We’ve learnt three things about the future of world trade from the temporary reprieve over tariffs that the US has given China – and China’s response to it.
One is the markets are now confident that both countries will be sensible. The massively negative reaction they gave to ‘liberation day’ on 2 April signalled their hatred of uncertainty but also of stupidity. Before Donald Trump’s arbitrary jacking up of tariffs to what were really absurd levels, they had assumed that he would ensure that there would be reasonable continuity of world trade. His plans, and China’s robust reaction, led to nagging doubts that their assumption might be wrong, there really would be a destructive trade war between the world’s two biggest economies. The S&P index duly plunged. Now, in premarket trading on Monday, it’s back above its pre-liberation day level, and within a percentage point or so of where it was at the beginning of the year. Phew!
The second thing we’ve learnt is that the toothpaste can’t go back in the tube. Old-style globalisation is dead. Every business involved in international trade is rethinking how it will operate in this new and different world. They are reassessing their supply chains of course, but also looking again at which markets it should focus on, and where it should invest. Apple is not going to rethink its plans to speed up the shift of iPhone production from China to India. Trade volumes through US ports will recover a bid, but not go back to their pre-tariff levels.
The third lesson is that the key concept of the post-world war two trading settlement, ‘MFW’, will be replaced by bipartisan arrangements between major trading blocs or nations. MFW stands for the Most Favoured Nation clause, an ugly way of expressing the idea that trading partners do not discriminate when they buy from or sell to each other. So if a country imposes a tariff on one country, or reduces it, it will offer the same terms to everyone else. That is the most important rule of trading under the WTO, and the Gatt before it, and while countries found all sorts of ways round it, it was that principle that was behind the extraordinary boom in world trade of the past 80 years. It was China’s accession to the WTO in 2001, thereby selling its goods more freely to the rest of the world and particularly the US, that enabled it to challenge American leadership and maybe even pass it in economic might.
The talks to come between the US and China will give some clues as to how world trade will be conducted
So what we are seeing is as important as the end of the Bretton Woods fixed exchange rate system, which gave currency stability through the 1950s and 1960s, but which broke up in 1973 to be replaced by floating exchange rates.
The detailed talks to come between the US and China will give some clues as to how world trade will be conducted in the years ahead. It’s quite possible that the new rules will be more effective than the old ones. After all, despite the WTO, countries found all sorts of ways of discriminating both against different trading partners and imports more generally: spurious health requirements, safety standards, and so on. Remember how Japan banned imported skis on the grounds that Japanese snow was different to snow in Europe or America?
But just as no one back in 1973 could fully envisage the effects of the shift from fixed exchange rates to floating ones – and in particular the great inflation of the 1970s and 1980s – we can only glimpse how a bilateral trading system might develop. But we know absolutely that the big players have to be sensible, and we have learnt in the past couple of days that perhaps, fingers crossed, they will.
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