Opinion: Will Donald Trump become the unlikely saviour of world trade?

Wolfgang Alschner is an associate professor at the common law section of the University of Ottawa. He holds the Hyman Soloway Chair in business and trade law.

A month into his U.S. presidency, Donald Trump has broken most rules of the global trading system. He has imposed a 25-per-cent tariff on his neighbours in clear violation of the United States-Mexico-Canada Agreement; doubled down on steel and aluminum tariffs, which the World Trade Organization (WTO) had previously ruled illegal; and upended the principle of the most-favoured nation treatment, which grants the same tariff rates to all trading partners, in favour of a proposed byzantine system of “reciprocal” tariffs that vary country-by-country. And yet, Mr. Trump may turn out to save the very system that these actions have called into question.

When we talk about Mr. Trump’s disruptive tariffs, we often forget that the U.S. has been chipping away at the multilateral trading system for more than a decade. Frustrated by perceived WTO overreach and its inability to rein in Chinese non-market practices, the Obama administration grew frustrated and blocked reappointments of members to the WTO’s highest adjudication body. That practice continued under Trump 1.0 and ultimately crippled the organization’s dispute settlement, creating impunity for the United States as Mr. Trump imposed tariffs on China and others during his first term.

The biggest blow to world trade, however, came under the Biden administration. With American power in decline, team Biden placed a bet: the best way to preserve America’s military and technological dominance lay in a retrenchment into trading blocks. Instead of global value chains underpinned by multilateral rules, the U.S. favoured trading networks that linked allies (“friendshoring”) and excluded geopolitical rivals (“de-risking”). The Biden team’s economic security agenda fused political, security and economic considerations and linked domestic industrial policy carrots with international trade restrictions, while altogether giving up on market-liberalizing trade agreements.

The Biden administration thereby precipitated a fragmentation of global trade into blocks. According to the International Monetary Fund, such geopolitical divisions would have depressed global economic output by 7 per cent over the long term. As U.S. import restrictions and export controls against Russia and China surged, these countries started to trade more with each other. Meanwhile, the G7, a club of wealthy liberal democracies, intensified co-operation on sanctions, non-market practices and economic coercion. Canada abandoned its long-standing championing of multilateral trade to side with the United States in imposing prohibitive tariffs on Chinese electric vehicles. The logic of that new era of geopolitical competition was that trade restrictions against foes were needed to deepen ties with friends.

Make no mistake, the rules-based global trading system has been broken long before Mr. Trump came into the scene. And this is why Mr. Trump’s actions might just mend that system.

Mr. Trump has begun upending that friendshoring logic of Joe Biden’s during his second term. Friends and foes alike have been threatened with tariffs. If anything, though, the U.S.’s geopolitical rivals seem to fare better. While Mr. Trump is playing target practice with Canada and the European Union, he has made overtures to China and Russia. The White House is working on a grand bargain that could see massive Chinese purchases of American goods and significant investment in the U.S., including in the battery, solar cell and electric-vehicle sectors – the very same industries that were shielded by restrictions under Mr. Biden. Breaking ranks with his western allies, Mr. Trump has also offered deeper economic ties to Russia as part of negotiations over a Ukraine peace agreement and thereby cast doubt on the future viability of the G7 as a trade governance forum. American economist Brad Setser called it “foe-shoring.”

Beneath the tweets and blusters, a subtler policy change is under way. Although the Trump administration is set to continue many of Mr. Biden’s economic security initiatives, the balance between national-security restrictions and mercantilism is shifting to the latter. The new logic is that money does not stink – even if it comes from China and Russia. In a bid to bring more investment into the U.S. and to see American companies sell more of their wares abroad, the “America First” trade and investment agenda is breaking with Mr. Biden’s block-based logic.

Policy measures by countries that are deemed harmful to trade, by year of

the globe and mail, Source: global trade alert

Policy measures by countries that are deemed harmful to trade, by year of

the globe and mail, Source: global trade alert

Policy measures by countries that are deemed harmful to trade, by year of implementation.

the globe and mail, Source: global trade alert

Mr. Trump’s policy shift is causing short-term chaos and confusion. And there is much to be said about the geopolitical implications of courting Russia and China while spurning the United States’ western allies. But there is an upside. Unshackled from the pressure to choose sides, countries can transact more freely. That is good news for middle powers caught between the U.S. and China. Out of self-interest and moral fibre, Canada and other western countries will remain skeptical of Chinese technology or refuse to trade with war criminals regardless of what America does. But gains can be had at the margins. If Chinese electric-vehicle manufacturers can come to Detroit, then Windsor or Monterrey can welcome them, too. The expanding list of goods and investment considered taboo on economic security grounds will thus likely shrink again, creating new trade opportunities.

The U.S. President’s tariff assault may also provide enough of a shock to end stasis at the WTO, enabling a multilateralism-minus-one. Unlike Mr. Biden, Mr. Trump views trade relations not as a struggle between democracies and autocracies, but as America versus the rest. From a purely trade perspective, that may not be for the worst. In the short term, the world will struggle to re-engineer global trade institutions amidst U.S. disruption, not in the least because decision-making at the WTO continues to require agreement by all members. In the medium term, though, countries serving global markets will have every incentive to (re)build global rules, even without the U.S.

World trade may thus eventually be the unlikely winner of Mr. Trump’s war against the trading system. Canada must acknowledge that commerce, values and alliances don’t mesh as they did under Mr. Biden and prepare to reap the gains from trade in this more multipolar world.