New trade paradigm defies post-WWII world US built

The American physicist and philosopher Thomas Kuhn observed, once in a great while in a given area of human endeavor, things change in a big way. The old orthodoxy collapses and is replaced with what he called a new paradigm.

It is becoming increasingly obvious that a Kuhnian-style paradigm shift in trade policy occurred in November 2016 with the ascendancy of Donald Trump.

{mosads}The outlines of this paradigm shift and the changes they augur are not mere “tweaks” or a “modernization” — they signal an historic course shift in U.S. trade policy that will present unprecedented challenges to America’s trading partners, American politics, our economy and the present domestic and international trading rules. Below is the outline of the emerging new paradigm.

Free trade is out, free, fair, reciprocal trade is in.

For over six decades, the U.S. focused on combating anti-trade ideologies and reducing trade barriers, both at home and abroad, through successive rounds in the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization (WTO).

Politically sensitive sectors, such as sugar for the U.S., would be protected with import quotas or tariffs by “paying” in other sectors, which meant that tariffs for specific sectors would not necessarily be reciprocal.

Under the new paradigm, the U.S. will no longer go after any and all trade barriers. Instead, we aim for a trade policy that is strictly reciprocal and “fair” (which at times is defined as not producing a trade deficit).

Creating opportunities for business is out, outcomes are in.

The old paradigm aimed to reduce trade and investment barriers, thus creating opportunities for U.S. business to be free to do business worldwide. The new paradigm shuns opportunities in favor of trade with a specific outcome, that is, elimination of trade deficits.

The old goal of creating worldwide trade and investment opportunities for U.S. business based on the belief that trade benefits most everyone has been dethroned by directed trade-deficit reduction via tariffs, quotas or other means.

A pre-1990 fixture of U.S. trade policy, so-called Voluntary Restraint Agreements on specific imports, could make a comeback.

Global sourcing is out, “Made in USA” is in.

Many overseas investments are trade-related, so under the old paradigm, the U.S. sought to maximize global opportunities for U.S. business by working to reduce investment barriers worldwide.

With enthusiastic support from U.S. businesses (whose representatives dominate U.S. trade policy advisory bodies), investment chapters became a standard feature of trade agreements, and U.S. agencies were created to help reduce political risk for companies wanting to invest abroad.

This effort was consistent with the broader post-World War II foreign policy goal of fostering American economic and political values worldwide. Along with improvements in communications and reduction in transport costs, this effort led to today’s economic globalization with its global supply chains.

The new paradigm seeks to stop and even reverse globalization — investment overseas will not be encouraged through trade agreement provisions and will be discouraged via jawboning and other means.  

A rules-based international trading system takes a back seat to bilateral, deals based arrangements.

For almost 70 years, the U.S. created and nurtured the WTO and its antecedents, seeking to draw all countries into this system, with its rules and arbitration bodies. The new paradigm is sharply critical of this approach, citing the large trade deficits that the U.S. has sustained under this system.

The U.S. has made it clear that it is no longer willing to operate as the generous benefactor and leader of the world trading system and is pushing for a more reciprocal approach along with other major reforms.

While the U.S. remains within the WTO, the recent thrust of U.S. trade actions has been unilateral and focused on individual trading partners. The U.S. has shown little appetite for multilateral, international approaches (via the WTO or other fora) in dealing with current problems like worldwide steel and aluminum overcapacity and intellectual property violations. 

The new paradigm’s effects are likely to be far-reaching. Several of its dimensions are not conceptually consistent with current U.S. trade legislation, so some accommodation will have to be reached.

The old trade coalitions and dynamics within Congress are likely to be upended, with some traditional free-trade interests, such as the U.S. Chamber of Commerce, qualifying their support, while others who have been critical of orthodox U.S. trade policy will become advocates of the trade deals forged under the new paradigm.

On trade policy, voting patterns and party allegiances among the American electorate may see changes as well. 

Is America on the right course? The new paradigm calls into question the continuing central role of the WTO, and with it, the international rules-based system the U.S. has painstakingly built over decades.

More broadly, those trade rules, which remain a work in progress, are part of the liberal rule of law that has formed the foundation of post-WWII U.S. foreign policy.

For all of its imperfections, many regard this as the single greatest contribution of America to the world. Preserving that valuable legacy is possible — we can effectively address important issues such as chronic trade imbalances and unfair trade practices through a cooperative, rules-based international approach. U.S. leadership in this effort is more important now than ever.

Michael J. Delaney is a trade policy consultant for TransNational Strategy Group, a commercial, economic/political and policy consultancy providing services to private sector and sovereign government clients. Previously, Delaney served as a State Department Foreign Service Economic/Commercial Officer for 30 years.