Trump wants to kill this fading giant. It might die anyway

Will the meeting of the 166 members of the World Trade Organisation in Abu Dhabi this week be the last gasp of air for the body that sets the rules for global trade?

If Donald Trump regains the US presidency in November it will effectively be the death knell for the already dysfunctional 30-year-old organisation. Even if he doesn’t, the outlook for the WTO, and globalised trade, is grim.

Donald Trump has been a long-time critic of the WTO.Credit: AP

While it might be a useful forum for discussion about particular trade issues – such as the agreement on trade in services the WTO was trumpeting on Wednesday – at the macro level, the WTO’s rules have been powerless to prevent or even slow an accelerating fracturing of the rules-based order for global trade.

In the US, Trump’s tariffs of more than $US300 billion ($458 billion) on imports from China remain in place under the Biden administration, which has itself imposed a continually widening range of sanctions on strategically sensitive areas of trade with China.

The Inflation Reduction Act, the centrepiece of Biden’s reindustrialisation policies, provides for massive subsidies to strategic industries – a flagrant breach of WTO rules – and US companies and US allies are re-engineering and reshaping global supply chains to distance themselves from an over-reliance on China.

China has retaliatory tariffs in place on US exports but it is its economic model, with state-directed mercantilist policies and its own massive, multi-layered and opaque subsidies for its strategic industries – and the sheer success of those policies – that has provoked the West’s response.

A struggling domestic economy and threatening levels of excess capacity in industries it has prioritised – electric vehicles, batteries and solar panels – risks an even more protectionist backlash from the US and Europe.

The Europeans have already initiated an investigation into the levels of state subsidy in Chinese electric vehicles and last year introduced their carbon border adjustment mechanism – a tax on the embedded carbon in imports regarded as “green protectionism” by its critics – which will take full effect in 2026.

This is not the world envisaged when the WTO was established, nor when China, which was opening up its economy and was pursuing more market-oriented policies – policies that have been reversed under Xi Jinping – was admitted to the organisation in 2001.

Instead, it is increasingly a world which is becoming divided into trading blocks that reflect geopolitical alliances.

WTO director-general Ngozi Okonjo-Iweala insists the organisation remains relevant no matter who is in the White House.Credit: AP

The US leads the West while China has its sphere of influence within its own region plus growing relationships with the 140 countries it targeted with its $US1 trillion or so Belt and Road Initiative. It has signed bilateral or regional-free trade agreements with 28 countries and now nearly 40 per cent of its trade is with economies that are within that broader trading bloc.

Even at a purely organisational level, the WTO is dysfunctional, with most of the credit for that plight attributable to Trump who, in 2019, gutted its dispute resolution and appeals process by vetoing any new appointments to its appellate body. Joe Biden hasn’t, to date, done anything to improve the WTO’s functioning.

While the WTO’s director-general, Ngozi Okonjo-Iweala, has insisted that the organisation remains relevant and focused on reform no matter who is in power in the US, Trump’s complete disdain for multilateral institutions, his lack of understanding of global trade, which he sees as a zero-sum game where the winners are directly matched by losers, and his vow to introduce a 10 per cent universal tariff on all imports (and a 60 per cent tariff on Chinese imports) would be the end of the WTO.

Even if Biden (or another Democrat) retains the presidency, the fracturing of global trade into blocs and the increasing levels of protectionism within the key Western economies (other than those, like Australia and Canada that are reliant on free trade) is almost certain to continue.

When US Trade Representative Katherine Tai arrived in Abu Dhabi for the WTO meeting she said she was very optimistic that it would help improve the effectiveness of the organisation.

That was only days after she released her office’s annual report to the US Congress on China’s compliance with the WTO’s rules. It was incendiary.

“As is well documented,” it read, “the Chinese government and the CCP (Chinese Communist Party) routinely intervene in the market using a wide array of non-market policies and practices, both to provide artificial competitive advantages to Chinese industries and enterprises and to actively disadvantage foreign industries, enterprises and workers.”

The report said foreign companies were competing not only against their Chinese counterparts but the Chinese state.

China has changed its economic strategy markedly since being admitted to the WTO in 2001.Credit: Bloomberg

It said it was important to highlight that China had not simply continued to pursue what it described as a “socialist market economy” when it joined the WTO.

“China’s so-called ‘socialist market economy’ has turned decidedly predatory,” it said, targeting traditional and emerging industries by providing unprecedented financial and regulatory support for its own industries while actively pursuing policies and practices that were calculated to “disadvantage and ultimately displace” foreign competitors.

China’s efforts were relentless – “it does not act with moderation.”

There’s a lot, lot more of similarly charged commentary in the report.

With China’s EV, battery and solar industries having the capacity to supply their domestic market several times over, there is such latent overcapacity in those sectors – and others – within China that the threat of China’s excess inventories being dumped into their markets is unnerving policymakers in the West.

This is not the world envisaged when the WTO was established, nor when China, which was opening up its economy and was pursuing more market-oriented policies – policies that have been reversed under Xi Jinping – was admitted to the organisation in 2001.

Absent an almost inconceivable U-turn in China’s economic strategies – a complete remaking of its economic and political models – its determination to dominate key industries and technologies will provoke increasingly hostile and protectionist responses from the US and Europe and other major Western economies.

Global trade will be further fragmented even if Trump doesn’t come along to ignite a new global tit-for-tat trade war and undermine America’s key trade relationships and alliances.

The WTO might still be able to play some sort of role at the micro level, assuming its governance can be restructured and its ability to function improved.

That would, however, be quite a modest ambition for an organisation that was created to help pursue a bold and idealistic vision of increasingly free and open markets and trade that would, unlike the zero-sum outcomes of protectionism, benefit both developed and developing economies.

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