How to deal with Mr Trump’s assault on global institutions

| August 21, 2018

Many in the United States are deeply worried that US President Donald Trump is actively undermining and trying to tear down the institutions on which the health of the American democracy and society depends. His administration is also doing the same to international institutions for which he has shown at best indifference but mostly contempt.

The US security alliances that have underpinned global peace and stability are also under threat. Trump has fanned uncertainty and anxiety around the world by questioning the value of the US alliances with Japan and South Korea as well as the entirety of NATO.

After World War II, the global community was able to take for granted a United States that aspired to values of freedom, democracy and openness, even if those values were imperfectly observed. The US withdrawal from the UN Human Rights Council and its separation of refugee children from their parents has put an end to US moral leadership for now. And it’s difficult to regain moral authority quickly once lost.

But what Mr Trump is doing to the international trading system is likely to be the most damaging. In its second year in power the Trump administration has found its feet in implementing protectionist measures and firing up a trade war.

Not only has it imposed catch-all steel and aluminium tariffs and imposed tariffs on US$34 billion worth of Chinese imports (all outside the WTO trade rules), the US Trade Representative is vetoing the appointment of new WTO Appellate Body judges and the administration has tariffs pending on a further US$200 billion of Chinese imports.

US leadership of the multilateral order has been the guiding light for over 70 years. That leadership can no longer be counted upon. Indeed, the rest of the world is going to have to work together to preserve that order in the face of its biggest challenge — from the United States itself.

Allies of the United States, as well as the rest of the global community, are grappling with how much to separate its dealings with Mr Trump from its dealings with the United States itself. The delusions that Trump is a blip and the United States will resume course quickly after he leaves office have been dispelled for most.

How long after Trump will it take to rebuild the global institutions that Trump has been trying to tear down? How long will it take to rebuild the trust in those institutions? The fish rots from the head, and the longer Mr Trump is in office, the more time it will take to rebuild the role of the United States as the world has known it for the best part of three-quarters of a century.

The priority now is to protect the international institutions from the United States and keep the multilateral system open to the eventual re-participation of the United States.

As I wrote in this week’s feature essay, ‘the threat to the global trading system will only be met by a concerted response by other stakeholders in the global trade regime. Such a response needs coordination and strategic action that doubles down on the rules-based global system’.

Managing the rise of China was going to be difficult for the United States and the global system — no matter who was in the White House. China’s economy is already larger than that of the United States in purchasing power parity terms and China is already the world’s largest trading nation and the largest trading partner for most countries around the world.

The United Kingdom worked hard to shape the Bretton Woods institutions in the aftermath of World War II to protect its interests in the face of the rising power, the United States.

The established rules have served us well but there are obvious gaps and weaknesses. A rational United States would be trying to fill those gaps and to expand and strengthen the rules in the face of a rising China. Instead it is trying to tear the rules down.

Much of the US policy establishment is swinging behind President Trump in justifying its attack on China, and for some, the WTO. Very few agreed with imposing tariffs on allies but many have excused them on China.

Letting China into the WTO is now portrayed as a mistake in Washington, although China’s economy has changed profoundly through its acceptance of market norms and the rules of international trade. Its society and polity have also undergone remarkable change, though in the eyes of some, it is still not enough ‘like us’.

The ‘China shock’, as it has become known in the United States, and the rapid expansion of its trade (which displaced more US workers than expected and for longer than was predicted) helped mobilise popular support for Trump’s protectionist policies. The aggregate effect of opening trade with China on the United States was overwhelmingly positive but the benefits have not been shared across US society.

The China shock has been more beneficial for other countries that have been able to share the benefits more widely across societies through a mix of higher growth, better income distribution and stronger social safety nets. Those generational issues will need to be addressed to sustain policies of openness in the US economy in the future, or else the current surge of American growth is likely to be a temporary affair.

Technology transfer to China is also seen as illegal and unfair despite most of its being delivered by the voluntary commercial decisions of US companies. The multilateral intellectual property regime may well be inadequate for the United States and other advanced economies.

The United States had made headway in its negotiations with China on a bilateral investment treaty to address these issues with China before Trump killed that off. The United States will not be able to impose its own new rules on China since China is already too large.

There is a movement to form a bloc of advanced economies in the WTO to address this, but such a bloc would risk fracturing the multilateral system into an emerging market versus advanced economy world.

Rules that deal with issues beyond those currently encompassed within the WTO and other frameworks will have to be created with China. The EU and China have initiated reform of intellectual property rules in the WTO: this is a welcome initiative.

Japan and Australia are in a difficult position, being allies of the United States. But the priority has to be the multilateral economic system. This system is of paramount importance to prosperity and security in the Asia Pacific region. Threatened with US tariffs on automobile exports, as Japan is, it cannot afford to yield to bilateral dealing with the United States.

Some countries, including Australia, have received exemptions from the US steel and aluminium tariffs’ according to Armstrong, and ‘by accepting those exemptions, they have failed their obligations to the rules-based order’. But like Japan, Australia cannot ultimately put political favours to Washington over its primary security and economic interests in the multilateral trading system.

International institutions and forums are fast turning into a ‘minus-US’ world. The G20, APEC, the G7 and now the WTO are all ‘minus-one’ groupings with the United States standing against multilateral principles, alone.

But the leaders in the rest of those groupings need to do more than put Trump in the naughty corner. They will need to move forward with collective leadership on an institutional reform and opening agenda, that, while open to United States engagement, no longer takes its cue from Washington.

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