The Revival of Economic Nationalism and the Global Trading System

The election of Donald J. Trump to the U.S. Presidency coincided with the United States adopting an “America First” policy in trade. This policy reflects an underlying theory of economic nationalism that is fundamentally at odds with the current approach of the multilateral trading system established by the General Agreement on Tariffs and Trade and the World Trade Organization (GATT/WTO). The current multilateral system is based on a “positive sum game” theory, i.e., the view that cooperative trade concessions can increase the volume of trade for all nations involved and result in reciprocal and mutual benefits. A large body of theoretical and empirical work, discussed and analyzed in this Article, supports the conclusion that the GATT/WTO system has historically achieved significantly increased trade volumes on both a multilateral and national scale since its creation at the end of the Second World War.

            By contrast, President Trump’s economic nationalism holds that trade is a “zero sum game” in which a gain in trade by one nation must be accompanied by a corresponding trade loss by another nation. Under the view of the current Administration, the United States has often been the loser in the global trade deals of the GATT/WTO. The current Administration now seeks to dictate the terms of any future trade agreements so that the United States wins at the expense of its trading partners in a zero-sum game. The economic nationalism espoused by the current Administration, if unconstrained, can result in the dismantling of the current multilateral trading system leading to long-term negative, if not catastrophic, consequences for the world economy.

INTRODUCTION

Since the high-point of economic nationalism and global protectionism following the United States implementation of the Smoot-Hawley Tariff Act of 1930,1 successive rounds of trade negotiations under the auspices of the General Agreement on Tariffs and Trade2 (GATT) have resulted in substantial reductions in tariffs—duties imposed on imports at the port of entry—by developed countries.3 Many developed countries also made commitments in the Uruguay Round of GATT to cut tariffs on agricultural and food imports (e.g., rice and dairy products) and to place constraints on government support for domestic agriculture.4 Available empirical evidence suggests that the reduction in tariffs attributable to the GATT and its successor, the World Trade Organization5 (WTO), has had a significant impact on trade volumes in both the manufacturing and agricultural sectors.6 At the same time, there has been significant growth in the number of regional trade agreements (RTAs), such as the North American Free Trade Agreement (NAFTA), especially since the 1990s.7 RTAs, such as NAFTA, go beyond the GATT/WTO by eliminating tariffs completely for all or some products;8 they also provide for deeper economic integration beyond simple tariff reductions by adopting harmonized standards for labor, the environment, and foreign investment.9 These developments indicate that the multilateral trading system put into place by the GATT and the WTO has led to new heights of global economic growth and integration since protectionism reached its peak in the 1930s.

The election of Donald J. Trump as U.S. President on a platform of “America First,”10 a revival of the policies of economic nationalism, presents a significant challenge to the existing global trading system. President Trump’s platform included pushing back against the multilateral trading system and the GATT/WTO, renegotiating NAFTA,11 withdrawing from the Trans-Pacific Partnership12 (TPP), and using the threat of adopting tough trade policies against China.13 These events should also be seen in the context of an environment that is increasingly unfavorable to deeper global economic integration: public pushback on negotiation of the Trans-Atlantic Trade and Investment Partnership14 (TTIP) and TPP despite their expected net economic benefits;15 failure to complete negotiations in the Doha Round of the WTO;16 and evidence for a slowdown in global trade growth post-2012 relative to both historical performance and to economic growth.17 These developments indicate that there may be a widespread revival of the policies of economic protectionism that can undermine or destroy the existing global trading system.

The underlying logic of economic nationalism, as espoused by President Trump, is fundamentally at odds with the underlying theory of the GATT/WTO multilateral trading system. The GATT/WTO system is based upon the economic logic of a “positive sum game,” i.e., that trade concessions can enlarge the pie to mutually benefit all participants in the system.18 Economic nationalism, by contrast, is based on a “zero sum game” approach, i.e., the pie is of a permanently fixed size so that if one nation obtains a gain in trade, then another nation must suffer a corresponding loss.19 The current Administration appears to be taking the approach that international trade has been sold to the United States as a “positive sum game” but in practice has been implemented as a “zero sum game” with the United States as the loser in many trade situations.20 By advocating an “American First” approach, President Trump is rejecting the economic logic of the GATT/WTO and is proclaiming that in the future, the United States will win at the expense of other nations if necessary.21 The adoption of an approach that is so fundamentally at odds with the underlying logic of the GATT/WTO by the world’s most powerful trading nation poses a threat to the entire foundations of the multilateral trading system.

The threat to the global trading system raises a number of key questions. First, the empirical evidence indicates that the economic logic of the GATT/WTO is valid as it has increased trade volumes overall throughout its history.22 How has the GATT/WTO achieved the dual goals of reducing tariffs and increasing trade flows in the decades since its founding and is that mechanism still effective in further increasing trade flows for the future? If the economic logic behind the trade liberalizing effects of the GATT/WTO is still relevant and applicable, then dismantling the GATT/WTO system can have a negative long-term impact on global trade. The revival of economic nationalism by the Trump Administration can trigger a new era that harkens back to the policies of the period before the Second World War that created an atmosphere of distrust and suspicion that eventually led to hostilities and military conflict.23 Second, does the GATT/WTO system contain any internal mechanism that can effectively constrain the growth of economic nationalism? If the GATT/WTO contains such a mechanism, then the multilateral trading system may be able to withstand the threat of a rising economic nationalism and continue on its current course in liberalizing trade. On the other hand, if the GATT/WTO system is unable to effectively limit the growth of economic nationalism, then it becomes vulnerable to becoming dismantled or destroyed, leaving the global economy open to all of the attendant negative consequences created by the revival of economic nationalism.

To answer these two questions, this Article proceeds in four parts: first, the seminal economic model rationalizing the economic logic of the GATT/WTO in increasing trade is outlined and explained; second, the approach of economic nationalism to trade policy of the Trump Administration is set in the context of this model; third, the relevance of the GATT/WTO in an era of increasing numbers of RTAs and increasing regionalism is examined; and fourth, the robustness of the GATT/WTO legal framework and dispute resolution mechanism as a means for limiting or restraining the effects of economic nationalism is evaluated. The key conclusion of this Article is that the underlying economic logic of the GATT/WTO in reducing tariffs and increasing trade is still relevant and valid, but that enforcement of the GATT/WTO and its effects in increasing trade volumes is likely to be threatened or may completely collapse due to the revival of economic nationalism and the potential for a trade war.

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* Assistant Professor, University of Washington, Tacoma, Division of Politics, Philosophy and Public Affair. ^Frank E. and Virginia H. Bazler Chair in Business Law, the Ohio State University Michael E. Moritz College of Law. `Andersons Chair of Agricultural Marketing, Trade and Policy, the Ohio State University Department of Agricultural, Environmental and Development Economic.