Britain’s hopes of going global are in tatters if it can’t behave at home
A battle for the very soul of world trade is raging while the Government is fatally distracted
Is this “global Britain”? According to the Government’s official line, Britain outside the EU will be “going global” and becoming “a beacon for free trade”. These are worthy ambitions. Looking at the Government today, however, “global” is not the word that comes to mind. Consider the past two weeks. Even as the EU ratcheted up its rhetoric, three of Britain’s most senior ministers focused on international affairs became embroiled in scandals of their own making. Our defence and international aid ministers had to go, and the Foreign Secretary yet again managed to shoot his mouth off. The likelihood that we are forced to leave the EU with no deal, due both to our own Government’s incompetence and the EU’S absurd and excessive demands, is rising.
Never mind, say the optimists. We’ll just go for the “WTO option”. Transitioning on to World Trade Organisation terms for half of our trade would be a shock, but the economy would adjust, and, with a strong government and well-executed plan, we would cope. It would certainly be better than signing up to be an EU vassal state in perpetuity.
If this is the path chosen, however, we need to proceed with our eyes open. It might not be making the headlines here, but the WTO is heading for a dangerous period.
Last week, Donald Trump travelled to Vietnam on his tour of Asia, and gave a speech to the members of the Asia-pacific Economic Cooperation. His message was unambiguous: “We have not been treated fairly by the World Trade Organisation,” he said. Too many WTO members had engaged in “chronic trade abuses”, he claimed: “They ignored the rules to gain advantage over those who followed the rules.” He added: “Those days are over.”
The US is already putting the WTO under pressure. For months, it has been blocking the appointment of two judges to the organisation’s highest judicial court, the appellate body, responsible for settling disputes between member states. Three judges are needed to sit on each case and so, to cope with the workload, it is meant to have seven members in total. But thanks to the US’S current policy, it is down to five, and in December, the term of another judge will expire.
The US has a list of grievances about the WTO, but chief among them is that its appellate decisions are undermining the US’S use of antidumping tariffs (a tax meant to protect its economy against imports it deems to be unfairly subsidised). The US still wins many more WTO cases than it loses but, as China has learnt how to use the system more effectively, the US has started to lose more of the ones that matter to it.
The root of the problem is that China’s heavily state-subsidised economy allows its companies to undercut their rivals in more capitalist economies like the US and Europe. When China joined the WTO in 2001, it promised to transform itself into a market economy and allow its trading partners better access to its markets. It has made some progress towards those goals, but not as much as it promised.
Over the same period, Chinese imports to the US have risen more than fourfold. This, according to Mr Trump, is costing thousands of industrial jobs. China’s economy is now so big that it effectively sets the price for thousands of commodities and industrial goods across the world. Yet, at the WTO, it still hides behind rules designed for much smaller, developing economies.
Now, any trade economist would tell you that it is the country over-subsidising its industries that will ultimately lose out from the situation. We, the capitalist world, benefit from cheap inputs, like steel, which should make our advanced firms more competitive. Unfortunately, this is also happening at a time when developed countries are struggling to educate their populations sufficiently for the better jobs higher up the economic food chain. With its lack of compunction about stealing intellectual property, its channelling of vast state resources into research and its good schooling, China is intent on competing for the better jobs as well as old-fashioned factory work.
The question of what to do about China is a global headache. Despite their collective interest in pushing Beijing to reform its economy more quickly, developed countries are failing to co-ordinate their responses. In fact, one of Mr Trump’s first acts as president was to throw out one major agreement that sought to do just that, the Trans-pacific Partnership.
The problem with the US’S WTO strategy is that it carries greater risks than rewards. Even if the US does get its way, it’s not clear that using more “trade defence measures”, as the anti-dumping tariffs are called, will address the issue. These measures might slow down or choke off some Chinese imports, but they won’t bring back the jobs that were lost and, without global co-ordination, will simply divert trade elsewhere.
The risk is that the whole WTO system grinds to a halt – its appellate body already has a backlog of some 40 cases. In turn, China could decide to take retaliatory action outside the WTO. All of this could take us right back to the days before the rules-based trading system, when it was much easier to start a dangerous trade war.
What’s needed is for countries like the US, the EU, Japan and, in due course, the UK to speak with one voice. The WTO is currently unable to move forwards with another round of trade liberalisation talks, but those countries that can move should forge ahead with deepening ties and make it clear that China is only welcome once it proves it can follow the rules. The real prize, after all, is to get China to open up its economy more.
None of this means that Britain won’t be able to shift on to WTO rules in determining and monitoring our tariffs and trade policy. But the third, crucial leg of the WTO’S work, dispute settlement, is under grave threat.
If we are really serious about “going global”, our political leaders should be following these debates and working out how to become a bridge between the capitalist economies that want to address China’s zero-sum mercantilism. We are at the start of a battle for the future of global trade and our national interests are at stake. But instead of gearing up to enter the fray, we are lurching from one ridiculous domestic “crisis” to another. Forget going global. Westminster, as usual, is going local.