A version of this article first appears on ‘The Prospector’, the blog of the Lakshman Kadirgamar Institute (LKI) https://www.lki.lk/blog/trade-tensions-and-strained-global-cooperation/ . I thank my co-author Aquilah Latiff, my former intern and final-year student at Royal Institute. 

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This September marked the tenth anniversary of the onset of the Global Financial Crisis, and the economic downturn that followed, delivering ripples throughout the global economy. In the immediate aftermath of that crisis, trade recovered faster than the overall global economy and it is widely recognised that one of the key reasons for this was that countries did not descend into a ‘race-to-the-bottom’ tariff war. In fact, unlike during the Great Depression of the 1930s, countries did not impose protectionist tariffs against each other; we didn’t see the ‘Smoot Hawley’ type tariffs by the United States[2]. After the 2008 crisis, the G20 countries did a remarkable job of coming together to fend off any protectionist tendencies and taking a unified and coordinated approach to stem the tide. They managed, through cooperative action, boost trade and soothe financial markets.

Fast forward 10 years, post-crisis era trade has undergone some major shifts. Asia – led by China – has strengthened as the centre of gravity for much of the world’s supply chains; an inevitable coming of age that the world must adapt to. Advancements in production technology and the rise of digital has meant that some workers in the West have not been able to adjust to the new economy; sectors, industries and geographies that had been left behind in parts of rural America, Europe, and Britain, continue to decay. And most notably, the promise of better international economic cooperation or improved global economic governance simply has not materialized. While the G20 was able to fight the initial fires, it has been unsuccessful in making huge strides since then, and neither has the established order of multilateral financial institutions set up after the Second World War.  What is troubling is, unlike the 2008 crisis that was a global phenomenon that elicited a global response, the growth of nationalist sentiment in many countries since then is likely to impede any chances of similar cooperation in this present time.

Indeed, a subtler form of protectionism has been creeping in – not tariffs, but other trade restrictive measures often called ‘non-tariff barriers’. These are well documented in the Global Trade Alert (GTA) database[3]. According to GTA’s latest assessment, the number of new discriminatory trade measures introduced per year have jumped to 898 by week 43 of 2018, compared to 286 by week 43 back in 2009 – an increase of over 3 times. The data shows a progressive worsening since 2012, with a substantial spike in 2018. Around one-third of the discriminatory measures are unfair subsidies or bailouts to domestic manufacturers and farmers. As the lead author of the GTA report Simon Evenett notes, “Tariff hikes get a lot of attention while government largesse operates under the radar screen. Murky protectionism matters too.”

International trade has evolved from more than just economics. Since the financial crisis, the language around trade has shifted. Before, politicians described it as a benign mechanism for promoting global growth. Now, their statements are steeped in the rhetoric of war. Instead of ‘global opportunities’ and ‘wealth creation’, politicians on both sides of the Atlantic talk about ‘protection’, ‘security’, and ‘national interest’. Through this linguistic metamorphosis[4], it has become apparent that trade is being used as tool of state strategy. We are seeing an almost ‘weaponization of trade’. A phrase highlighted at a trade conference that the author participated in recently captures this cogently, “Trade is a useful weapon in a nationalist narrative”.

The current US-China trade war has had striking national security undertones. While there are provisions within the WTO framework for national security considerations it is widley accepted as a ‘hole’ of sorts and requires countries to be very restrained in their usage of it. But it is now being used more loosely, primarily by the US. As Mark Wu, Professor at the Harvard Law School remarked at a recent forum that one of the authors participated in[5], the rise of the national security dimension in trade is probably a result of the failure in the realm of security in digital trade and cyber espionage.

No doubt, trade and foreign policy have been interwoven throughout history. But the recent belligerence of the language around trade and the propagation of more nationalistic trade policies is creating an “us vs. them” mentality. Some political parties in the West have created a sense in their voting populations that most people have been excluded from the benefits of globalization. When in fact, this exclusion can be more closely attributed to a consequence of the failures of national policies and of those politicians to do the right reforms at the right times to prepare their populations for a changing global economy, including rapid technological shifts. In this, Germany stands out as a success – it was were compelled to do the tough domestic reforms early and is now one of the most competitive economies in the world. Germany recovered quickest from the crisis and is now leading the way in technological advancements driven by ‘Industry 4.0’.

With the emerging tide of nationalism in the West, its consequences for trade policy stances of Western nations, the rise of political and economic influence of China and India and other emerging economies, and the pullback of the US role in global leadership precipitated by Donald Trump, the state of global economic governance is in flux. There is yet to emerge clear, coherent, and credible global economic decision-making – the kind of setup that helped the global economy navigate the post-World War 2 era (‘Bretton Woods’ institutions) or the ‘fire-fighting’ G20 grouping that helped navigate the post-global financial crisis era. If another economic downturn were to fuel further nationalist sentiment and the faster erosion of international cooperation, the world might find itself on an old, familiar, and rather unfortunate path, putting at risk the vast economic gains made as a result of global trade since the Second World War.

 For smaller countries like Sri Lanka, who are not makers and shapers of the international system but are rather recipients of, and players in, it, domestic reforms should be a key focus. While keeping a keen eye on the global developments, Sri Lanka needs to focus on rapidly reforming its own trade and investment policies. Without the reforms to become a nimble and agile economy, Sri Lanka can get swept up in the tumultuous trade winds and miss out on the possible gains of a shifting global economic landscape.

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[2]The Tariff Act of 1930 commonly known as the ‘Smoot–Hawley Tariff’ was an Act implementing protectionist trade policies sponsored by Senator Reed Smoot and Representative Willis Hawley and was signed into law on June 17, 1930. The Act raised U.S. tariffs on over 20,000 imported goods, and was widely blamed for precipitating the Great Depression.

[3]Available at https://www.globaltradealert.org

[4]A phrase coined by Rebecca Harding in Harding and Harding (2017), “The Weaponization of Trade: the Great Unbalancing of Politics and Economics”.

[5]During a panel discussion at the Annual Meeting of Global Future Councils, Dubai, 11-12 November 2018.