Threats loom for world trading system

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Hello, and welcome to World Weekly from The Financial Times. I'm Gideon Rachman. Today we're looking at the threats to the world trading system in the wake of Donald Trump's visit to Asia. And joining me on the line from Washington is our World Trade Editor, Shawn Donnan, and here in the studio, our Economics Commentator, Martin Sandbu.

Shawn, something kind of interesting happened in Asia, which was that the Trans-pacific Partnership-- which Mr. Trump pulled America out of on his first day in office, big new trade deal-- was revived, but without America. Was that unexpected? And how significant is it?

It's incredibly significant. And it's something that we've been moving to slowly since about the middle of the year, which is the 11 remaining countries, in particular, Japan, have been pushing to keep this deal alive. And they spent almost a decade negotiating this thing.

And the view of Shinzo Abe is that he spent a huge amount of political capital. And he really needs this thing to keep living, and keep going on. And that's echoed throughout the Pacific Rim. You hear that from Australia. You hear that from New Zealand, Mexico, Chile, Peru, all the countries in the TPP that are really keen to keep this thing going.

And does it really make sense without America? Because I thought America, the world's largest or second largest economy, depending on how you calculate it, was totally central to everybody's calculations in putting the thing together.

Absolutely. So the US, the world's second largest or largest economy depending on how you count, really gave the thing scale. But Japan is still a big economy, the world's third largest economy. And it is now the anchor of the TPP.

And if you're Canada, and you are looking at your trading relationships, they've just concluded a deal with the EU that's gone into force. A deal with Japan is still pretty enticing. So no, it's not the TPP that we talked about representing 40% of the global economy thanks to the US. Instead, it's the TPP that represents about 13% of the global economy.

But that's still significant. And the important thing is there's also a lot of countries that have been thinking about still joining. Countries like South Korea, the Philippines, Indonesia have all talked about joining. Colombia, a member of the Pacific Alliance, has flirted with the idea of joining at some point. So this thing can get bigger still.

Hmm. Maybe Britain should join. Martin, how much of a game changer, nonetheless, is the advent of Donald Trump to the White House? Because he is the first American president I can remember who is openly suspicious of global trade.

I think it's clearly a game changer for the US, and for the US's role in the global trading system and the economic liberal order in general. I think it looks like it may be less of a game changer for the world as a whole than we had reason to fear a year ago. And what we see, basically what this TPP at 11 is an illustration of, is that the rest of the world-- and Shawn has written very well about this-- is very keen to keep globalising. And they have good reasons for that.

The developing world, emerging countries, they want to keep globalising, because globalisation has, on the whole, been great for them. It's made them, if not rich, then richer than they were, taking them out of poverty. We throw around the figure of about a billion people lifted out of poverty, largely on the back of trade-driven industrialisation in poor countries.

The second reason is that most countries that don't have a leader like Trump realise that the sort of anti-globalization mantra is sort of snake oil. It's not going to solve the problems of the left behind. And that's why they're not going to give up on it.

And the third thing is that people see, and the TPP issue illustrates this, that if you are the one country that doesn't go along with further globalisation when others do it, then you lose out. And that's even true for the biggest economy in the world, the US. So in TPP, you see now that Australian and New Zealand farmers, for example, will have access to the Japanese agriculture market that American farmers wanted to have, and will now continue to be excluded from.

So it's not just that the US isn't advancing. It's, in relative terms, falling behind in terms of market access. You also see in the TPP, they tweaked it a bit, and they removed some of the things that the US had pushed for.

So we'll know more about this, but I think on intellectual property protection, for example, where US IP industry was very strongly insistent on protections of patents, and so on. So a lot of this is actually making Trump, paradoxically, look a bit like a loser. And I think other countries are drawing the lessons from that.

And yet Trump himself doesn't seem likely to pull back from his agenda. And Shawn, I guess-- well, there are two big things to watch. Let's take them one by one. What's happening with NAFTA? Is it really under threat now?

So NAFTA is absolutely under threat. They are, this week, starting a fifth round of the renegotiations of NAFTA that Donald Trump launched. They took a month off. And they took a month off mainly because the US had come with these radical proposals to make NAFTA renewable every five years, put a sunset clause in there, to put some requirements in NAFTA that half of cars produced in North America be actually produced in the United States-- stuff that the Canadians and the Mexicans just aren't going to go along with.

But the way this all ties in with the TPP example is that both Canada and Mexico are members of the TPP. And if you talk to people in Washington in the business community, in the agricultural community, they say we've got a real problem here. If NAFTA collapses, there there's a very real possibility that both Canada and Mexico-- sorry, that Japan and the EU will have better access to the Canadian and the Mexican markets, i.e. our neighbours, than the US will. And that is exactly what Martin is talking about, that risk of the US falling behind.

There's another thing which is just a kind of strategic idea that Donald Trump has, that he can do better for the United States in bilateral deals. That's the idea that he took to Asia-- that he could negotiate a better one-on-one deal with Japan than the Obama administration was able to in the TPP. The problem that Donald Trump has with that idea is no one wants to sit down on the other side of the table. And that's largely because they're watching the NAFTA negotiations, and seeing how belligerent the US is being in those negotiations.

And Martin, behind all of these regional and sub-regional agreements, there's the WTO, which is the World Trade Organisation. And it seems like after initial sense that maybe Trump wouldn't take it on, he might be intent on doing it some damage.

Well, there is talk of the US having an intention to sabotage the workings of the WTO, specifically the sort of dispute settlement part of the WTO, the arbitration tribunal, because they are refusing to nominate a new judge when the current judge's terms expire. So there's talk or there's a fear that the US is trying to, without actively withdrawing or anything, just make the whole thing unworkable. We'll see how that plays out, and I hope Shawn will chip in and tell us how that's going.

More generally, I think we need to acknowledge that the WTO, to some extent, we shouldn't just think about it as a way to liberalise trade further, but as an accomplishment of past waves of trade liberalisation. Tariffs are sort of reasonably low across the board for most goods all around the world now. Pretty much every country is a member of the WTO.

There's sort of a very liberal baseline of trade. So the slowdown in trade we saw after the crisis looks to me like it had more to do-- it was more cyclical. It was because the world economy was so sluggish, advanced economies in particular had stopped investing. And a lot of trade is actually with capital goods trade.

So if we're starting to see a strong recovery in rich countries-- and that's what it's looking like-- we should probably expect that trade to pick up, too. So in a sense, we have a good framework in place. It would take a lot to damage it.

What do you think, Shawn? Are you reasonably sanguine about the WTO, even in the Trump era?

No, I'm not. I think there's some really alarming stuff going on. And as is always the case with the WTO, it's happening in slow motion. I mean, the Trump administration can do a lot of damage simply by benign neglect, if you will. And it's not so benign, I guess.

The point that Martin was raising about the appointment of judges-- this has to do with the appellate body of the WTO, which was seven full-time judges were appointed from all over the world. They serve terms, and four-year terms, I believe. They tend to serve two in a row.

And two of them have had their terms expire. So you're down to five judges by next month. The third will go, you're down to four judges. By September next year, you fall to three judges.

And that's an important number, because it takes three judges to form a panel that hears these appeals. And the three judges you're going to be left with are one from China, one from India, and one from the United States, all of whom are the countries that represent, arguably, the majority of the trade disputes that are heard there, and all of which, simply by their nationality, are going to raise questions about the lack of bias in the system.

The dispute settlement function of the WTO, that role as a global referee, that's the whole reason the WTO, and its establishment in the mid 1990s, was so important. Before that you had these kind of one-on-one trade wars that were being waged all over the world-- the US against Japan, the EU against the US, and so on-- yet no one in the middle, no neutral arbiter to kind of blow the whistle and say, back in your box. And that's what the WTO has been doing.

You lose that, and you start moving much more down the path of potential trade wars. Now, Donald Trump clearly doesn't like the WTO, because the WTO has been blowing the whistle on the United States a fair amount in recent years, mainly in the area of anti-dumping cases, where the US is particularly aggressive. So he wants to be liberated to do the kind of hard trade measures that he wants to do, and if he doesn't have the WTO in the picture that's going to help him do that.

Just to be clear, he's sabotaging this, or the Trump administration is, by just blocking the appointment of these crucial appellate charges.

Absolutely. So the WTO operates by consensus. It has 164 members, any one of which can block proceedings simply by refusing to sign off on something.

And briefly, Martin, putting my parochial British hat on, kind of interesting, isn't it, when the Brexiteers' argument is, well, we can always fall back on WTO rules, if the WTO itself is in a state of decrepitude.

Now, that's a good point. I think we could also mention one of the other possible sort of post-Brexit solution, people talk about joining NAFTA. Well, if NAFTA unravels, there's not much to-- maybe we just become a Pacific nation.

But I'd just like to get, to close, a sense from both of you of where you think we are sort of politically with the world trade system. Because on the one hand, you do have TPP going forward. The WTO is still just about there. World trade is continuing to grow.

On the other hand, I could point to at least four things where politics is now getting in the way of world trade. We've talked of two of them-- Trump, obviously. Brexit is another, which could have significant implications for trade in Europe.

But there are others, too. I mean, there are sanctions on Russia, and the way that China was throwing its weight around with South Korea, and suddenly discriminating against South Korean companies. Do you get a sense that the sort of political consensus that supported globalisation is crumbling and important ways or not? Shawn first.

So it's certainly being challenged. And it's been challenged here in the US. But one of the striking things over the last year is, just as we've seen countries move ahead with the TPP, is how we've discovered just how pro-trade Republicans in Congress are, and just how powerful the business and agricultural lobbies are here in the United States.

So there's a check in the system on Donald Trump's protectionist instincts. So the war against the system that Donald Trump is waging is really only just getting started. And the some good signs that there's people here in the US who want to block him.

Now, is the trade system globally under threat? Absolutely. Is it going to crumble? I don't think so.

Martin?

I think I'm a little bit more optimistic than Shawn. I think the various issues you've mentioned, obviously, are challenges to free trade. But I don't think they are putting the whole system in doubt. They're kind of ripples on the surface, except for Trump, where there's a real risk that he may actually just want to isolate the US.

But for the reasons that Shawn pointed out, I'm not sure that that's what the US will do, partly because he's not the only player, partly because business interests are now becoming more vocal about what they stand to lose out. And he depends on some of those interests. Whatever else he is, he's also a politician, although a strange kind of one.

So I think it may be that the US doesn't isolate itself as much as we may fear. If it does, I think the rest of the world is still, as I said, pretty committed to globalisation and a liberal global economic order. So the big question is going to be, if the US pulls out, given that the system has been built around the US as the anchor, can the rest of the world kind of put together the remaining pieces and keep the system functioning?

OK, well, it's a big question to watch in the coming weeks and months. So thank you for the moment, however, very much to Martin Sandbu here in the studio, to Shawn Donnan in Washington. That's it for this week. Until next week, goodbye.