Perspectives: Friend-Shoring is No Substitute For Having Global Trade Rules



David Henig | Borderlex

There is talk of a new ‘Washington consensus’ on trade as spelled out in a recent speech by US National Security Adviser Jake Sullivan. This Washington view partly overlaps with the EU’s new approach to trade policy. But their new position of domestic industry above anything else will not deliver without following a global trade rule-book.

A recent speech by US National Security Advisor Jake Sullivan on the Biden administration’s approach to balancing domestic industrial policy and global trade  laid out a clear objective “to build capacity, to build resilience, to build inclusiveness, at home and with partners abroad.”

Sullivan’s speech gave a number of examples of partnerships the US is pursuing with other countries – with the EU discussed first.

His focus was not just bilateral. Sullivan also mentioned the World Trade Organization, “the Biden administration is still committed to the WTO and the shared values upon which it is based: fair competition, openness, transparency, and the rule of law.”

On the surface, there is plenty of common ground with how the EU views current trade policy challenges. Brussels would also emphasise the concept of autonomy or resilience. And industrial capacity, working with friends, and remaining committed to the multilateral WTO would certainly form part of the EU’s approach to global trade.

The resort by the US and the EU to large-scale subsidies to accelerate the the green transformation in particular raises the question of where the balance lies between domestic and international considerations in their trade policy making. The crux of the matter is the extent to which it is possible to prioritise domestic manufacturing yet still maintain diverse global relationships and nurture a strong WTO.

When looking at US actions, it seems that Washington’s lowest priority is the WTO. There has instead been a flurry of activities with selected partners to pacify their reactions to the Inflation Reduction Act, which includes WTO-incompatible provisions.

Where the EU faces similar dilemmas, Brussels put a greater emphasis on WTO consistency. This feels like the right approach in that prioritising domestic activity and special deals create dangerous risks globally, as it sets a precedent for a ‘free-for-all’ on international trade rules.

Subsidies driven by a ‘zero-sum’ view of trade

Western trade politics today seem driven by three main factors – national interest currently expressed as active industrial policy, the real or perceived security and/or economic threat of China, and the low-carbon transformation. The first of these is arguably the most important, as developed countries make clear their preference for maintaining or growing manufacturing jobs at home.

With domestic interests defining the priorities, this is not a rerun of the Cold War, of one bloc against another. In any case, the level of trade with China, in both the EU and US, is of a far greater order than in the pre-1990 situation.

The underlying political belief seems to be that in effect manufacturing jobs such in the area of electric vehicles or other parts of the green tech sector can be shifted from China to the EU or US – and that that they are finite in number. However, this also means that the US in particular wants the first set of jobs to come to them, not to allies.

Major powers prioritising their own perceived economic needs with little concern for others is the world of the 1920s and 1930s. Indeed, the failure of this model was what led directly to the establishment of the non-discrimination principles underlying the General Agreement on Tariffs and Trade, and now the WTO, which saw trade as something from which all countries could gain.

There are therefore good reasons to worry about the current direction of travel in both the US and the EU.

US, EU : different approaches to allies

The underlying assumption of the Biden administration that the global economy is essentially zero-sum, that one country or the other gets the jobs, explains why the US has little time for traditional trade agreements that emphasise mutual benefit.

Yet it has also spent considerable time working with allies, whether the EU or Japan, for example to offset some of the losses they could face under the subsidies of the Inflation Reduction Act.

Partly, this comes from a belief that trade with countries similar in geo-political outlook or economic structure is at least less harmful. This is also linked to the US’ security policy and a related need to nurture allies particularly with regard to China, explaining for example the cooperation under the Indo-Pacific Economic Forum.

EU thinking does appear different. Brussels’ outlook is that there is a mutual benefit from trade which can be guaranteed by the measures it is taking in its ‘strategic’ autonomy agenda.

While the US will only offer some special dispensations from the domestic measures they are taking, the EU is trying to balance these with greater respect for established WTO principles such as non-discrimination.

This plays to a more fundamental distinction between the US and EU: Europe is more reliant on trade for its prosperity than the US.

Both however see the need for more common ground when it comes to global politics.

Security requires global trade rules

Europe and North America sponsored the global trade architecture after the World War II. There was a shared understanding that this was necessary if not sufficient for global peace.

Recently, in the context of China’s assertive foreign policies, there has been talk of reaching trade agreements with other third countries as part of a new security architecture. India is most often mentioned in this context.

Yet the US prioritising its domestic jobs and doing special deals feels like offering crumbs from the table, or worse that they undermine the role of all other countries in setting global trade rules.

EU rules for carbon prices under its carbon border adjustment mechanism or its deforestation rules are similarly often greeted with scepticism from other countries who do not see these initiatives as cooperative.

Third countries expect to be part of the discussion.

India sees itself as a global player, for example in this year’s G20 presidency which is widely celebrated there – even if on the WTO it is seen as typically obstructive.

Zero-sum national interest-based policy ultimately can’t be the basis for stable geopolitics. That was already realised by the founding fathers of the GATT in the 1940s.

Special deals that treat third countries differently according to their political affiliations can be withdrawn or changed far too easily.

Even if only as an aspiration, there is no substitute for global, multilateral, trade rules.

Would it be possible to specify: responding to security challenges raised by China? Or anything slightly more precise?

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