Shifting narrative on trade policy: From int’l to domestic

The multilateral trading system and the liberal order on which it is founded are under immense strain. A toxic mix of populist appeals to protectionism and the invocation of national security concerns is disrupting and weakening the global value chains that have underpinned growth in international trade since 1970s.

The temptation to resort to such policies is heightened by a particularly challenging international economic environment. Four elements are dominant in creating this challenge. First, there is the prospect of continued global macroeconomic imbalances — including Asia’s growing savings stockpile — creating associated current account concerns. Second, increasing income disparities within advanced economies are fuelling anti-globalisation sentiments. Third, there is a budgetary burden imposed by ageing populations in many countries. Finally, the continued ‘dollarisation’ of the world economy is increasing the clout of US-imposed trade and financial sanctions, impacting highly unstable geopolitical configurations and tensions.

In these circumstances, there is a need to address the two interrelated policy failures that have fuelled populism in trade policy, including in Brexit. First, there has been a failure to explain that trade is not the principal cause of widening income gaps and not a source of a race to the bottom in social and environmental standards. 

Second, there has been a failure, nevertheless, to help those who lose from trade opening, with its concentrated and immediate costs and its dispersed and often delayed gains.
Rectifying these failures will require that trade policy and market opening be placed more firmly within the broad domestic policy framework. Trade policy is not just a question of international diplomacy.

The benefits of a liberal trade regime will only be fully secured on the basis of domestic economic policies that facilitate the mobility of workers and the entry and exit of firms. These policies must allow labour and capital to move from declining to expanding areas of activity. This means adopting a policy framework with appropriate macroeconomic settings, microeconomic policies for efficient labour markets and an education system that enables skills to match evolving needs.

Putting trade more firmly in its domestic policy context still requires international negotiation. Indeed, within Robert Putnam’s two-level-game construct, placing trade policy in the context of sound national economic management would widen the domestic win-sets open to governments, increasing the chances of reaching agreement at international level.

There is much for the WTO to do. The US concerns about China’s state-led system are justified but the answer is not to impose unilateral penalties outside the WTO disciplinary measures. Instead, there is room for the WTO to strengthen multilateral rules on industrial subsidies, to address abuses to the Agreement on Trade-Related Aspects of Intellectual Property Rights and to clarify China’s market economy status under GATT Article VI.

Another pressing issue on the WTO’s forward agenda is to address the digital transition by finding the right balance between data privacy and data availability and between structural and behavioural approaches to the regulation of two-sided platforms. And there is a key environmental role for the WTO in liberalising trade in environmental goods and services and in limiting fossil fuel subsidies.

The change of mindset suggested here — trade opening in the context of sound domestic economic management — might seem optimistic. But without this shift, it is high-level advocacy of liberalisation that will be divorced from policy realities. Instead, the tendency to use trade restrictions as a blunt instrument to achieve other non-trade objectives will continue to grow.
Australia has a central and credible role to play as an advocate of the liberal order. The Hawke-Keating era demonstrated that an open trade regime needs to be grounded on solid domestic policies.

An effective Australian contribution to the present policy debate will need to build on some key assumptions and hard-nosed assessments.

First, that there is a shared responsibility for current distortions to trade. This is notably due to the US unilateralism, China’s state interventionism and the EU’s decision to take account of alleged social and environmental breaches when deciding on anti-dumping measures. Other trade distortions include substantial tariff hikes in India, increasing agricultural distortion in Indonesia and tightened scrutiny of foreign direct investment flows into Japan.

Second, that the United States is unlikely to re-emerge as the custodian of the liberal trading order and that China is equally unlikely to take its place.

Third, that there are limits to what can be achieved by preferential trade agreements and that though there can be complementarity between multilateral and preferential deals, this will only happen if the multilateral system is itself robust.

Finally, that the most promising approach to the revival of multilateral cooperation in trade will involve appeals to national self-interest, founded on the implementation of domestic policies that put commerce in context. Contrary to mercantilist thinking, the main benefits of trade for a country come not from exports, but rather from the improvements in resource allocation and domestic productivity that import competition brings. And that is why, as the Trump administration is now clearly demonstrating, a tax on imports is effectively a tax on exports.

In a foreign policy speech earlier this year, Australian Prime Minister Scott Morrison quoted an observation by George Kennan that ‘if our purposes and undertakings here at home are decent ones … the pursuit of our national interest can never fail to be conducive to a better world’. These words have never been truer when put in the context of a trade policy that recognises and effectively advocates the benefits of open markets for imports as well as exports.

(Ken Heydon is a Visiting Fellow at the London School of Economics (LSE). He is a former Australian trade official, Deputy Director-General of Australia’s Office of National Assessments and senior member of the OECD Secretariat. This article is drawn from his latest book ‘The Political Economy of International Trade: Putting Commerce in Context’ 
(Polity, 2019))