have become extremely transactional, either in defense or trade.

On the trade front, Trump had imposed sweeping tariffs on trade partners, large or small. The President is confined to misconceptions that trade deficits are evil while surpluses are virtuous, and that trade partners are screwing American people with their surpluses against the U.S. The president is utterly wrong. With trade and current account surpluses, the U.S. is providing dollar-based liquidity to the rest of the world and it stimulates the global economy, which in turn benefits the U.S. On top of it, Corporate America has a strong grip on technology and the digital economy. Tech titans’ robust service export surpluses underpin the U.S. current account though it is still in deficit distinctly. It doesn’t matter to Trump anyway. Effects of factory closure and and manufacturing job losses are felt acutely in certain local communities whereas benefits of global trade are spread out very thinly in the entire population in the U.S. 

At the other end of the spectrum, there is China. The country worships manufacturing-driven export growth. Beginning with textiles, toys and other light industries, exports lifted the People’s Republic out of poverty that was so rampant in the decades of Mao Zedong. Having risen the ladder of manufacturing value chain, the country has become superbly competitive in almost anything, not only in traditional manufactured products but also in tech and digital products that are closing in on the gap against the U.S. As a result, the country is raking in a huge amount of trade surpluses, amounting to $1.2 trillion in 2025, which is obscenely high 6% of GDP. It is common for an average middle income country to pursue growth on exports. That’s how Japan and the rest of East Asia have got where they are. In fact, South Korea remains very expert-driven having been elevated to a high income country status. This is a path normal countries tend to follow. Size of the Chinese economy, however, is far from normal. With its sheer size, China makes trade partners scared. Exports from China are capable of inflicting greater damages to trade partners in the form of factory closures and job losses in the manufacturing economy than economies of normal size could.

The Financial Times’ Martin Wolf calls it ‘neo-mercantilism”. The U.S. has declared that it no longer honors the system that made the global economy thrive, wanting to focus on upgrading its own domestic economy and catering to robust demand from American people. China on the other hand vows to be a defender of free trade, which has enabled the country to move up the ladder of economic development. China, however, has hardly honored the spirit of the system, with its single minded obsession of exporting everything it can produce. Any statement from China to promote domestic demand so far has been hardly met with meaningful actions. It has proved to be a lip service. In the process of rising to where the country is today, China has aggressively abused the system.

Europe and Japan are better than China on the surface with more genuine commitments to letting the system work. Their efforts, however, have not brought significant results. Both the EU and Japan remain exporters of industrial goods while importing primary products, crude oil essentially. Europe in particular, and Germany to be specific, keeps running significant trade surpluses. Boosting domestic demand has been their policy goals for decades, and it seems to be a forever goal. 

During the 2007-09 Great Recession that was triggered by the Global Financial Crisis, demand had evaporated when American consumers stopped spending. Though the epicenter of the crisis was the U.S., other economies were hit harder than the U.S. Europe often looked down spending habits of American consumers. When the profligate customers went on a buyers’ strike, however, sellers of goods went into an even deeper problem however hard they might have worked. Thus it was made clear that buyers of goods have the upper hand. The U.S. economy has always played a role of the buyers of last resort, absorbing almost everything the rest of the world wanted to sell. In the process, the U.S. has been building up gigantic trade deficits that have grown to alarming levels. It inevitably needed some kind of adjustments. When the U.S. loudly said at last “Enough!”, that was it. It came to a point that the U.S. is no longer able to be nice to everyone. Other presidents would have done this in a more elegant, or less crude fashion at least, than outright protectionism, but the global trade system has been due for a radical overhaul anyway. 

China once played the role of spender of last resort. In late 2008 when the global economy was sinking into a deeper and deeper hole amid the unprecedented banking crisis, China announced a huge fiscal stimulus package, creating demand that was utterly in short supply. While China saved the global economy in 2008, construction works have their limits in driving the economy. After roads, railroads and bridges were built in the populous parts of the country, infrastructure investments faced falling marginal rates of return, contribution less to the economy. Nonetheless, the Communist Party did it for another ten years every time the Chinese economy showed signs of slowdown. As projects moved to rural areas, their economic rewards diminished, while building up debt on the government’s balance sheet. To lift the Chinese economy from acute slowdown, the Communist Party not surprisingly went on export drives. China’s trade surplus against the U.S., soared as a result. When Donald Trump resorted to protectionism, Beijing rerouted goods to other destinations, notably to Europe, Asia and Latin America. Now these regions are burdened with absorbing what the U.S. would have bought. Big tasks are imposed on them and they are not too happy whether they are in the orbit of China or not. If China is willing to buy what these country try to sell, that would raise their comfort levels. Imports into China, however, remain open only to producers of commodities and intermediary goods, not to finished goods makers. (For this reason, China runs trade deficit against Japan, by importing intermediary industrial goods that China doesn’t make.)

At Davos, Canada’s Mark Carney delivered a speech bluntly saying that the world has ruptured. The U.S. and China are going to keep doing what’s convenient for them. He called for middle powers to gather around to create a new system more equitable and rules-based to them than today’s framework that is at the whims of the U.S. and China. That would still benefit the majority of population on this earth. In a ruptured world, the WTO and its Director-General Ngozi Okonjo-Iweala still have a lot of work to do. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.