Reciprocity, Trade and the WTO: the end of the rules-based economic order?

In the lead up to the election of President Trump, a research team led by David Autor— an economics professor at MIT — found that the geographic impact of Chinese imports was directly correlated to political extremism in the United States, on both the left and right. The team termed this “the China shock.” In the aftermath of the Brexit vote, Italo Colantone and Piero Stanig, found precisely the same trend in the United Kingdom. Those localities impacted by Chinese imports were most likely to vote for the Brexit. What’s more, even service workers — who wouldn’t be as affected by Chinese imports as their manufacturing neighbors — were more likely to vote leave if they lived in a community that had been impacted by the China shock.

Domestic Chinese economic policies are having an enormous impact on U.S. and European politics and societies, and it isn’t entirely clear what options there are to mitigate against that impact.

The conversation over the last year has turned to a controversial option — “reciprocity”. In essence, this amounts to saying “we won’t give you access in our market that you won’t give us in yours.” The policy has been suggested by multiple senior U.S. officials, Chancellor Merkel, and any number of economists. While this might not seem controversial to a white working-class citizen made unemployed by Chinese trade, it marks a major departure for those whom, in another context, would likely maintain a more ideologically pure commitment to rules-based global trade — a commitment that has tended to sit at the centre of U.S. global leadership. Reciprocity is essentially bilateral and thus threatens to undermine the multilateral system, and the tit-for-tat approach goes against the openness that the U.S. and Europe have long advocated for.

Rules-based global trade has led to the most incredible reduction in poverty and large-scale conflict in human history. For many, the great gains of the liberal international order rest upon that central argument. It is even an argument that has resonated with China, evidenced most recently by its coronation at Davos as the great defender of globalization. If membership of the World Trade Organization is anything to go by, it is also a framework that most countries have bought into — albeit to varying degrees. While trade has never been uncontroversial, most arguments since the end of the Cold War have tended to center around questions about pace, power distribution, and degree rather than the central principles. But the global trading order has never faced disruption by an economy as large and as centralized as China’s.

This inherent challenge in the U.S. and European economic relationships with China brings us back to a theme that has emerged throughout the pieces on GMF’s Out of Order. Our international liberal order is inherently in contradiction with itself, and the ideals it espouses cannot be simultaneously sustained. If we want to to be liberal, we might need to be a bit less international. If we want order, we might need to be a bit less liberal. In the case of reciprocity, we may well risk unravelling the concept of international economic law — the basis for global cooperation over the past several decades.

We have managed to sustain all three elements through some combination of power, luck, compromise, and an occasional willingness to depart from coherence — but changing externalities are making that increasingly difficult. In this instance, we are faced with a choice between sustaining liberal democracy at home and sustaining a liberal order internationally.

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