Talk of a potential ‘grand bargain’ between the US and China has prompted ever more speculation over the future of global commerce, finance and the institutions which have been the centre of international economic order since the end of the Second World War. But how likely is it that a bilateral agreement between Presidents Trump and Xi will replace or marginalise the multilateral rules-based system?
President Trump’s views on transnational institutions are well known from his first term in office when he threatened to withdraw from the World Trade Organisation (WTO). He believes that by creating and facilitating globalisation these institutions have been responsible for the decline of the US economy, disadvantaging US manufacturers, destroying jobs and ripping off American consumers. He sees multilateral agreements as, at best, irrelevant to future trade and international relations, at worst deeply hostile to US interests. In one interview with Fox News he stated, ‘[the WTO was set up] to benefit everybody but us’. His view on trade in general is that it is a ‘zero sum game’ – there are only winners and losers – rather than the belief of most free market economists that all parties can benefit from lower barriers. What’s more he sees it as a potent tool for achieving political aims, as evidenced by his attempt to prompt Mexican and Canadian governments to address the cross-border flow of fentanyl and illegal immigrants.
President Xi holds the polar opposite opinion. Globalisation has treated China very well (Trump would argue at the cost of the US economy) bringing economic growth, wealth and social progression to the country. It is no surprise, then, that at the 2025 China Development Forum, attended by multiple Western business leaders (including FedEx), Chinese Premier Li Qiang Li stressed that entrepreneurs would be “staunch defenders and promoters of globalisation” and “resist unilateralism and protectionism”. International flows of capital and goods are still highly important for China which has an urgent need for foreign investment – FDI has been falling significantly in recent years – and at the same time access to global markets is critical for its export industry. It is also important to remember that globalisation has allowed it to project soft power throughout the world – especially into Asia, Africa and Latin America. In this regard, it shows no sign of a change in policy.
Given that China has much to lose from a ‘grand bargain’ which reforms or rewrites the global trading system, there would have to be a major incentive to engage with US demands. Some foreign affairs analysts think that Taiwan will be a very attractive bargaining chip in the reset, given Trump’s lacklustre support for its independence. Doubts have been raised over whether Taiwan can rely on US military intervention in the event of a Chinese invasion. A unification of the two countries (China views Taiwan as a rogue province) is fundamental to Xi’s vision of a Greater China.
Europe’s position in a future US/China-led world is precarious. Many in the region are naturally nervous of dependence on China and especially of Germany’s deep industrial ties with the country (mindful of its disastrous energy reliance on Russia). However, they feel rebuffed by the Trump administration’s plans for a trade war and its broader view that the region as a whole is ‘pathetic’, as communicated in recent social media messages. Even those who would have naturally fallen in with their Atlantic partner’s plans for the world are now thinking that Europe must go it alone, more in line with President Macron’s view of European strategic autonomy.
Business leaders themselves also have diverging views on the future of global trade. Sir Mark Tucker, Chair of the global bank, HSBC, said in a recent speech in Hong Kong that globalisation in its present form ‘may have run its course.’
“Economic considerations guiding optimally efficient supply chains led to one of the world’s greatest periods of wealth creation we have ever seen. The balance of economic power changed as a result, and what used to be sustainable no longer is.”
Whilst he was careful to add that he did not believe that the world would ‘regress or geo-fragment’, his main thesis was that the greatest opportunities would lie in new political groupings and trade partnerships. The BRICS+ group of countries is foremost in his mind, not least the links which it will create between Asia and the Middle East.
Whether ‘de-globalisation’ will occur or not, some sectors are already feeling the reality of President Trump’s trade policy. Tariffs on the import of finished vehicles will come into effect from 3 April meaning that, for the US consumer, European, Japanese and South Korean cars will become more expensive – how much more will depend on whether the additional costs are absorbed by the manufacturers. Foreign companies assembling cars in the US will not be impacted but they (along with US car makers) will be affected by a second round of tariffs on auto parts effective from 3 May. It is this second tranche which will be most far-reaching given the integration of the US auto industry within regional and global value chains. The rising cost of cars and car parts in the US will inevitably suppress sales and consequently production (possibly by up to 30%) impacting on transatlantic and transpacific volumes. Most at risk, though, are cross border flows within North America. Mexico and Canada believe that the imposition of tariffs is illegal under USMCA agreements – but it is unclear which organisation or mechanism will rule on this and whether any judgment is enforceable.
It is important to note that President Trump’s tariff policy forms part of a much broader strategy, the aim of which is to rebuild US manufacturing, hollowed out for previous decades by off-shoring or near-sourcing of production. Trump’s vision is to localise entire supply chains within the US – something which will have support in many parts of the economy (not least trade unions). Whilst many in global industry do not agree with the policy, this is a legitimate goal – and one which politicians in Europe also espouse (dressed up as ‘strategic autonomy’). However, as supply chains are re-built there will be higher costs for US consumers and a risk of lower quality products as US business becomes sheltered from global competition. It will take many years for manufacturers to adjust to the new environment – factories cannot just be relocated from Asia or Europe to the US overnight. Consequently, to avoid the disruption whilst achieving the policy goal, it could be argued that tariffs would have been better phased over a number of years, to allow manufacturers to invest in US production facilities.
Indeed, the fact that such high tariffs have been threatened (whether or not they are actually imposed) seems to suggest that maximum disruption was the aim. That is, to break the model and then re-build it in a form which favours the US. Only time will tell if this is the reasoning behind what otherwise seems to be haphazard and mutually destructive policy making.
Returning to my original question of whether a ‘grand bargain’ between the US and China will lead to a new global trade paradigm, this seems unlikely – at least in the short term: the US and China are just too far apart on many key issues, including security, and both sides are unlikely to compromise. Having said that, Xi may reckon that he will never have a better opportunity to achieve his goals in Taiwan and to this end he might be willing to make economic sacrifices. The WTO is likely to survive, although progressively weakened by US bilateral deals and by an emerging world focused on China. Eventually, it is possible to foresee three competing rule-setting blocs being developed: the US, China and Europe, creating a complex and difficult global environment which inhibits the efficient movement of data, goods and funds.
It may be tempting for many politicians in Europe and rest of the world to hope that there will be a reversal of policy at the next US presidential election. This would be foolish as there is no reason to think that the next President, either Republican or Democrat, would reverse many of Trump’s decisions. The world has been on a path towards neo-protectionism since the Great Recession of 2008 as evidenced by the number of trade barriers which have been implemented and the growth in industrial subsidies. Whilst the EU may cry foul over the presently threatened tariffs on vehicles, it must be remembered that it has agreed to tariffs of up to 35% on Chinese electric vehicles. Canada too has levied tariffs on Chinese EVs, steel and aluminium and China has subsequently retaliated with 100% tariffs on some agricultural products. Confidence in a rules-based multilateral trading order seems to be diminishing fast, and a future bilateral ‘grand bargain’ between Trump and Xi may eventually result in its complete demise.
Author: John Manners-Bell
Source: Ti Insight
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