For a superpower like the United States, free trade is, in practice, an invitation to partake in its wealth. But it also implies an obligation, including political support (or at least non-opposition) and an expectation that the poorer nation will give back part of its new riches by buying the superpower’s high-tech exports and debt. This, in essence, is the system that has worked wonders for the U.S. for nearly 75 years.
From 1978, the People’s Republic of China signaled its acceptance of this invitation with “economic free zones” in several of its provinces, which began to open up the Chinese economy to the outside world. It was an extraordinary moment, when former enemies the U.S. and China willingly chose a new path focused on trade.
Then in 2001, after more than two decades of a relationship characterized by mutual admiration, mistrust, and suspicion, China joined the World Trade Organization (WTO) – and over the next 11 years, further built up its relations with the United States.
But China did not play completely fairly. It subsidized and protected its nascent industries, manipulated its currency, and forced technological transfers (meaning that foreign companies had to enter joint ventures with local firms, sharing their technology and intellectual property).
At the same time, China did not abandon its communist system as the U.S. would have liked. Nonetheless, it was getting richer – and companies from other advanced economies were in turn benefiting from its new wealth.
Between 2012 and 2015, China made some serious missteps from the the United States’ point of view. The Chinese government made clear it had ambitions to surpass the U.S. both economically and militarily. As such, the “obligation” that arose when it accepted the United States’ free trade offer was effectively voided.
On top of this, China was shutting down its market to some of the most innovative, fast-growing and strategic U.S. companies – namely Alphabet (Google) and Meta (Facebook and Instagram) – shattering the expectation of reciprocity that free trade implies.
Donald Trump’s first election win in 2016 was symptomatic of the breakdown of this old order as the president denounced trade agreements like NAFTA, started trade wars with China and the EU, and imposed tariffs. His re-election marks the definitive transition to a new order.
Trump’s vision for international trade is highly transactional, where countries fight for market share and access to resources. Economic gains for some nations spell losses for others. This, arguably, is the definition of unfettered mercantilism – a protectionist system where countries try to maximize exports while minimizing imports.
Trump’s proposals to integrate Canada and Greenland, and reintegrate the Panama Canal, into the United States – as he mentioned again in his inaugural address – exemplify this vision of global trade. Danish sovereignty over Greenland now appears less acceptable to the U.S., in a world where China is a formidable economic adversary. Resources, in particular the rare earth minerals used in the manufacture of batteries for electric vehicles, might be a large motivating factor.
Capturing more market share for China’s exports has long been an aim for its manufacturers. China did this very well in a rule-based trade system where the country was able to defend itself at the WTO from accusations of dumping (selling its goods abroad below the cost of production) and other unfair trade practices. But it’s far less clear how the country will sustain this in a more protectionist world.
Pursuing greater market share through short-term dumping might become self-defeating. Foreign markets could close completely to Chinese exports when governments – at least, those powerful enough to resist diplomatic pressure from China – realize their local industries are being hit. Recent data showing Chinese trade increasing while its corporate profits are declining points in this direction.
Unless there is a major political breakthrough in relations with the United States under Trump, China is likely to be pushed to retaliate by putting up even more trade barriers, such as tariffs and regulations.
Historical lessons from the last mercantilist era – from the end of the Spanish Golden Age to the French Revolution – tell a story of ever-changing alliances and ruthless political and economic competition between nations, as well as constant conflicts. Now, too many contemporary signals – including trade wars, challenges to long-term alliances and trade agreements, and the stockpiling of key materials – point toward this pattern for the world to ignore them.
For business leaders, this will have important consequences. Concepts like comparative advantage, economies of scale and the flexibility of being able to manufacture in various parts of the world – which have driven the rapid growth of international trade in the last four decades – are likely to become less important.
Instead, security, strategic sectors such as energy and mineral mining, and industrial policy will take precedence. This could change business leaders’ perceptions of risk, how trade networks are structured, and the flow of global investments. And for consumers, higher prices and reduced choice might also become more apparent as the consequences of this new trade order begin to materialize.
This article was originally published on The Conversation. Read the original article.