Brexit’s advance opens a new trade era

The notion that global economic integration amounts to human progress had a good run, dominating the thinking of the powers that be for more than seven decades. But a new era is underway in which national interests take primacy over collective concerns, with trading arrangements negotiated among individual countries.

Britain’s voters made that clear Thursday in handing an emphatic majority to Prime Minister Boris Johnson and his Conservative Party, all but ensuring that the world’s fifth-largest economy — and a charter member of the international trading system — will proceed with its abandonment of the European Union.

A preliminary deal hailed Friday by the two largest economies, the US and China, raised the prospect of easing their high-stakes trade animosities. But the nature of their engagement — country to country, not mediated by the World Trade Organization or some other international authority — underscored the principles of the new age.

Britain now faces another complex phase in its tangled European divorce proceedings — negotiations over the terms of its future economic relationship with the Continent. But in one form or another, “getting Brexit done,” the mantra that Johnson promised and can now deliver, marks a profound change in the world trading system.

A cattle ranch near Lifford, Ireland, on Oct. 4, 2019. Economic integration has allowed goods to flow seamlessly from one end of Europe to another. (Andrew Testa/The New York Times)

In the aftermath of World War II, the victorious Allies built an international order on the understanding that when countries swap goods they become less inclined to trade artillery volleys.

Britain’s departure from the EU is the clearest manifestation that this idea no longer holds decisive sway. It is not the only one.

The traditional arbiter of international trade disputes, the WTO, is listing toward irrelevance as countries bypass its channels to impose tariffs. Its appellate body, which adjudicates disputes, has been rendered inoperative by the Trump administration’s blocking of new judges. The panel needs at least three judges to render verdicts, but now has only one.

“The sense that policy moves in one direction, toward more liberalisation and more integration, has been replaced by recognition that policy can go backward as well as forward,” said Brad Setser, a senior fellow at the Council on Foreign Relations in New York.

The US and China together account for more than a third of the global economy, making their wave of escalating tariffs a cause for alarm about diminishing fortunes in nearly every country exposed to international trade — from Germany to South Korea to Mexico.

President Donald Trump has put stock in the unrivalled scale of the US economy in seeking favourable trading arrangements. In his calculus, the US boasts the advantage in any bilateral trade negotiations and can tilt the rules toward American interests.

Products in transit at Felixstowe, a container port in southeast England, on Oct. 18, 2019. The decisive majority secured by Prime Minister Boris Johnson and his Conservative Party in the election on Dec. 12 all but ensures that the country will proceed with its abandonment of the European Union. (Ben Quinton/The New York Times)

This was the logic that prompted Trump to renounce US participation in the Trans-Pacific Partnership, a trade bloc spanning a dozen countries. It was a project pursued by his immediate predecessor, President Barack Obama, in part to press China to address long-standing complaints that it subsidised key industries, doled out credit to favoured companies and manipulated the value of its currency to gain advantage in world markets.

In taking on China, the Obama administration employed the multilateralist mindset that had guided US policy since the end of World War II. The Pacific trading bloc would set rules on investment, labour and environmental standards. Its members would profit through growing trade, and China would want in. To gain access, China would be forced to adopt the bloc’s rules.

But in Trumpian thinking, multilateralism is for suckers. Shortly after he was sworn in, declaring as his credo “America First,” Trump ditched the Pacific bloc and weaponised the US market: If China wanted access to the 327 million consumers in the richest country on Earth, it would have to buy more American goods and play fair.

Friday, Trump cited the preliminary agreement as evidence that his strategy was working. The US would sharply reduce the tariffs it had affixed to Chinese goods, while China promised to buy more American farm products and respect intellectual property. Trump called it “an amazing deal for all.”

But economists said the announcement of new farm purchases reflected goods that China was already buying. Even as the scrapping of the next wave of tariffs weighed as positive for the global economy, few were proclaiming the advent of enduring peace. The US and China have descended into such an adversarial state that they are likely to continue seeking alternatives to exchanging goods and investment. Companies that make goods in China will face pressure to explore other countries, posing disruption to the global supply chain.

China’s leaders have come to construe trade hostilities as part of an American bullying campaign engineered to suppress their national aspirations and deny the country its rightful place as a superpower. Nationalist sentiments and security concerns have become intertwined with trade policy, complicating the pursuit of a final deal.

Now Britain, in leaving the European bloc, embarks on a strategy aimed at securing bilateral trading arrangements with major economies, from the US and China to Australia and India.

Trade deals are complex and difficult. They entail prying open new markets for exports in exchange for exposing domestic companies to new competitors. Powerful interest groups complain. Deals take years.

Arithmetic reveals that no combination of trade deals is likely to compensate Britain fully for what it stands to lose in walking away from the European single marketplace, a territory stretching from Greece to Ireland.

Britain sends nearly half of its exports to the EU, a flow of goods imperilled by Brexit. Britain’s appeal as a headquarters for multinational companies will be undermined as it finds itself separated from the Continent by a revived border.

The fraying of international trading arrangements and the rise of nationalist imperatives have been driven by intensifying public anger in many countries over widening economic inequality, and the perception that trade has been bountiful for the executive class while leaving ordinary people behind.

In Britain, struggling communities used the June 2016 referendum that unleashed Brexit as a protest vote against the bankers in London who had engineered a catastrophic financial crisis, and who then forced regular people to absorb the costs through wrenching fiscal austerity.

In the US, Trump’s political base has rallied to his trade war. In Italy, France and Germany, furious popular movements have fixed on trade as a threat to workers’ livelihoods, while embracing nationalist and nativist responses that promise to halt globalisation.

“The era of freewheeling markets and liberalism is ending,” said Meredith Crowley, an international trade expert at the University of Cambridge in England. “People are dissatisfied with the complexity of policy and this feeling that those who have the levers of policy are somehow out of their reach.”

Economists see perils in this unfolding era, especially as governments champion national industries at the expense of competition. They point to history, notably the Great Depression, which was deepened by a wave of tit-for-tat trade protectionism kicked off by the US through the Smoot-Hawley Tariff Act of 1930.

The law sharply raised tariffs on a vast range of agricultural and factory goods, prompting US trading partners to respond. As world trade disintegrated, nationalist rage spread, culminating in the brutalities of World War II.

The British election, and the splintering of the European trading bloc, amounts to the most consequential upsurge of economic nationalism in generations.

“Since Smoot-Hawley, I don’t think we have seen something as dramatic as this,” said Swati Dhingra, an economist at the London School of Economics.

One major variable has gained clarity: Congressional Democrats and the Trump administration this week hailed an accord that clears passage of the renegotiation of the North American Free Trade Agreement, the deal that has allowed some $1.2 trillion worth of goods a year to be exchanged freely across the US, Canada and Mexico.

Yet on another front, Trump has threatened to impose tariffs on imported automobiles, a step that would be especially disruptive in Germany, Europe’s largest economy. Germany sells far more goods to the US than it imports, drawing the ire of the American president.

Trump has openly warned that he could cite a national security threat as justification for auto tariffs. Trade experts have derided that strategy as an affront to the norms of the international trading system.

Last month, Trump allowed a self-imposed deadline to lapse without imposing auto tariffs. But he has left a major international industry guessing about what happens next.

Since Britain shocked the world with its vote to abandon the EU, its political institutions have tangled themselves in knots trying to decide what to do with their nebulous mandate to leave. Businesses have deferred hiring and investments, awaiting clarity on future trading terms.

The uncertainty has already exacted significant costs, and far beyond Europe, according to a new paper by Tarek Hassan, an economist at Boston University, and three European accounting experts, Stephan Hollander, Laurence van Lent and Ahmed Tahoun.

Every year since the referendum, the average company in Ireland — which trades heavily with Britain — has seen its growth in investment reduced by 4.2%, and hiring is 15% less than it otherwise would have been because of uncertainty, the paper concludes. Yet even across the Atlantic, the average US company has seen investment growth limited by 0.5% a year and hiring slowed by 1.7%.

“There is already a significant drop in employment as a result of the risks of Brexit,” Hassan said.

Some analysts suggested that the election enhanced the possibility that Johnson would pursue a softer form of Brexit, keeping Britain closer to the European market. His majority is so comfortable that he need not worry about alienating the hard-liners in his party who favour a clean break with Europe.

But some alteration now lies ahead. If Brexit uncertainty has been damaging, what replaces it is the near certainty of weaker economic growth and diminished living standards.

“It’s going to have massive implications,” Hassan said.

©2019 The New York Times Company