Excerpt from pages 3-5.
The Road to Protectionism
A series of global shocks over the past 15 years have upended the post-World War II framework for international economic cooperation and set in train a widespread reassessment of how trade should be conducted and with whom. The old rules of the game no longer apply.
The global financial crisis of 2008-09, the heavy-handed application of tariffs by Donald Trump, the Covid pandemic, China’s remarkable economic rise, and now the war in Ukraine have skewed international trade and investment policies in ways rarely seen before. Governments continue to apply high tariffs to restrict imports and screen inward flows of investment. But in recent years they have begun to use tools that were far less frequently employed before, including restrictions on exports and reviews of outward flows of investment.
As troubling as this may be, of even greater concern is how the events of recent years have inured politicians—and the wider public—to the dangers of closing markets. A series of dramatic trade events have shifted the paradigm of what is acceptable and cleared the way for ever more restrictive policies.
The normalization of invoking national security
Since the 2008 global financial crisis, governments have steadily embarked on increasingly protectionist policies, though it has not been a mad dash. Trade facilitating measures were implemented during this time and the rules-based multilateral trading system had some success in restraining the 164 members of the World Trade Organization (WTO) from a full-fledged flight to protectionism.
In response to the financial crisis, the WTO began to monitor trade policy interventions more closely to gauge the reaction of its members. Trade restrictive measures were higher in some years than others, but overall the accumulation of trade restrictions has steadily expanded in coverage of global commerce. WTO economists estimated that the cumulative stock of import restrictions—mainly tariffs—last year up to mid-October impacted merchandise imports worth US$2.07 trillion or 9.3% of the global total, up from US$234 billion or 1.3% of the total in 2011.1
Since the multilateral trading system began operating in 1948, the invocation
of national security as a rationale to restrict trade was extremely rare. This is because governments were aware of the tenuous balance to be struck between a government’s sovereign right to determine what is in its national security interests and the possibility that national security exceptions to global trade rules would be used carte blanche to simply avoid following the rules. During the past 10 years, these fears have been realized. What was once the exception has become common.
The pandemic and the rising global rivalry between the United States and China have induced a new wave of restrictions, including the hoarding of vaccines and respiratory masks, curbing the transfer of technology, and more recently, efforts to review, slow, or prohibit outward flows of investment to certain markets. Despite the clearly adverse impact of these actions (export restrictions on Covid vaccines led to severe vaccine shortages in Africa, for instance) policymakers show little appetite for changing their ways.
The pace and scope of these actions are upending long-established trade patterns and, if left unchecked, are likely to accelerate and deepen the economic fragmentation that is already underway.
WTO economists estimate that fragmenting the global trading system into two rival blocs would drain 5% of global GDP, with developing countries taking an even bigger hit.2
The International Monetary Fund (IMF) projects that a deep and wide fracture would cost 7% of global output, or the combined annual GDP of Japan and Germany. The Fund warns that if a technological decoupling takes place, some countries would see their national income contract by 12%.3 The risk of such a decoupling is increasing.
A convergence of flashpoints
Despite these warnings, the forces driving this fragmentation not only remain present, they are growing more pronounced. Restricting trade and investment is not new. Governments have been imposing restrictive measures in one form or another for hundreds of years. The difference is the motivation behind these measures.
Take tech, for example. The ostensible rationale for tightening trade and investment policies is two-fold: to protect the privacy of citizens through restrictions on handling data and to hobble rivals’ ability to employ cutting-edge technologies. Such dominance promises not only economic prosperity but also military supremecy.
The pandemic and US-China trade war have prompted a new wave of restrictive trade policies that threaten to deepen economic fragmentation and drain global GDP.
Such is the link between technology and military prowess that Washington has ratcheted up its restrictions on exports of high-tech products and is now prepared to establish specific laws to prohibit inward investment and mechanisms for monitoring outflows of US investments as well. These measures are largely viewed as an effort to contain China. Furthermore, the United States is applying intense pressure on its allies to do the same.
The United States’ place at the center of this conflagration is no small irony given that Washington was the driving force in creating the global institutions and processes that provided the guardrails for globalization. Today, the United States is less concerned with enhancing or even preserving, multilateral processes or institutions than with assuring its continued preeminence on the global stage.
The catalyst for Washington’s change of heart on global cooperation on trade
and investment has been the rise of China. A key driver of important legislation in Washington has been the fear that China may soon usurp the United States as the world’s leading superpower and rulemaker. The passage of both the US Inflation Reduction Act and the CHIPS and Science Act in 2022 was spurred by bipartisan support for countering China.
The war in Ukraine has prompted the West to put economic sanctions on Russia. But there is a fundamental difference in the US appraisal of the European giant: Russia is largely an exporter of resources and armaments; it boasts military might but is an economic backwater. Many military analysts see next-generation semiconductors and artificial intelligence as critical components in advancing military power throughout the next decade. Few believe Russia will be at the forefront of developing such technologies. But China is a very different story.
Keith M. Rockwell is a Senior Research Fellow at the Hinrich Foundation. Prior
to his retirement in June 2022, Keith served as a Director at the World Trade Organization (WTO) and spokesperson for the organization for more than 25 years. He also is Global Fellow at the Wilson Center.
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