When China joined the World Trade Organization (WTO) the expectation was that this would reaffirm commitments to an integrated global economy. But multilateral negotiations in the WTO have hit major roadblocks and have failed to address new mercantilist policies.
Unfortunately, the U.S. has taken the lead in a retreat from global economic integration. U.S. trade policy is now focused on ‘friend-shoring’. Tariffs and other trade restrictions are designed to shift supply chains from China and its allies, to benefit the U.S. and its allies. The U.S. has also contributed to regional fragmentation, e.g., the Indo-Pacific Economic Framework for Prosperity.
China has responded with its own countermeasures, boosting tariffs and trade restrictions on the U.S. and its allies. China pursues industrial policies to divert supply chains toward its own industries, imposing tight controls on exports from high technology industries. China also pursues mercantilist policies through bilateral and regional trade agreements.
The challenge now is to restore commitment to an integrated global trading system. If multilateral negotiations in the WTO have failed, new approaches must be pursued. We propose plurilateral negotiations within the framework of an international ‘Free Trade and Investment Agreement’.
Since we do not have one dominant player to the world economy, such as Great Britain in the 19th century, or the U.S. in the post-World War two era, plurilateral negotiations should be led by the dominant players in international trade and investment, the U.S. and China. But membership in a Free Trade and Investment Agreement should be open to any country willing to commit to the rules and conduct of a globalized trading system. Trade and investment policies pursued by member countries could not discriminate between different foreign countries.
A ‘Free Trade and Investment Agreement’ could give the major players, the U.S. and China, as well as other countries, an opportunity to pursue plurilateral negotiations to restore a global trading system. Negotiations could focus on distorting practices that have been roadblocks to reform in the WTO. With leadership from the U.S. and China other countries would have an incentive to join.
Even if a ‘Free Trade and Investment Agreement’ provides common ground for restoring a global trading system, there will be some areas where countries will not agree, such as legitimate national security issues. Plurilateral negotiations could also provide a forum for discussing and resolving these national security concerns. While members must have the flexibility to pursue unilateral policies on national security issues, there must be guardrails to limit the negative impact of unilateral policies on other countries.
Pluralist negotiations within a ‘Free Trade and Investment Agreement’ could be accompanied by renewed support for multilateral negotiations within the WTO. Some issues, such as tariffs, are best resolved through multilateral negotiation in the WTO. Using a ‘Trade and Investment Agreement’ to break the deadlock on distorting issues could set the stage for reaffirming commitments to multilateral trade negotiations in WTO.
A precedent has now been set for plurilateral negotiations and a ‘Free Trade and Investment Agreement’. The U.S. and China have reopened channels of communication to address the mercantilist policies that are distorting trade and investment. These discussions include arms control and non-proliferation. The U.S. has also extended an olive branch to Russia to engage in similar discussions but has not received a response to this invitation.
Thus far the discussions between the U.S. and China have been informal. A ‘Free Trade and Investment Disarmament Agreement’ would establish a permanent institutional framework for plurilateral discussions. Discussion of economic issues could also set the stage for resolving a wider range of issues, including military conflicts in the Ukraine and the Middle East, and proliferation of nuclear weapons.
As Milton Friedman argued, we have underestimated the potential for authoritarian regimes to impose repressive measures on their citizens and others. But this should not prevent the U.S. and China from taking the lead in creating a ‘Free Trade and Investment Agreement’ and reaffirming their commitment to a global trading system. The U.S. and China have the most to lose if deglobalization results in Armageddon, but we don’t need to repeat the mistakes of two world wars and a Great Depression.