The escalating trade war between the U.S. and China is nudging the world economy toward its first recession in a decade with investors demanding politicians and central bankers act fast to change course.  The volatility in the world economic system suggests investors may be beginning to take threats of a trade war more seriously.

Body:

The global trade landscape is witnessing strong cross-currents. Trade sentiments are oscillating between sheer despair and scattered hope.

Multilateral institutions on the decline:

• In the decades following World War II, the General Agreement on Tariffs and Trade was the center of gravity for trade negotiations.
• While that system wasn’t perfect, most of the world’s countries could at least participate, to one degree or another, in hammering out the rules of trade.
• The multilateral trading order reached its heyday in 1995, with the creation of the World Trade Organization. But more recently, the system has weakened. Today, most of the world’s new agreements are struck between only two countries or within a single region.
• Trade war will gravely undermine the rules-based multilateral system that has underpinned global prosperity since the end of World War II.
• As the United States accuses China of predatory trading practices while doling out unilateral punishment, the trade organization tasked with preserving the peace appears marginalized.
• Threats to WTO:
  • WTO is already under strain.
  • The collapse of the Doha round of trade talks in 2015, after many fruitless years, put needed reforms on hold indefinitely.
  • Disputes that might have been swept into a new trade round have fallen to the WTO’s dispute-resolution machinery, which is too slow and too frail to carry the burden.
  • The WTO has not kept pace with economic change.
• As America is looking to pursue a mercantilist trade policy in defiance of the global trading system, other countries are bound to follow. That might not lead to an immediate collapse of the WTO, but it would gradually erode one of the foundations of the globalised economy.
• Countries have shown little appetite for continuing the multilateral negotiations. E.g.: Trump hammered on regional accords, famously renegotiating the North American Free Trade Agreement and withdrawing from the Trans-Pacific Partnership.
• There is a move away from multilateralism – in which many countries agree on certain trading principles – and toward bilateralism – which pits nation against nation, raising the stakes.

Rise in Bilateralism:

• The administrations have given further credence to the notion that it favours bilateralism over multilateralism and protectionism over free trade. E.g.: USA
• The clear preference is for bilateral deals where a country can use its market power to force concessions from its negotiating partners.
• Bilateralism could help fix specific grievances with trading partners.
• On the contrary, growing bilateralism also points to a breakdown in trust and the mechanisms of international co-operation.
• Bilateral and regional deals are making it easier for large countries to use trade policy more explicitly as an arm of foreign and military policy.
• Modern bilateral deals are not recreating the colonial systems of the past, but they do tend to center on major powers in what some scholars have called a “hub” and “spoke” pattern. The “hub” often enjoys significant influence over the “spoke,” and not just in commercial affairs. China’s overtures to African countries over a free trade deal, for example, are likely linked to its strategic interest in securing access to national resources.

Way forward:

• Multilateral co-operation is needed to maintain an open global economy.
• Some international issues simply cannot be fixed bilaterally. These include environmental issues such as climate change, critical economic issues like trade and the functioning of the international financial system.
• One pernicious consequence of abandoning multilateralism is the mounting complexity and discriminatory nature of global trading arrangements.
• Even though it is a lengthy and time consuming process, the settlement of disputes through international conventions and rules is the need of the hour.
• One real benefit of the multilateral systems like WTO is that the same rules, more or less, apply to everyone.
• Major trading powers, such as Japan and the EU, should continue to insist on the importance of maintaining a rules-based trading system, with the WTO at its core.
• WTO dispute settlement resolution mechanism should be approached instead of unilateral decisions.
• The benefit of the WTO process is that it prevents the damaging consequences of trade protectionism.
• Nations can resolve their disputes through WTO instead of raising tariffs.
• Trade disputes should be resolved within the WTO framework. As economists have pointed out, when assessing economic relationships, what matters is not a country’s bilateral trade balance with a specific trading partner but its overall trade balance with the rest of the world.

Conclusion:

If the rising number of bilateral deals become an instrument of security policy, and trade increasingly flows only to strategically friendly countries. Even without an emergency, the leaders of the world’s largest economies will need to rediscover the habit of co-operation or the world cannot come out of this intensified trade war.