The Populist Damage To The Trading System



Kent Jones | VoxEU

In the global trading system, the age of anxiety has given way to the age of populism. Between 2017 and 2020, populist governments held political power in 26 countries, including the US, the UK, Russia, India, and Brazil. Anxiety over globalisation and social change have created a potent sense of frustration and anger among a large portion of their populations, which in some cases has included strong opposition to the rules-based trading system. Populism occurs in democratic systems when a political leader focuses the anger of disaffected voters on a culpable ‘elite’ held responsible for the disruption (Guriev 2019). Research on voter behaviour suggests that such anger can motivate a strong backlash against alleged elitist politicians at the ballot box (Gil 2016).

While trade itself may not be the main object of resentment, the populist narrative often uses aggressive nationalism and emotional slogans to link trade agreements with foreign intrusions on national sovereignty. In the US, Donald Trump connected the alleged theft of US economic welfare through trade deficits with China, immigrant ‘invasions’ from Latin America, and violations of sovereignty through international trade agreements to the machinations of a liberal globalist ruling class that must be uprooted and replaced. In the UK, leaders of the Brexit movement harnessed popular resentment against EU bureaucrats for dictating domestic economic policies and tax payments to Brussels with the rallying cry, “we want our sovereignty back”. In a new book (Jones 2021), I explore the ways in which populist regimes affect trade policy, and in particular how the Trump administration unleashed an attack on WTO rules and how Brexit imposed significant economic costs on the UK from lost trade and investment while weakening pro-trade influences in EU trade policy.

A country’s trade policy generally reflects a balance between its economic interests in the long-standing human proclivity to seek gains from trade on the one hand, and the tendency for groups to close off access to foreigners when there is a perceived external threat on the other. In more stable, prosperous times, trade is likely to be seen as a positive influence. Economic adversity, unwelcome social change, and internal turmoil allow populists to exploit divisions within the country that may link trade with a vilified domestic elite seen to be in league with nefarious foreigners. Populist movements that incorporate right-wing or left-wing ideologies seem particularly prone to adopt protectionist policies. Populist-inspired protectionism is also more likely to arise in large countries with trade bargaining power, or in countries whose exports (such as oil) are less exposed to trade rules. Populist movements in small economies that are dependent on open trade for their exports, in contrast, have insufficient bargaining power to oppose the global trading system, and their supporters therefore tend to seek out other scapegoats.

Yet when the populist government represents a country that is the pillar of the open global trading system itself, it may not only embrace protectionism, but may also undermine the system’s rules and turn global trade relations upside down. Donald Trump, an avowed protectionist, appointed Robert Lighthizer, a like-minded US Trade Representative who knew the WTO system well, to pursue trade policies that would attack the foundations of WTO agreements. He used the WTO’s national security exception (GATT Article XXI), for example, to declare that imports of steel and aluminium displaced domestic jobs in these industries, thereby representing a security threat that justified unilateral tariffs on these products. He also declared that the US had the right to invoke the national security exception for any self-declared reason and furthermore could not be challenged in doing so under WTO rules (Pinchas-Paulson 2020). This policy violated all previous Article 21 practice, which had been reserved for rare cases of import supply concerns linked with military threats by trading partners. It also laid bare the tenuous nature of all WTO rules, whose legitimacy relies in large part on their observance by leading countries that are party to the agreement.

The broader danger of the precedent to invoke national security as a free ticket to impose protectionist tariffs was that it opened the door to rendering all WTO tariff-binding agreements as potentially null and void. Similarly, Trump’s use of unilateral sec. 301 trade restrictions in starting a trade war with China violated the principle of peacefully resolving trade conflicts through WTO dispute settlement. The trade war of the 1930s was in fact a major reason for countries, led by the US, to establish GATT disciplines in 1947 that prevented unchecked tariff escalation. That goal had been largely fulfilled until the Trump administration’s unilateral tariffs against China, followed by Chinese retaliation in kind (Bown 2019).

The danger of Brexit populism to the trading system has been more subtle, but no less serious. Many Brexit supporters proclaimed themselves free traders and declared that a UK outside the EU could do better negotiating new trade deals with other countries, especially the US. At the same time, the hopeful Brexit pro-trade view was that the EU would find its economic links with the UK too valuable to abandon, leading to a ‘soft’ separation agreement that would unpack the EU agreement and retain the trade and investment aspects of greatest benefit to the UK. This view severely overestimated the UK’s bargaining power. The UK made no quick progress on a US trade deal, while EU countries rejected the ‘soft Brexit’ outcome, concluding that any decline in EU trade and direct investments with the UK could be offset elsewhere, with much less damage to the EU than the UK. The EU countries also decided it was important to remove the incentive for any other member countries to abandon key EU obligations while holding onto the most desirable EU trade elements of the agreement. While the December 2020 Brexit trade agreement did allow tariff-free access to EU markets for UK exports, it introduced disruptive red-tape transaction costs on trade based on regulatory differences.

The other major impact of Brexit was on EU trade policy, as it eliminated the usually pro-trade UK influence on the European Council, increasing the voice of protectionist forces from populist parties and governments in other EU countries, such as Hungary, Italy, and France.

What can be done to stop the populist erosion of trade rules and institutions? The task begins at home with traditional prescriptions for addressing protectionist pressures, such as reforming tax and other laws and regulations to increase labour mobility, shifting resources to displaced workers, and improving adjustment measures and retraining opportunities. Yet, populist protectionism presents a special problem in trade policy, as it tends to target foundational rules and institutions. For the US, an important part of the problem lies in the delegation of trade policy authority from Congress to the executive branch that took place in the Reciprocal Trade Agreement Act of 1934. This arrangement reduced the check-and-balance role of Congress on President Trump, who was then free to pursue many protectionist policies without oversight. Legislation to balance legislative-executive control over trade is therefore needed. In the EU, the cautionary lesson of Brexit is the danger of a continuing democratic deficit that leaves the EU public removed from many policy decisions made in the European Council, which can breed populist resentment over trade and other issues.

A more profound problem has arisen among many populist regimes in recent decades that have been unwilling to give up political power (Kyle and Mounk 2018). In order to avoid electoral defeats, their strategy has generally been to gain partisan control over domestic institutions and electoral processes, posing the danger of an erosion of democracy and decreased support for a rules-based trading system.

The WTO, having been crippled by US populism and other discordant tendencies in global trade relations, also needs reform. Its rulebook must be updated to discipline subsidization by state-owned enterprises and deal with new trade issues in a rapidly evolving global economy (Mavroidis and Sapir 2021). New and perhaps broader leadership is needed in WTO governance, as squabbling within the organization has subjected multilateral negotiations to paralysis under its consensus principle. In the absence of needed changes, the WTO may be destined to give way to a set of fissiparous regional trade agreements, further endangering the stability of the global trading system and the prospects for global trade liberalization.

Kent Jones is Professor of Economics at Babson College, Wellesley Massachusetts, where he has taught since 1982 and served as Chair of the Economics Division from 1999-2005.

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