From UPSC perspective, the following things are important :
Prelims level : Nothing much
Mains level : Global Trade
The growing trade war between China and the USA does not hold good news for the world.
Background of the multilateral trading system
- For much of the last century, the US managed and protected the rules-based trading system it created at the end of World War II.
- That system required a fundamental break from the pre-war environment of mutual suspicion between competing powers.
- The US urged everyone to see that growth and development for one country could benefit all countries through increased trade and investment.
- The US served as a benevolent hegemon.
- The system’s multilateral institutions, especially the IMF, helped countries in dire need of funds.
- America’s power stemmed from its control over votes in multilateral institutions, both directly and through its influence over countries in the G7.
- Most countries trusted the US would not misuse its power to further its national interests, at least not excessively.
- The expansion of rules-based trade and investment opened up lucrative new markets for US firms. America granted some countries access to its markets without demanding the same level of access to theirs.
- If emerging-markets expressed concerns about the potential effects of more open trade on some of their workers, economists were quick to reassure them that any local pain would be outweighed by the long-term gains.
Impact of trade
- Trade affected domestic workers unequally, but now moderately educated workers in developed countries bore the brunt of the pain, while higher-skilled workers in urban service-sector industries flourished.
- Policymakers in advanced economies reacted to the backlash against trade in two ways.
- They tried to impose their labor and environmental standards on other countries through trade and financing agreements.
- They pushed for far stricter enforcement of intellectual property (IP), much of which is owned by Western corporations.
The case of China
- This resulted in the rise of China.
- Like Japan and the East Asian tigers, China grew on the back of manufacturing exports. But, unlike those countries, it is now threatening to compete directly with the West in both services and frontier technologies.
- China has adopted labour and environmental standards and expropriated IP according to its own needs.
- It is now close enough to the technological frontier in areas like robotics and Artificial Intelligence.
- China’s burgeoning tech sector is enhancing its military prowess.
- Unlike the Soviet Union, China is fully integrated into the world trading system.
Breakdown of world trade order
- Advanced economies find that higher regulatory structures and standards they adopted during their own development now put them at a competitive disadvantage vis-à a-vis differently regulated emerging-market countries. A
- These countries resent external attempts to impose standards such as a high minimum wage or ending the use of coal.
- Emerging economies have delayed opening their domestic markets to the industrial world. Developed country firms are especially eager for unfettered access to the attractive Chinese market.
What does the future hold
- China can be slowed but cannot be stopped. A powerful China must see value in new rules, even becoming a guardian of these rules. For that, it must have a role in setting them.
- One can hope that China and the US will, avoid opening up any new fronts in the trade and technology war.
- There is a dire need for negotiations.
- Countries need to negotiate a new world order which accommodates multiple powers or blocs rather than a single hegemon.