Last week I was asked to give a talk about multilateralism vs. bilateralism, an important debate but not one that always makes the front page. At the event, the conversation quickly veered off into an interesting discussion of lots of related issues without ever directly resolving the main issue of which path is better. I have thought about that a bit more, however, and this week’s column is about where I ended up.
The issue is timely because we have a president who has repeatedly made clear he prefers a bilateral approach to trade negotiations, or dealmaking as he would say. Ambassador Lighthizer has said that a bilateral approach is superior because it is easier to negotiate with only one party and easier to enforce if there are problems down the road. Those are assumptions that deserve to be tested, but first, we need a word about what we have now.
Most of the world continues to function under the multilateral system created in 1944 at Bretton Woods by the Western allies foreseeing the end of the war and wanting to make sure that never happened again. The tripod of organizations they created have managed the system reasonably effectively for 75 years: the International Monetary Fund (IMF), the World Bank, and the International Trade Organization that failed and became the General Agreement on Tariffs and Trade and was, in turn, replaced by the World Trade Organization (WTO) 50 years later. (A history that demonstrates how difficult getting agreement on trade can be.)
Now, however, there is growing concern that the system is running out of gas. The IMF has been good at providing carrots to countries in trouble but less effective applying sticks to those pursuing harmful policies. The World Bank has played a key role in economic development but increasingly finds itself badly outclassed by capital from other sources, such as the Asia Infrastructure Investment Bank and direct financing from various Chinese entities, which do not demand the same internal discipline and integrity that the Bank demands. This, in turn, makes them much more popular to authoritarian leaders more interested in fattening their Swiss bank accounts than in actually building anything for their people.
The WTO has produced only one significant agreement since its creation in 1994—the Trade Facilitation Agreement. The Doha Round has been stalled for years, and countries ready to move on to new issues are blocked by those who will not let go of the old ones. The United States is busy destroying the dispute settlement process, and compliance with notification requirements remains spotty.
I have believed for a long time that the crux of the problem is that the developed nations that designed these institutions are discovering their people no longer care about sustaining them, while the emerging economies like China and India are unwilling to pick up the slack, despite being major beneficiaries. Put less elegantly, China is saying you built it, you own it, you pay for it, and we are saying you broke it, you gained from it, you pay to fix it.
Sadly, there is not a near-term solution to this. The Trump administration’s argument on all trade issues is that the crafty foreigners have taken advantage of the United States for years, and now it is time for them to pay up. In other words, everybody else has to make concessions, and we pay nothing, having already given at the office for years. No one should be surprised when other countries reject this argument.
While efforts to break the impasse will and should continue, the reality is that the rest of the world is moving on to smaller agreements as the preferred Plan B. The European Union has negotiated agreements with Canada and Japan and is working on one with the Mercosur nations. In the wake of the United States pulling out of the Trans-Pacific Partnership (TPP), the other 11 members have gone ahead with the agreement. Negotiations on the Regional Comprehensive Economic Partnership (RCEP), which includes most of Asia, continue. At the WTO, negotiations on the Environmental Goods Agreement and a Trade in Services Agreement remain alive—barely—and a negotiation on digital trade has been joined by more than 70 WTO members. These will be hard slogs but are evidence that countries are not giving up on better rules and more market access even if the institution designed to provide them is failing. They also reveal a trend toward building coalitions of the willing—like-minded countries agree on new rules in the hope that over time, more countries will see the advantages and join in.
Meanwhile, the Trump administration is pursuing bilateral initiatives with Japan, the European Union, and various players to be named later. So far, the evidence that they are easier to negotiate than multilateral agreements is inconclusive, since most are unfinished—likewise, the enforcement question.
Successful or not, however, it is a striking departure from our 75 years of global leadership in the interest of the global common good and a reversion to the “might makes right” philosophy that prevailed for centuries. That can also succeed for a while if everyone accepts who is at the top of the food chain, but agreement on that, if it ever existed, is breaking down. The president may think the United States is still the lead dog, but others are running faster and catching up, which makes even more serious conflict with them likely, while our friends, most of whom the president has insulted, are moving on without us. This is not a pathway to success either for us or for the trading system as a whole.
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