Revamping the Trading System

During a recent Brookings Institution event, director and senior fellow Ryan Hass, brought up that the guest speaker, Michael Froman, president of the Council on Foreign Relations, had written in the September/October issue of Foreign Affairs that, “The global trading system as we have known it is dead.”

It’s the first line of the article, “After the Trade War,” and it begs: Why?

The World Trade Organization (WTO) and the multilateral trading system, as we know it, has been strained and stressed over the last 15 years, and the current environment ­“may have put the nail on the coffin,” Froman said during “U.S.-China Trade Wars: A Conversation with Michael Froman.”

Some of the assumptions and design elements of the multilateral trading system are flawed, he said: “(They) didn’t fully take into account, for example, the nature, significance and importance of an economy like China that integrated into the global economy and was following a fundamentally different set of rules.”

He continued: “I think with what President Trump has done is said ‘OK, it's over’ and I don't think we go back to it, regardless of who’s president after President Trump. I think we have to think through what comes next.”

In the Foreign Affairs article, Froman writes that it is “futile” to cling to the old system: “The challenge is to create a system of rules outside the rules-based system of old.” The current era of unilateralism and tariffs will help inform the system of the future, he said during the talk.

On Tariffs

The U.S. is less dependent on trade than other countries or regions, like Asia, Froman said. But that doesn’t mean complacency.

Tariffs used to average about 2½ percent; now they average about 16 percent, with tariffs on Chinese imports about 57 percent, he said. He noted that there is a lag time between the tariffs taking effect and their impacts, as companies want to remain as competitive as possible and so try to keep their prices down for as long as they can.

“(But) that cost has to be borne some place,” he said, and besides manufacturers and importers, consumers will be impacted. Just look at inflation inching up.

Froman said that he believes the future hinges on changing the current environment, where:

• The U.S.’s trade deficit “is a mirror of our own spending habits,” he said, adding that the fiscal situation needs to be dealt with and more savings incurred
• Countries like China and Germany need to move toward more consumer demand-led growth, rather than export-led growth.

On the Future

The question is how to get there, Froman said.

There needs to be a conversation around where to take international economic cooperation and the trading system from here, he said. His idea: Establishing coalitions between various trading partners that come together around particular issues. Such coalitions could be like the Trans-Pacific Partnership (TPP), from which the U.S. withdrew in 2017, during Trump’s first presidency.

If the U.S. doesn’t want to enter into such partnerships, it still has a need to work with other countries on secure supply chains, export controls and other areas and coming up with pertinent rules, Froman said.

Additionally, a domestic policy package needs to be created alongside any trade decisions, he said, “to ensure that American workers can survive and thrive in a changing economy.”

The trade situation isn’t necessarily what is impacting job loss/creation in America; technology has a greater impact, he said. But, because trade agreements and immigration can be negotiated — and software releases can’t — they have become the scapegoat, he said.

On Trade with China

Froman said U.S.-China trade relations are under stress, adding that:

• It’s not just the U.S. having leverage over China
• China has discovered where it has leverage over the U.S.
• One area China has leverage: critical minerals

The underlying issues — like intellectual property rights — of the U.S.-China relationship need to be discussed.

(Image credit: Getty Images/Sankai)