Is the Global Trading System a Bust? (Part 1)

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(Editor’s Note: This is the first of two posts addressing the global trading system. Check back tomorrow for Part 2.)

The Economist asked the question in a debate that has been running over the last few weeks, stimulated in part by President Trump’s unprecedented actions on tariffs and quotas aimed at perceived cheaters of the global trading system.

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The article summarizing the debaters’ arguments (with contributions by guest contributors) makes fascinating and very appropriate contemporary reading for anyone interested in the topic. Few would argue that in its earliest guise the multilateral, rules-based system managed by the World Trade Organization (WTO), to lift the article’s words, has built up and delivered unprecedented prosperity across the world.

But even ardent supporters would also concede it has contributed to the decimation of the industrial base in many rich countries. Other factors have played a role, like automation and environmental policies, but the global trading system has played its part in this transfer for manufacturing capability and accompanying jobs.

The article questions whether the global trading system is broken, whether we should do away with it altogether, and whether a return to national tariffs and bilateral trade agreements is the solution to the perceived problems it has caused.

But the reality is that while the WTO and its rules-based system has significant faults, it is not bust in the way the world order of the 1930s, which was complete chaos and, as one of the arguments points out, fraught with government-imposed tariffs, quantitative limits on trade, discriminatory deals and foreign-exchange controls. It got so bad at times that some international commercial relationships even devolved into barter. This writer can remember his firm dealing with the Soviets in the 1980s, bartering ship loads of hot rolled coil steel from Russia and shipping back cold rolled steel coil from British Steel in the U.K.

But if the system is not busted it is certainly flawed, and those flaws have resulted in multiple problems.

Firstly, the 1990s and 2000s saw strong economic growth and falling consumer prices delivered rising prosperity across the world. However, the economic rise of countries like (but not restricted to) China that deliberately buttressed their state capitalist models to exploit trade opportunities removed the system of the natural checks and balances that early supporters expected would keep the model fair and open.

The West was complicit in this process, as the news source points out. Investors pressured CEOs to enter ill-conceived joint partnerships, transfer technologies to Chinese competitors and ignore industrial espionage.

Despite pledges to the contrary, China, along with many other developing countries, maintained high tariffs, export subsidies, currency controls, and tax systems biased in favour of exporters. These policies were initially tolerated while China was economically less significant and growing out of poverty; now that it is the second-largest economy in the world, the distortions these ongoing policies cause are untenable.

The argument goes on, as a result of the above trade deficits have been persistent and growing. The Economist notes in 1989 that the American trade-in-goods deficit of $6 billion with China was a manageable 0.11% of American GDP.

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After 30 years of continuous growth, it is now $375 billion, a leakage of nearly 2% of the entire American economy.

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