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Trade Tensions: It's Not Trump or Biden, It's the Discontents

12 Apr 2024
By Ken Heydon
Annual Meeting of the New Champions. Source:  WEF /

Geo-strategic rivalry and concerns of supply-chain vulnerability are driving the weaponisation of trade policy for other goals. But suppressing and distorting trade is bad for global growth and development, and ineffective in attaining those other goals. Some key Australian activities are directly in the firing line.

The evidence is there to see. The stockpile of G20 import restrictions has grown more than tenfold since 2009, and continues to grow. And the increased frequency and complexity of distortive subsidies is – according to a collective report by the IMF, World Bank, WTO, and OECD – bringing significant discord to the trading system.

But on some counts, it might be argued that there will be an easing of the commercial tensions between China and the Western democracies which lie at the heart of the trade-weapon campaigns that are being waged.

China is not the Soviet Union and does not seek to overthrow capitalism. Indeed, China may be seen as less threatening. As its reform momentum slows and it becomes, respectively, more inward-looking, it is likely to focus more on its domestic market; beomce less attractive to foreign firms (as suggested by Apple’s shifting of iPhone production to India); older, with a fertility rate of 1.3 children per woman, well below the 2.1 needed to keep a population stable; and less dynamic, with productivity stagnating after showing impressive growth in the 2000s.

The reading that a less dynamic China will be a more compliant partner is, however, far too sanguine. China will remain a major power, posing an increasingly important challenge to Western technological leadership. Under Xi Jinping, China will continue to see the world in combative terms, exemplified by his call  at the twentieth Communist Party Congress in October 2022 to resist foreign powers “bent on containing China.” And many American and European legislators will persist in seeing relations with China as nothing less than an existential struggle.

In this environment, there is no reason to believe there will be a let up in the four campaigns of trade weaponisation: sanctioning aggression, arming the value chain, promoting self-defence, and “serving” science. Let’s take each in turn.

First, mankind’s proclivity to quarrel, both within and across borders, combined with an equally strong human instinct to help the victims of these quarrels, will ensure continuation of costly but largely ineffective trade and other sanctions against aggression. Action against China’s treatment of its Uyghur minority is a case in point, as with Washington’s import restrictions under the Uyghur Forced Labour Prevention Act. Historian Nicholas Mulder has indeed warned that as countries that consider themselves vulnerable to sanctions progressively withdraw from the world economy, their pursuit of autarky and other countries’ search for workable trade sanctions will see them locked in an escalatory spiral.

Second, the headwinds that are slowing the globalisation of production will not end it, and precisely because of this the costly and largely counter-productive pursuit of self-reliance in the face of concerns about supply chain vulnerability will persist. America’s drive for semi-conductor supremacy has not prevented Huawei acquiring its own (Kirin) version of a US-banned chip. American and European leaders may now speak of de-risking rather than de-linkage, but the goal is the same – subsidy-fuelled self-reliance within the value chain. Australia is on the same track with the proposed “Future Made in Australia Act.”

Third, in the perennial struggle between the exercise of national sovereignty and compliance with the international rules of the trading system, the pendulum has definitively shifted towards power-based trade defence in the name of national security, not least in the United States and the European Union. The punitive tariffs on steel and aluminium of the Trump administration are being effectively carried over by the Biden presidency, even though for every steel job saved, sixteen will be lost elsewhere. And in Europe, the recent Anti-Coercion Instrument and the Enforcement Regulation for Trade Disputes are essentially unilateral, power-based expressions of national sovereignty that will only fuel trade friction, particularly with China.

Fourth, and perhaps most critically, protectionist capture and third-party retaliation against trade distortive measures designed to build national environmental and public health capacities will continue to ensure that such measures do more harm than good. Over 30 WTO members restrict imports of, mainly Chinese, solar PV equipment, while Australia is set to join the solar panel subsidy race. And two years into the COVID pandemic there were still restrictions on crucial remedial products with a trade value of $US122 billion. Looking ahead, trade in hydrogen, vital to the energy transition, risks being caught in Europe’s – and prospectively, America’s – Carbon Border Adjustment Mechanism, while the promise of gene editing, in tackling both health and environmental challenges, faces a damaging and unwarranted repeat of GMO-type restrictions. Australia is heavily engaged in both of these at-risk activities.

Fortunately, for each of the four campaigns of trade weaponisation there is a better way: advancing imaginative diplomacy to accompany the sanctions stick; building genuine resilience within the supply chain through sound domestic policies; fully restoring trust in the multilateral trade defence tools of the WTO by effectively disciplining, in consultation with Beijing, subsidies to China’s SOEs operating internationally, and attacking environmental and public health goals directly – such as by reducing fossil fuel subsidies – not via the blunderbuss of trade restriction and distortion.

For these better ways to work, however, the discontents of trade – the broad public, with a generally positive view of protectionism –  that have made weaponisation possible in the first place must be seriously addressed. After all, the aggressive trade policies of Donald Trump, Joe Biden, and Ursula von der Leyen are each the symptom of a deeper cause. Addressing that cause means doing better at helping those who lose from trade, at making the case for open markets, and, critically, at adjusting to trade-induced economic disruption.

A key to successful adjustment is to build on, and adapt, existing strengths. The port of Gladstone in north-eastern Australia is a good example of this. Gladstone, as pointed out by Ross Garnaut, is successfully adapting to become a transmission node for declining fossil fuel power generation by building on enduring industrial traditions, and established port infrastructure, to export liquefied natural gas for the cars and power stations of Japan and Korea.

The stakes are high. Without serious attempts to address the discontents, while at the same time engaging with China, the weaponisation of trade will continue to put at risk decades of growth achieved through globalisation and the ability to deal successfully with the climate transition and the next pandemic.

All countries, not least China and other autocracies, are engaged in weakening the multilateral trading order, but a particular concern arises when the Western democracies act against the system they themselves created, for we need more, not less, liberal internationalism.

Ken Heydon is a former Deputy Director-General of the Office of National Assessments, a senior member of the OECD secretariat, and a Visiting Fellow at the London School of Economics. This article is based on his latest book “The Trade Weapon

This article is published under a Creative Commons Licence and may be republished with attribution.