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- [00:01]
A
I'm Scott.
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B
I'm Bill and we're the Trade Guys.
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C
You're listening to the Trade Guys, a podcast produced by CSIS where we talk about trade in terms that everyone can understand. I'm Phil Luck and I'm here with Scott Miller and Bill Reinsch, the CSIS Trade Guys. Thanks for listening to the Trade Guys Today in a special live recording, we're discussing the future of globalization. Is the rules based order dead? And if so, what comes after all this and more on the Trade Guys. Hello everyone and welcome back to the Trade Guys. I'm Philip Luck, Scholl chair and international business and Economics program Director here at csis. I'm here with Bill and Scott for a live recording of the Trade Guys. And today we thought we'd zoom out a bit and ask some of the big questions. Is globalization dead? Is the rules based system over? And if so, what's replacing it? And will tariffs last longer than the Trump administration? And if so, how will that reshape the American economy? And if it does reshape the American economy, will the American people connect the dots? We'll unpack all this, the politics, the data, and the big picture. So, Bill, I want to start with you with the first question. Obviously, you know, an easy one over the middle of the plate. Is globalization dead? What does that mean? We say that a lot. And what does that mean about where we go from here?
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B
Well, first I need to point out to our listeners that this is live so we're lined up actually in person. This is probably the first time Scott has been to my left throughout all of the podcasts. I'm delighted to be in the center and I apologize for my voice and my, my cold. I've had it for a long time. It's going away with great reluctance, but it is going away. We've talked about globalization in the past. My view has always been, I think, sunnier than some other people's. I don't think it's dead. I'm not even sure it's on life support. It's clearly, I think, going on anyway. And the reason it's going on is because the tools that enabled it haven't gone away. And those tools are enormous reductions in the cost of transportation. Think containerization, enormous reductions in the cost of communications. Think cellular communication and basically the digitization of the economy. All of those things transcend boundaries. They're all global. They're not going to be uninvented. The world is going to continue to take advantage of them. Economic linkages are going to continue. What we've seen is it's not so much that trade is declining, although you can argue that growth is slowing, but it's not declining, but it is rearranging. And it does appear that countries are trading more with like minded parties. It's odd that ideology would actually come into this sort of thing. But democracies are trading more with democracies and authoritarian states are trading more with authoritarian states. I think the other reason it's rearranging is that, you know, the message that the Trump administration has sent really in the trade field is the United States is no longer a reliable trading partner and other countries are doing the obvious thing in that situation. They're finding other partners. And that's what we're seeing going on right now. We've got, you know, the EU making deals with Mercosur, Mexico, Indonesia negotiating with India, Australia and the UAE and Malaysia, the Philippines and Thailand. India has a deal with after the non EU members countries in Europe. It's negotiated with New Zealand, China, Chile and Russia, their BRICS negotiations there. The UAE is negotiating with six or seven different countries. Mercosur is reaching out as well. It's got a deal with EFTA negotiating with other countries. So this is all going on around us. And the interesting thing about these negotiations, they're not all going to get to the finish line. I mean, negotiations don't always succeed, but most of them are surprisingly conventional. They're negotiating open markets, they're negotiating lowering tariff barriers, they're negotiating getting rid of non tariff barriers. It's very conventional, which is maybe one reason why they're not all going to get to the finish line. But the noteworthy thing for the United States is that it's happening without us. We're on the sidelines. And so globalization might be dead for the United States temporarily. I don't think it's dead for the world. And I'll stop there.
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A
I actually agree with Bill about the technological basis for globalization. In fact, over the years I've come to look at globalization, whatever we mean by that word, as a distinctive form of technological progress. It's the kind of technological progress that reduces the barriers of the movement of goods, people, ideas and culture. And that comes in a variety of ways. It comes in seen and unseen ways. It comes with a movement of people, easier movement of people. And so I do agree with Bill. One thing about technology is once an invention is demonstrated as beneficial, you don't you never forget it. I grew up in northeastern Ohio, which is the current happy hunting grounds of my Religious kook ancestors, the Amish, which is a true story for me. I'm a Swiss Anabaptist by roots. But there's a hardware store in that part of the country called Lehman Hardware and they specialize in tools and equipment and implements for non mechanized application. So if you want an apple peeler that is not run by electric power, Lehman Hardware is the place to go. And I learned from the people at Lehman Hardware that once you have a useful invention, it never goes out of production. You can access tools that were patented in the 18th and 19th century that are still made today because they're useful tools. So human beings don't forget we're toolmakers because of the amount of energy we devote to our cerebral cortex. But we, once we figure out how to use a tool, we don't forget it. So Malcolm McLean, he put a trailer of one of his trucking fleets on board at the deck of a ship in 1956. That was the beginning of container shipments. Could have been invented at any time, but the world moved to container shipments thanks to Malcolm McClain doing it the first time. But we're never going to forget how to use the technology that's embedded in container shipping. So that's the first principle. Second is that there are natural limits. And we found the natural limit to information and communication globalization in about 2007. So if you look at the broadest possible measure, which is the share of GDP that is traded of total global output, however you want to measure that, before the Industrial revolution, It was about 5% and 5% back into time. The Industrial revolution destroyed distance. Okay, all of a sudden industrial, it was easy to move things a long distance. The cost of transportation dropped dramatically and the cost of scale production dropped dramatically because of steam power. The combination of those two forces brought the share of traded goods as a total, as a share of the total economy to about 25%. And we got it back down to 5% in 1947. So we're surely capable of destroying globalization. But it came right back. Once again, this cycle started over with information and communication technology peaked in 2007. The best measures of that, the more aggregate you get, the more you include everything, the fuzzier the measure gets. But it pretty much peaked at 30, 31, 32%. Now there's a lot of things that aren't globalized. Haircuts aren't globalized. Services delivered personally are not globalized. So they have global ideas, they have global brands behind them, but the services itself. So you can't get to A hundred and thirty seems low. And so I think there's upside potential. It takes cooperation, though. The technology is still there and the win, win nature of bargaining and trading among individuals still, deals don't happen unless they're mutually beneficial. And that mutual benefit in exchange of both goods and ideas is still an underlying driving force. We can certainly get in the way, which we've done recently and we'll probably do again.
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C
I agree with your optimism, I think, but I want to push back slightly. So, I mean, to your point, Scott, like we've definitely gotten away in the past. I mean, the 1940s for instance. And Bill, to your point, I mean, it's reorganizing, but I think we do need a sort of system of rules that sort of support this free engagement. So we'll certainly sort of see that probably deepening, hopefully with sort of like minded countries, as you said. But as we see trade getting more and more weaponized, to me it actually doesn't. It's not that surprising that we're seeing trade move more with ideology because to the extent to which you are worried about those who don't share your ideology, weaponizing trade against you, sort of reducing your vulnerability seems like a good or a rational thing to do. And one thing I want to say, Scott, you're exactly right on merchandise trade. This sort of peaked in the following the Great Recession. Services trade continues to grow quite robustly. It's about 60% of all growth in trade, even though it's a much smaller base. So there we see things. But of course, that's an area where, at least for now, we have far fewer barriers to trade. So, you know, at least for today. So, I mean, if we see continuing devolution of relations between ourselves and more autocratic regimes, what do we think? This, you know, okay, if globalization is not going away, what is it going to look like?
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A
Well, a couple of thoughts. One is it's been obvious to me over the past eight years now to almost 10 years that once a barrier is applied, it's very difficult to remove. Okay, so President Trump's first administration 1.0, had the Section 301 dispute with China, which had a lot of tariffs put in place. Don't want to sound like Ben Stein and Ferris Bueller's day off, but does anybody remember how many of those tariffs were reduced in the Biden administration? Anyone? Anyone? Zero. Okay. All right. And some of that is the nature of bargaining when it comes to trade. Negotiators are well trained not to give away something for nothing. And so in the absence of some bargaining mechanism or an incentive, once a tariff's applied, stays in place. It's the history, really, of, since the great financial crisis in 2008, is that the number of additional trade restrictions has increased every single year. There's a terrific group, Global Trade Alert, based in Geneva, that publishes a lot of statistics on global trade. They're very reliable, as these groups go. And it's clear that pre Donald Trump, this was not the Garden of Eden of free trade, nor was it on the planet. Okay. There are lots of trade barriers. Once applied, they tend not to be retracted, and the accumulated burden has only grown. And that's without the sequel of Donald Trump.
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C
Totally agree with that. I was in the Biden administration when we were doing the review of those tariffs. Now, those of you who remember, you know, during the campaign, those tariffs were talked about as being entirely unstrategic and a bad policy and raising costs for consumers. Then the administration got into place. You know, there's a lot of talk about bidenizing the tariffs, making them smarter. And to be fair, they were not especially strategic in the first Trump administration. They were basically the result of four phases of a trade war. We had tariffs on everything from, you know, sneakers to advanced machinery. And when we were in the administration, we were arguing I should back up a second. These tariffs were put in place in response to Chinese theft of intellectual property, which is absolutely unfair practices. Yeah, exactly. So this was punitive. Right. And so our argument was, if you want them to be punitive, but you want them to be more effective, you should raise them on things that are more strategic. That'll increase the cost for the Chinese party even larger. And you should reduce them where we're paying most of the tariff. And it's not as strategic. But as Scott's pointed out, when you finally get to the idea of lowering tariffs on any particular product, there's a domestic constituency who shows up and says, well, hey, now that things are pretty good now with that. So it was incredibly difficult. We were able to raise them on certain things. I mean, you know, 100% tariff on EVs, for instance. But, yes, it's incredibly difficult. What does this mean? What does this sort of inertia and stickiness mean for what we should be thinking for in the trade policy? Okay. That. Let's think a little bit more about sort of, okay, globalization's not dead. Right. Great. Bill and Scott have told us it's. It's alive and well. I guess maybe it's alive.
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A
It's alive.
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C
So what does that mean for the rules based trading system. So I, I think I agree with you both that look, trade is a technology in some sense. We don't forget that it exists. We don't forget that it's useful. But it is certainly bolstered by and supported by a set of rules that make it easier. That rules based system is at the very least under a lot of strain right now. So let's think about so for instance, the WTO bill mentioned sort of all these sort of bilateral agreements. What do you see as sort of the future for multilateral arrangements? And if those are sort of going to be on life support, what will come up in their stead?
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B
I think we're heading for plurilaterals, coalitions, the willing. You've seen that even in the WTO with the Investment Facilitation Agreement and the E Commerce Agreement, which is under negotiation, countries that want to be more ambitious than the whole organization is capable of are getting together and trying to be more ambitious on their own. It's interesting in this case that this is not a new phenomenon. This has been going on for some years. And the culprit is not really Donald Trump. I mean, he's one of the culprits, but he's not the creator of the problem. I would argue the creator of the problem really is India, whose basic approach has been we want what we want and if we can't get what we want, we'll make sure nobody else gets anything. And they have regularly objected to the continuation of the E Commerce moratorium, for example, and even to the inclusion into the WTO rulebook collateral agreements that 121 other members have signed on to that didn't include the Indians. And that fact in the investment case didn't include us either. But we were not the ones that stopped it from being incorporated into the wto and it still would apply only to the people that signed it. So this is an odd position to take. It's sort of saying, you know, I'm annoyed because I'm not getting what I want, which has to do with public stockholding and agriculture. But because I'm annoyed at that, I'm going to make sure the rest of you don't get anything that's forced the organization to follow more of a plurilateral path. And that seems to be where we're going sometimes that's abused. The WTO rules have room for that. Article 24, which allows for regional bilateral pluralateral agreements. The catch is they're supposed to cover substantially all trade and the reality is of the 600 or so that have been notified over the years, most of them don't, largely because most of them don't include agriculture, which is a sensitive topic. But the rules also say that if you are making progress toward covering substantially all trade, you're okay. This has come up, it continues to come up with the Trump deals and then came up in the European Parliament. European Parliament has to act on that deal. The United States Congress has not been presented with this interesting contrast there. But the parliament has to vote on it. And a number of members of the Parliament said this doesn't fit the rules. It's preferential. It's not most favored nation. You're giving a deal to the United States you're not giving to anybody else, which is true. And the response from the commission really was well, yes, but we're working on it. This is a deal in progress and we're trying to get to the substantially all trade point. You can believe that or not, but I think the rule is being stretched here. It's not that elastic. We'll see what the parliament does with it. What's happening is some degree of, I hate to use the word fragmentation, although I think in the digital economy you're going to see more of that as different countries pursue different rules on privacy and data localization and free flow of data. But in general, I think we're going to be stuck for the time being with plural laterals. And I think the task of people that want to build them is to make them as inclusive as possible, as big as possible. And the theory of them is we're going to do this thing on E commerce or whatever it is, and we're going to grow faster than new people that didn't sign up for it. And over time, that's going to show up and that's going to inspire the rest of you to join up because you're going to want to grow as well. That was the idea behind the Information Technology Agreement, for example. So we'll see what happens. It's a little bit early to draw that conclusion, but that's the idea.
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A
You know, I agree with Bill that the system isn't working, but I want to start from a different point. We which is it's nobody's fault.
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B
Oh, yes it is. And here's what don't let the Indians off the hook.
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A
We'll keep Bill's caucus intact. But here's, I think, the best way to understand what's going on with a lot of the institutions that we rely on in the post war era is of course, I think the notion of rules based open trading system was a great contribution to peace and prosperity. I think it was a miraculous idea that had broad public support and worked extraordinarily well to benefit many, many people around the world. So I have only the highest regard for the rules based system as expressed in the GATT in the wto. But I'm with George Friedman here. George Friedman wrote a what I thought was a prescient book about a decade ago called the Storm before the Calm. And there was a book about institutional cycles of the American government. And he noted that we have some institutions, many of them created in the post war era which are no longer solving the problems they once solved. They're out of steam, they're unable to resolve it just because they're underlying the world itself. And the government itself has changed so much since then. And so my reaction is that's probably what's happening. And you can tell the lethargy that has crept into the trading system. When you think about the last time a multilateral, relatively comprehensive trade round was launched was 2001. It was the beginning of this century. When's the last time anybody here has heard about the Doha Development agenda? That's like a Wikipedia question these days. It turns out that what was supposed to be a three year round of market access and resolving some ongoing concerns by developing countries lumbered on into sort of zombie status until 2015 or 2016, where it was quietly put out of its misery and the members of the WTO discussion decided to stop talking about it because it was, you know, it was upsetting things that the pro du lac lunch wasn't nearly as convivial when we talked about the dda. So we're not going to talk about it anymore. I mean, that's what happened to multilateral trade in a nutshell. Nobody wanted to make it work. And so I think what's happening here is that's a reflection of the fact that the institution, whatever it might have been, is no longer well positioned to solve problems. Bill may have the solution, or he certainly has a partial solution. And I think that's the storm we're in right now is figuring out what are the other possible solutions that can get us somewhere positive by acknowledging that the old system is incapable of doing what we once expected it to do.
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C
I want to follow up on that really quick. So I'm curious if you guys think it's incapable of what you used to be able to do or if we've sort of set out objectives that are simply not fit for the time. Right. So for the Doha Round, I would say that basically great objective in 2002 or so, when it started. By 2009, when the Obama administration came in, the Doha Round was largely around development and sort of basically relaxing rules for developing countries that they didn't have to meet certain standards, you know, at certain levels. This would include China. By 2009, we were in a fundamentally different world with a China that had completely developed. The idea of sort of putting them on a sort of an easier track or not making them sort of come to the same standards other countries was simply untenable. So I think that, to me, is a point where, again, for the time, it was perfect, but we had simply didn't update the objectives to the world we were in.
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A
It was a balanced agreement when it was concluded in 2001. Right.
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C
But 2001, 2009 were very different worlds.
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A
World changed. Right, exactly. And it stayed a balanced agreement for maybe about three years, but not nine. You're right.
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C
Right, right, exactly.
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A
Nobody had the interest in moving it.
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C
Right.
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B
I can tell you a story about that. I had a long conversation with Shu Schwab about this, who was US Trade Representative in 2008 when initially sort of went down the drain. And I asked her what happened, and she said this wasn't a commentary on everybody, but she said her problem as the USTR at the time, was that she couldn't find anybody in the business community, meaning you guys around the table, that would be willing to go into Congress and say, this is really important and we have to have this. And her conclusion was that the way the US System works, trade agreements don't pass themselves. There has to be some people out there in the private sector saying, we want this. We need this. We need this for our own production, for our own profitability, and are willing to go to their members of Congress and say, you need to vote for this because it's important. And she said she couldn't find anybody that wanted to stand up and do that. There wasn't enough in the agreement to make it attractive to American companies. Nobody was against it. I mean, everybody thought, this is a good idea. We're pro trade. You know, let's do this. But that wasn't the point. The point was not just to be forward and put out a press release. The point was whether CEOs would go themselves to the Congress and whether they would mobilize their workers to say, you need to support this. You need to tell your congressman or senator to support this because your job is going to benefit from it. And she couldn't find enough people to do that. So she was one of the people that pulled the plug. I mean, other countries had different reasons, but in our system, I mean, she had a point. I was a lobbyist at the time, and we were out there. The National Foreign Trade Council was out there. We need to finish this. This is great. It's really important. I went to a couple of ministerials and discovered mostly that I sat around the lobby talking to the same people that I talked to here, waiting for someone to emerge from behind closed doors and give us a bit of gossip. But I didn't detect enthusiasm. You know, I didn't have my members banging on the door saying, you know, we really need this, we have to have this. They would say, well, it's a good thing, you know, we're for it. And what we discovered in the US Process is that's not enough. The next problem became, and I reason and Scott alluded to this, is we then entered an era where China began to loom much larger as a force in the multilateral system, but also as a disruptive force economically. And we are now contending with two elements of that. One is overcapacity. The Chinese refer to this as involution, which is a wonderful word, but I don't know what it means. It means, appears to be a nice term for we're making too much stuff and we don't know what to do with it.
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A
So we'll sell it to you.
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B
So we'll sell it to all of you. Yes, that's part of the problem. And the other problem, which we haven't talked too much about yet, is the extent to which they pose a national security challenge, not just for us, but for a whole bunch of countries via a variety of things, mostly cybersecurity related issues and hacking issues. And you see this. We've seen basically the disappearance of trust. A lot of trust is disappearing between our political parties, between branches of government. Actually, with the judicial system and certainly with China, we don't trust them anymore. And that's complicated, the trade perspective, because it's very easy to find. I mean, look at Trump. He's finding national security threats everywhere. Kitchen cabinets, bathroom vanities are threats to our security. Trucks are threats to our security. I mean, the statute opens the door to that. In the beginning, it kind of made sense. Semiconductors, right? Pharmaceuticals, steel, you know, could debate that one. But we're getting farther and farther away from the concept. But it's all based on this fundamental idea that we don't trust the Chinese to do anything.
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C
Really importantly, though, all of those measures are not country specific.
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A
Right.
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C
I mean, this is an issue that even lumber and furniture, it's Vietnam and Canada also included in those actions.
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B
Well, he starts to grant exemptions then. And even Brazil got an iron ore exemption.
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C
All right, Well, I think this is a great place to end because I agree with both of you. All right, so that's it for this session. Thank you so much. I'll hand it back over to you. You've been listening to the Trade Guys, a CSIS podcast. For more audio content, visit csis.orgpodcasts thanks for tuning.