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Quarterly issue 4

International trade in a world of populism

Author: ICAEW Insights

Published: 03 Dec 2020

An illustration of a plane flying over a road, shipping yard and cargo ships.

Globalisation is in transition. US-China tensions and the COVID-19 pandemic are changing dynamics. We explore how international trade has been affected by the rise of populist politics, and consider how it will change again in the future. Words by Gavin Hinks.

Among many other changes, the US election has removed globalisation’s critic-in-chief. Shocking economists and world leaders alike at the 2018 United Nations General Assembly, President Trump said America would “always choose independence and cooperation over global governance, control and domination”.

Joe Biden has a different view, saying in an October town hall, “America First has made America Alone”. But despite his stated desire to re-engage with the intergovernmental organisations Trump repudiated, the rise of many protectionist policies is here to stay – and the COVID-19 pandemic has accelerated the trend further. The globe was witnessing “greater protectionism and less trade liberalisation worldwide”, according to a report from Global Trade Alert at the end of last year. 

Between January 2017 (the beginning of the Trump presidency) and November 2019, 2,723 policies (tariffs or subsidies) were introduced to create “trade distortions”, the report found. This distorted more than $10bn in trade, it calculated, and involved policy changes in 15 countries (counting the EU as a single jurisdiction), not just the US and China. 

Another way of looking at the impact of protectionism is through world trade figures. According to the World Trade Organisation (WTO), the value of world merchandise trade was down 3% last year, and growth in trading services slowed dramatically from 8.6% in 2018 to 2.1% in 2019. This comes directly after the opening salvoes of the US-China trade war and before the effects of the COVID-19 pandemic become fully clear. 

Rancour between the US and China and hostility towards globalisation hasn’t just resulted in protectionist trade policies, but also open attacks on the institutions established to support global trade and international cooperation. 

In September, the WTO ruled that US tariffs were “inconsistent” with international trade rules, while the US hit back with claims that the trade body was “completely inadequate” for the task of dealing with China’s approach to trade.

Simon Evenett, professor of international trade at St Gallen University, Switzerland, and author of the Global Trade Alert report, says populist governments around the world are targeting globalisation, the WTO and other international bodies for two main reasons.

“One is to blame the suffering or disadvantage of working class people on foreigners. It’s easier to blame the other than realise that your own country’s education system, transport infrastructure, and the like, have real problems,” he says. The second is the well-worn concern with “elites”. Populists are anti-elite. And associated with all of these organisations – whether it’s the WTO, the European Union, the IMF or the World Bank – is that they are all largely technocratic institutions dominated by highly educated and highly credentialed people … exactly the emblematic elites that populists love to trash.

Other presidents share these views. Brazil’s Jair Bolsonaro famously has only disdain for globalisation; Hungary’s Viktor Orbán says the “globalisation model is obsolete”; Turkey’s Recep Tayyip Erdogan, describes it as a “new way of colonialism, modern slavery”.

So how will populist governments and their protectionist instincts shape the world? Biden’s election may well blunt some of the anti-elite protests but critiques of globalisation’s current model will certainly persist.

One of the issues underlying broader concerns with globalisation is the way it is regulated through the WTO. These predate President Trump’s arrival in office and persist despite a widespread belief that since its founding in 1995 the WTO has done much good. Following a golden period after the collapse of communism and the arrival of China (2001) and Russia (2012) as members, complaints about the body and calls for reform have solidified.

Reforms needed

These have focused on the WTO’s Appellate Body – viewed in the US as too willing to intervene in domestic policy decisions – and a process that allows countries to self-designate as “developing”, thus gaining “special and differential treatment” under WTO rules. This has led to a claim of “elephants hiding behind mice” as states with big economies take advantage of the rules. China and Brazil are very different from Burkina Faso or Ecuador, critics insist.

Then there are complaints that the WTO is a body based on “hard law”, subject to compulsory dispute resolution rather than guidelines that are “less adversarial”. And criticism of the WTO’s “consensus” decision-making process (sometimes described as “medieval”) which can allow a single member to sidetrack a resolution.

Despite its flaws, and a widespread acknowledgment that it is in need of reform, many believe the WTO is essential in today’s uncertain world.

Read expert views on the future of the WTO:

Andrew Staines, UK Ambassador and Deputy Permanent Representative (Economic) to the United Nations agencies in Geneva, says the multilateral system is currently struggling, but in many ways that means the need for the WTO and globalisation has “never been higher”.

“Globalisation is not going to go into reverse in the medium term and so,” says Staines, “in a globalised world, we rely on the multilateral organisations increasingly in order to try and establish the global norms; global rules that allow us to cooperate in a meaningful way.”

Staines adds: “You’ve only got to look at the collapse of trade in the first half of this year to see the value of multilateralism.”

The pandemic has complicated things even further. The WTO calculates that the global economy will shrink by a devastating 9.2% in 2020 as a result of COVID-19, though that is better than the 12.9% estimated in April this year. 

And just as there is speculation about the pandemic permanently changing business or urban pollution, discussion has also focused on whether coronavirus will drive a change in globalisation. One common experience many governments witnessed during lockdown was the withering of global supply chains, especially for essential items such as medicines and personal protective equipment.

This might be expected to prompt governments into bringing production of pandemic essentials back within their borders. However, according to Evenett, governments have been prompted into easing trade barriers for such items, against the general protectionist trend.

“Governments suddenly realised they were taxing things like soap, which doesn’t make sense,” he says. But he cautions: This is not a pushback against protectionism, it’s merely a reaction to COVID-19.

In many ways Evenett’s Global Trade Alert report remains pessimistic about the prospects of protectionist activity coming to an end. He believes that much depends on the attitude of governments as the pandemic goes on. Production facilities around the world for key products have been ramped up and if they manage to cope with demand during a second wave of the virus, then the pressure to localise or repatriate production may go away.

Without the pandemic as a driver of liberalisation, Evenett sees protectionist activity continuing along much the same lines as now. “In the absence of a good news scenario, much of the expectations are still to the downside; more trade restrictions, more fragmentation, less engagement with less sourcing from abroad,” he says.

Evolving globalisation

There’s no escaping the observation that so much of international trade and protectionism is less about economics and more about the politics. That may add a note of pessimism to the current discussion, but there is optimism too.

Michael Cox, a professor at the London School of Economics, and an expert in international relations, says access to markets in Europe and America remains “crucial” for China; big US corporations still rely on open markets and the EU continues to favour trade liberalisation. The big drivers of globalisation, he says, are still in place.

“Although it’s been compromised by COVID-19,” he says, “and although there’s pushback on some aspects of what we might call the package of globalisation, I’m still quite sceptical it’s going to make a great deal of difference. It’s going to be difficult to just push back on economics which have so deeply embedded themselves in the world economy.”

One thing he does see happening is a change in the “flavour” of globalisation. Just as there are different kinds of capitalism, so globalisation could see itself transformed into something new.

Big international bodies are aware of the criticism that globalisation has left many people behind and have attempted to compensate. The European Union, for example, runs a project — the European Globalisation Adjustment Fund — to support those left behind by trade liberalisation. The WTO itself has long recognised the problem and launched numerous studies looking at possible solutions.

Cox believes multilateral bodies will push for change. “A much more inclusive form of globalisation, or economics more generally, may be an absolute precondition after COVID-19,” he says. 

There may be another driver of more, or better, cooperation on trade. According to Martin Walker, a professor of finance at the University of Manchester, tackling climate change can only take place if countries get together to improve coordination of their response, perhaps a new international climate body. But any solution, he says, has got to involve agreements on trade.

“It requires joined-up thinking about trade, on the one hand, and the environment on the other. The problems shouldn’t be solved in isolation from each other,” he says.

Protectionist policies have gained traction. As millions were left behind, trade liberalisation has lost its sheen and the WTO is under pressure to reform. But globalisation is deeply entrenched and remains a key driver of wealth with the backing of highly influential players on the global stage. 

There is widespread recognition that policies must be more inclusive and sustainable. The only question is whether globalisation and its institutions can change enough to outlast the populists and shifting sentiment, and bring about smoother trading relations.

An illustration of a plane flying over a road, shipping yard and cargo ships.

The impact of the US election

Both Walker and Evenett argue that globalisation won’t get a free ride even with Joe Biden (above, with vice-president-elect Kamala Harris) as the 46th president.

“Biden favours free trade, and multilateralism,” says Walker, “but that doesn’t mean all the problems would go away, because there are difficulties: China does subsidise domestic companies to a very considerable degree.”

That fact alone will help maintain a focus on trade with China and whether the WTO can be reformed in a way that enables it to more effectively confront Beijing to the satisfaction of other members.

But there are other political considerations to be borne in mind. Evenett highlights Biden’s need to keep his own working class voters happy. “A lot of the belligerence towards China will probably go away, at least rhetorically,” he says. “The rivalry will still continue, but it will be managed in a slightly less dramatic manner.

“What Biden will do, which is very similar to Trump … is redirect more and more US government spending towards local firms. So, Biden’s a big fan of Buy American too.”