John Bruton

Opinions & Ideas

Category: WTO

HIGH NOON IN BUENOS AIRES

The G20 meeting in Argentina, which took place last weekend,  simply postponed a confrontation between the US and China which could prove to be as momentous for Ireland as the Brexit vote in the House of Commons on 12 December.

Will a deal be possible in 90 days time?

The omens are mixed. Some US officials say China is offering nothing concrete to bridge the gap between the countries, just promises. President Trump is particularly sensitive about imports in the wake of thousands of lay offs by General Motors last week, which he blames on import competition.

President Trump has already imposed a 10% tariff on a wide range of Chinese goods in an effort to rebalance trade between the US and China. He has said he will increase the tariff rate from 10% to 25% on 1st January, if he does not get satisfaction from the Chinese.

He has threatened further measures to follow.

His concern is about the alleged theft on US intellectual property by China, Chinese subsidization of exports through state supported companies, and the supposed under valuation of the Chinese currency to boost Chinese exports.

A full fledged trade war could start if matters are not sorted out in the next 90 days.

One might think that a dispute like this might be referred to an arbitrator, who could adjudicate on the facts and the arguments. The WTO dispute panels are there to do this. But the US is refusing to appoint judges to sit on these panels, and President Trump has even threatened to withdraw from the WTO altogether.

A Trade War between the US and China would be very bad news for Ireland.

More than any other EU country, Ireland is dependent on the US as a destination for our exports. If the trade dispute with China hits US growth, the effect of that would be felt in Ireland more than in any other EU country.

As an export oriented country, Ireland has also invested heavily in building an export trade to China. We rely on a growing Chinese middle class to consume our meat and dairy products.

We also depend disproportionately on multinational companies, who use global supply chains, which would be disrupted drastically by a trade war between the world’s two biggest economies.

President Trump feels that China has gained unduly and unfairly from its membership of the World Trade Organisation (WTO) since 2001. Since then, while still being a state directed economy, China, through its membership of the WTO, has been able to get easy access to the markets of the world under the WTO’s Most Favoured Nation principle (MFN).

MFN requires a WTO member state not to discriminate between countries, and to charge the same tariffs of goods from all WTO members, including China, unless it has a comprehensive trade agreement with that other country (in which case it is allowed to discriminate in favour of that country).  

President Trump’s deeper worry is that China is using the profits it is making from its export industries to build its military and naval strength in the Western Pacific, where the US also has bases and alliances.

The US sees its bases in Korea, Japan, Thailand and the Philippines as defensive. After all, the US has had a military presence in the western Pacific, in the Philippines, since its war with Spain in 1898. But to China, these US bases, ringed across the sea lanes China uses to survive, are a threat.

To break out of its encirclement, China has increased its own military spending substantially. But it is still spending less than a third of the US defence budget.

So this is not a simple trade dispute that can be settled easily.  

China will continue to want to break out of ring of US bases on its eastern flank. Indeed its much publicised “One Belt One Road” initiative, to develop transport links from western China all the way to Europe, could be seen as an attempt to break free of its dependence on the Pacific sea routes, where it confronts the US and which the US could block in the event of confrontation between the two countries. Japan faced a similar situation in 1941.

The growing trade dispute is already having an effect. China’s economy is showing some signs of stress. New car sales there have declined. Corporate borrowing is high and could be hit by a rise in interest rates, which might be forced on China if it needed to revalue its currency to meet one of President Trump’s complaints. The biggest increase in global debt in recent years has been in China. It is an important element in the global banking system. A slowdown in China would affect the rest of the world.

China acknowledges it has a surplus in goods exports to the US, but believes this is compensated by services exports by the US to China, and by the privilege to US enjoys because its currency, the dollar, is the world’s reserve currency.

To an extent, China and the US are talking past one another. The Americans are even complaining about having to translate Chinese trade proposals from Chinese into English!

Given the complexity of the rivalry between the US and China, the best outcome one can hope for in 90 days time is a some form of combination of minor agreements and postponements.

The really important battle for Ireland and for the EU will be that of defending and strengthening the WTO.

Arbitration, rather than confrontation, should be the way to resolve trade disputes.

WORLD TRADE DEAL IN BALI IS A BIG BOOST TO CONFIDENCE

Globalisation has meant that, no matter where we live in the world, we are liable to be affected by what happens very far away.

An environmental disaster, a financial panic, or a disease outbreak, in one part of the world can quickly affect people on the other side of the globe. No country, no matter how big, prosperous, or well armed is really an island any more.

The world, and its problems, were easier to manage (perhaps unfairly), when a small number of countries had to give their consent to any global agreement or rule.

This was especially the case during the century when most of the world’s surface was controlled by a few colonial empires.

It remained the case, when most of the major international organisations were founded, in the aftermath of the Second World War. Indeed that War, and a desire to ensure it was not repeated, forced nations to go beyond national sovereignty, and find new institutions to allow joint actions on a global scale.  Initially these institutions worked  easily enough because a cartel of big countries, the ones with permanent seats and vetoes on the UN Security Council, could both set, and decide, the issues on the agenda.

That world has gone.

The number of countries enjoying legal sovereign status has increased dramatically, so unanimous agreements are harder to achieve, The number who can  say “no”, on questions to which everyone else is (however reluctantly) is saying “yes”, has increased out of recognition.

Meanwhile, economic power, and thus the ability to pay for military power, is shifting. 

The world may soon have several policemen, with conflicting mandates, rather than a single (American) policeman.

China is testing the old order in the East China Sea at the moment.  This new multi polar order may seem fairer, but it will not make the world safer. 

At times, it seems as if it had become impossible to agree anything on a global scale. 

The bleakest moment was when the Climate Change talks collapsed in Copenhagen. The invasion of Iraq was another such dispiriting moment.

Now, with little notice, signs of hope have  appeared.

An interim deal with Iran on its nuclear programme has been agreed, although Israel (which officially has no nuclear capacity but actually in the only nuclear weapons power in the Middle East) is not happy.

And then, out of the blue it seemed to many, a world trade deal was concluded, by the 160 member WTO, in Bali last weekend!

During my time as EU Ambassador in Washington, I saw the draining away of hope that a world trade deal would ever happen. This was soul destroying, because the WTO seemed until then to be the only global organisation which really worked, and whose  disciplines were uncomplainingly incorporated by nations into their domestic law.

Now a deal has been put together  in Bali which will reduce the cost of trade by  10% to 15 %, by simplifying and standardising custom procedures. Limits will be placed on export subsidies.

The WTO disputes resolution procedures (a sort of World Trade court) will see their credibility restored by this breakthrough, because the organisation behind them, has shown it can actually make decisions, after all. That was a good week end’s work.

This will also help restore business confidence more generally , in ways that will have little to do with the ostensible content of the the deal in Bali.

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