What will come after the trade war and the China split

It’s all too easy to get lost in the daily disorder of the global trade war. Which tariff doubled? What deal has been ostensibly struck? Why are certain semiconductor chips no longer subject to export controls? 

These day-to-day twists and turns move markets and make news. More important are the underlying trends that will define the international economy, and the United States’ role in it, over the long term. 

In an effort to take a step back from the day-to-day noise and assess the future of the global trading system, I just published a new essay in Foreign Affairs magazine, “After the Trade War.” If you have not read the full article, here are my highlights. 

The first step towards a new international economic order is admitting the global trading system as we have known it is dead. A return to the status quo is impossible with both the US and China following their own set of rules. 

But the death of the global rules-based trading system doesn’t mean we should accept a beggar-thy-neighbor world as the new normal. 

Greater protectionism

The challenge going forward is to develop rules where and when we can among like-minded countries, even if the fully multilateral rules-based system grinds to a halt. This is as important to the US as it is to other economies – and it will take our leadership. 

If the unilateral, mercantilist approach of Washington and Beijing proves to be contagious, and other countries begin to act in a similar fashion, we could find ourselves back in a situation that looks a lot like the pre-World War II period.

Trade back then was used as a weapon among states. And we know where that ultimately can lead. 

Short of conflict, the trend toward greater protectionism, subsidization and de-integration could lead to slower global growth. In turn, this could adversely affect US exports, American businesses, workers, and farmers who produce those goods. 

Last year, those exports totaled around US$3.2 trillion. We have moved from a world in which most economies sought to derisk themselves from over dependence on China. Now, they are considering derisking from the United States as well. 

The US is still an incredibly attractive market and resilient economy, but we should expect to see other countries pursuing expanded trade with other partners. 

So far, we have seen relatively little retaliation against President Trump’s tariff actions. 

But that could change as the impact begins to bite. Other countries have politics too, and trade has a way of spurring domestic reactions because of the direct and indirect effects it has on particular constituencies. 

One thing that has become increasingly clear is our dependency on other countries, especially but not limited to China. During the last several years, Beijing has gained an in-depth understanding of where it has leverage over other economies.

Pragmatic strategy

Exactly how much leverage it can use has been shown through restrictions on magnets and critical minerals. 

Where should we go from here? We can’t put the toothpaste back in the tube. Nostalgia is not a strategy – neither is hope. But a world without rules is one which runs too much risk. 

We need to consider a pragmatic strategy of “open plurilateralism”– groups of like-minded countries coming together to define a set of rules that reflect new realities.

These would be “coalitions of the ambitious” which share interest in specific areas and come together to adopt high standards on certain issues. 

Importantly, these coalitions would be open so other countries who share similar interests and are prepared to implement those standards can join. 

For some nations, that could be trade liberalization, opening markets, and integrating economies. The United Kingdom joined the (Comprehensive and Progressive) Trans-Pacific Partnership, and evidently the European Union is considering doing the same. 

The United States is not likely to do that anytime soon. But for Washington, there is value in bringing together countries to adopt common views about controlling the export of key technologies and developing secure supply chains. 

Establishing principles for the use of industrial policy and state subsidies could be other goals in coordinating competition with China. 

Emerging technologies

There might also be an opportunity to pull countries together to set the rules of the road for artificial intelligence, or AI, and other emerging technologies, as well as the digital economy more generally. 

While open plurilateralism is messier than the multilateral trading system, it is a pragmatic, second-best response to the new world we live in. Whether such a system forms with us, despite us, or around us, is very much an open question.  

Michael Froman is president of the Council on Foreign Relations.

Read the full essay a read, and let me know what you think by replying to president@cfr.org.

This edited article was published by the Council on Foreign Relations under a Creative Commons license. Read the original here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.