Adam Tooze: Washington Is Undermining the Trade System It Helped Build

Cameron Abadi

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The United States, which was central to the establishment of the global trading system 75 years ago, is challenging it these days. Last month, the World Trade Organization (WTO) declared that some of the tariffs imposed by the Trump administration, which U.S. President Joe Biden has kept in place, are illegitimate, according to the WTO’s own rules. The Biden administration responded essentially by saying it considers the tariffs to be justified on national security grounds. Conveniently, the appellate body at the WTO that would be tasked with adjudicating the dispute is unable to do its job because the United States has refused to appoint judges that would allow it to function. This comes as Europe is also upset at the United States for subsidies and the 2022 Inflation Reduction Act, which Europe claims are also in violation of the WTO. That may lead to other retaliatory tariffs—essentially the kind of trade war the WTO was designed to prevent.

Is the United States intentionally trying to sabotage the WTO? Is China the real culprit, as Washington suggests? And who defines what free trade means in the first place? Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity.

Cameron Abadi: Is there a case to be made that the United States is intentionally trying to sabotage the WTO? And if so, what are the stakes?

Adam Tooze: We’re really at a kind of historical transition point. And I think many people thought that the attack on the WTO by the Trump administration was an aberration. I think that was always a misunderstanding. [Former U.S. President Donald] Trump himself was, you know, in a fundamental sense, non-WTO conforming. His understanding of trade was just not compatible with the sophisticated notions of reciprocity and the legality that the WTO embodies.

What’s very striking is how far the Biden administration has, in fact, adopted that, when the WTO ruled that the tariffs that the United States imposed on steel were egregiously in breach of all of its norms. These are the Section 232 measures on steel and aluminum. The United States has, in fact, revoked the measures it took against Canada and Europe but has kept those against China firmly in place. And when asked to state its position, it did so in astonishingly blunt terms. It said these WTO panel reports only reinforced the need to fundamentally reform the WTO dispute settlement system. So the Biden administration’s position is that the judgment against it confirms its view that the WTO is broken because the WTO has proven ineffective at stopping severe and persistent nonmarket excess capacity from the People’s Republic of China and others.

It’s really extraordinary. They’re basically saying, “Look, we will not back down. We regard this as a matter of existential interest and of national security interest.” That blows the whole system up. And not only is the United States refusing to accept this judgment, but it is also basically paralyzing the dispute settlement system. So this is really quite a fundamental breach. And steel and aluminum are really the least of it. You know, the most fundamental measures are clearly those the U.S. has taken in the microchip arena where it’s engaged not just in general purpose protectionist measures but really surgical strikes on the industrial capacity of China in general and particular Chinese firms in particular—Huawei, of course, being the most extraordinary example of this.

CA: At the center of this are these tariffs that the Trump administration put into effect, which have been in effect for a handful of years. Has trade empirically diminished since they have been in place? Have they had a measurable effect on the total volume of trade that the United States is involved in, and have they also had an effect on inflation?

AT: The tariffs have worked. They have had an effect but mainly in the form of trade displacement. So what’s happened is that trade has shifted from the Sino-American route to other routes, and the most important of those is probably the connection to Vietnam, which has seen a substantial increase in trade with the United States. And the important thing to know about that is that much of the trade that is now routed through Vietnam is still with Chinese companies, but it’s now coming out of Vietnam rather than China.

The significant exception to this, and the example which really breaks that rule, is the targeted attack on the microchip sector and the microelectronics asset sector in China, where regardless of where they produce, Chinese firms have been targeted. And that has had a noticeable impact on the speed of the roll out of 5G technology around the world because Huawei was the mid-tech supplier of choice. It was the low-cost option for 5G networks, and it has been now systematically discriminated against—really at America’s behest—[around] most of the world. So this is causing holdups in the rollout of 5G.

Does all of this impact inflation? Yes, it does. At the margin, it’s quite clear that imposing tariffs on cheap sources of imports and shifting imports to less efficient sources cause prices to rise. And of course, in the context of the inflationary surge that began in 2021, it was a good talking point, especially for Democratic experts and commentators, to point to the damaging impact of Trump’s protectionism on American inflation. But many of the Trump tariffs have, in fact, been rolled back—notably those which affected Europe and Canada. And it made a good talking point, of course, that the Trump tariffs did raise costs in the context of rising American inflation in 2021. So it clearly isn’t the main driver of the inflationary dynamic that America has experienced and the rest of the world have experienced since 2021.

CA: It does seem like the United States is intent on shifting blame for this rupture of the global trading system onto China. The U.S. Trade Representative has pointed out that China has been violating fair trade practices for years. What do you make of this argument? Is China the real culprit here like the United States is arguing?

AT: I think the weasel word there is “real,” right? There’s no doubt at all that China is a culprit. China has dirty hands. China has been, in various ways, fudging the trade rules. It subsidizes state-owned businesses. It provides gigantic support to national champions of various types. It has been ruthless in its appropriation of the people’s intellectual property. And if you promised yourself in your support for China’s WTO accession that, at some point, China would engage (in a sense) in a kind of economic regime change and there would be “transformation through trade,” obviously that has been quite fundamentally disappointed. So all of that is true.

But, of course, on the other hand, if you’re asking what accounts for our current state of antagonism, you’d have to say that the fact of the matter is that China lived perfectly well with the status quo over the last 20 years. And they assumed, I think, that whatever the formalities and whatever the verbiage, everyone had always understood that this is how this would go. China was a much lower-income country in the 1990s. It was not a champion of any area of technology at the time. And so, everyone understood that as a developing emerging market economy—in fact, a low-income country initially—it would do whatever it takes to catch up. And that’s essentially what it’s done. And, of course, in the meantime, it’s provided a gigantic market, a huge source of profit for businesses in the West, both in Europe and the United States. And whatever damage the West suffered in China was more than offset by the giant profits it was making along the way. If you think, for instance, of the automobile industry, its entire fortunes were transformed in the first 20 years of this century by the growth of the Chinese market from a tiny fraction of global demand to being the largest market in the world. So if your market is increasing, then the things you do that are naughty on the margins are relatively trivial by comparison with the growth that you produce.

It’s a little bit like a divorce. America is suing for divorce. So to that extent, it’s like the active party in the rupture, but it’s citing 20 years of abuse by its spouse to justify this move. And that’s the kind of logic of the situation. Imagine if China had adhered to every single rule, had fulfilled every promise it made in the late 1990s. Could any of us be confident in saying that we wouldn’t at this point be at precisely the point we’re at, namely, that America is engaged in an undeclared economic war against China, particularly in the tech sector? And I think the answer is pretty obviously, no. We couldn’t be, right? The reason why America is now pushing back at China’s economic growth in its most essential technological components is not really that China broke the rules. The reason is that China has succeeded in growing too rapidly and now poses a manifest, world historic challenge to American dominance in key sectors.

CA: I find myself wondering why are industrial subsidies and even tariffs seen as a contradiction of trading principles in the first place. I guess another way of phrasing that would be: who defines the “free” in free trade?

AT: I think this is a brilliant point. It’s really a subtle and interesting one. And it’s one that trade theory began to grapple with really from the 1970s onward, which is precisely the question of whether it’s more than mere convention to say that wage costs, for example, are natural conditions that favor one country rather than other. Those are considered legitimate reasons for comparative advantage in a pattern of trade as opposed to policy interventions. Is our underlying norm of trade essentially one of a perfectly homogenous condition? Like a chess game, something like that, in which the sides are perfectly balanced, and then it’s just down to skill to decide the outcome? It’s an incredibly fragile set of distinctions, which are implied by these conventional understandings.

I mean, take advantageous geography. I’m in New York City right now, and obviously, in some ways, it has advantageous geography. We’re at the delta of the great Hudson River. In Manhattan, there’s this extraordinary island positioned in the middle of it. But obviously, it takes gigantic actions of investment, dredging, the construction of piers to create the possibility of taking advantage of this natural geography—to achieve and to turn New York into one of the world’s great ports. Now, in doing that, if you start out from the existing state of play, when you make those investments and build that infrastructure, you are changing the name of the game in global competition. That in and of itself creates the underlying geography. And the geography is then widely recognized as being absolutely acceptable as a differentiating factor. [Economist] Paul Krugman really made his reputation as a theorist in thinking about precisely these kinds of logics, how comparative advantage at any given moment is the product of path-dependent, historically conditioned patterns of development.

And the consequence of this is profoundly destabilizing to these kinds of simple distinctions between natural advantages and political distortions because what at any given moment appears to be a natural pattern of advantages and disadvantages is, on closer examination, the effect of history in every possible sense. And that potentially, of course, opens the door to a complete free for all. Because if you accept this logic, then really the distinction breaks down.