The trend for integration of global markets has softened and might soon even revert, which will force nation-states to rethink their trade strategies.
Britain has chosen to leave the European Union at a crucial moment for the world economy and the world trading system. Indications are growing that the continuous integration of global markets for goods and services, as well as of cross-border supply chains, is coming to an end. Moreover, the global trend of negotiating increasingly deep and wide-reaching free-trade agreements (FTAs) also seems to have hit a wall.
Since World War II, the international trade in goods and services has grown significantly faster than global production. As a result, most countries grew increasingly open. Global trade in 2015 was almost 40 times that of 1950 while global production had grown by just a factor of 10.
This trend has softened and might soon even revert. China, by now the world’s largest trading nation, has shifted its growth model from mostly export-driven to more domestic-demand driven. As a consequence, the share of exports in GDP has been declining for China, and the country’s openness has declined to the level of the early 2000s.
The British decision to leave the EU’s single market by 2019 has delivered a first blow in the belief that trade deregulation is permanent. The next may come swiftly: as many now realise, the US can leave the North American Free Trade Agreement (NAFTA) with Mexico and Canada even more easily and quickly than Britain can leave the EU. (After a presidential decision, the US could quit NAFTA within six months.)
Moreover, there is now a real possibility that some of Donald Trump’s policy proposals, such as a punitive tax on car exports from Mexico (many of which are produced by German-owned car companies) or a corporate tax reform with provisions that discriminate against imports, could lead to a full-blown transatlantic trade war.
As a consequence, companies can be expected to rethink their foreign engagement and their cross-border supply chains. This would mean less cross-border investment to outsource parts of the production process, and less trade in components – even for countries which have not changed any of their trade policies.
In other words, trade agreements have lost value, and in future will not provide the secure trading environment firms have come to trust. Even if Britain negotiates and signs new trade agreements, the value of these will have diminished as the business sector realises the fragility of such provisions.
The second trend is a change in the type of trade agreements that are being negotiated and through which international trade is liberalized. Until the early 1990s, this liberalisation was mostly brought about by progress in WTO-based negotiations. When progress at the WTO level slowed, attention then turned to free trade agreements and more recently to relatively deep agreements among a large group of economies (so-called ‘mega-regionals’).
Both from WTO-based liberalisation and from mega-regionals-based deregulation, very little progress can now be expected over the coming years. The WTO-process had almost come to a standstill even before the election of Donald Trump. Now, the US cannot be expected to put its weight behind further substantial trade negotiations under the WTO framework, making further progress even more unlikely. (Trump has even threatened to leave the WTO should the organisation present an obstacle for some of his policy plans.)
At the same time, with the US having pulled out of the planned Trans-Pacific Partnership (TPP) with a large number of Asian and Pacific Rim countries, and the European Union unable to mobilise public support for the Transatlantic Trade and Investment Partnership (TTIP), it is difficult to imagine significant mega-regionals emerging anytime soon – especially as Donald Trump has stated that he is opposed to multinational trade agreements and prefers bilateral deals.
For Britain, this means that it also has to focus on bilateral free trade agreements. The downside of this approach is that these agreements will hardly provide a degree of ‘deep’ integration which could have been achieved by real progress in WTO negotiations or through mega-regionals.
The main problem with bilateral FTAs is that they create a cobweb of different regulations which make it difficult especially for small and medium-sized firms to operate in. One crucial issue will be rules-of-origin, which prescribe the share of value which needs to be added within the partner countries in order to allow a product to be traded tariff-free. These rules usually differ from one free-trade agreement to another. Instead of exporting and importing under one set of rules with a large number of trading partners, firms will have to use different regulations depending on the location of their customers or suppliers.
This does not mean that Britain cannot still flourish in this changed environment – but it will require new thinking on how to engage with the global market. For trade, the old strategies are spent.
This commentary was first published on FutureForeignPolicy.com on 19th February 2017.