Confronting neo-mercantilism: why regulation is critical to global trade

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Paul Rawlinson, Global Chair, Baker McKenzie

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The regulation of international trade is under the spotlight like never before. Trade tensions between the US and China, a fractious Brexit negotiation, the rewiring of NAFTA and a deadlocked World Trade Organization (WTO) highlight current challenges and the importance of legal regulation to keeping global trade and investment flowing.

Without agreed legal frameworks, the default becomes “might is right”, where the most powerful countries leverage their positions to favour themselves over others. Unfortunately, this is the direction in which we are headed. The unforeseen return of mercantilism – particularly in the US under President Trump – is based on the false premise that one country can only make economic gains at the expense of another. It holds that every deal has a winner and a loser, and nothing can be mutually beneficial.

The weaponization of tariffs and the focus on eliminating individual trade balances is based on long-discredited theories that predate globalization and modern central banking. These include the premises that there is only a fixed amount of wealth and growth available in the world, and that the nation state is the best unit for organizing economic activity and grabbing a bigger share of this fixed pie from other countries.

This is nonsense, but no less dangerous for being so. If countries cease to adhere to an agreed regulatory framework for trade, then there is no functioning international system to govern a world economy that for decades has grown through globalization and a multilateral approach to trade. The latter has been underpinned by a WTO rulebook that says if you offer something to one country, then you must offer it to everyone.

The idea that it is China’s problem that the US buys more goods from China than it sells is as wrong-headed as the premise that the EU is at fault for selling more cars in the US than US manufacturers sell in the EU. Looking at individual deficits is meaningless. To paraphrase one economist: I have a terrible deficit with my barber – I give the guy money every few weeks and he has never given me so much as a dime. Some of the Brexit debate is just as unsophisticated, with a number of British politicians making factually incorrect assertions about WTO rules.

All the evidence points towards some world leaders having misunderstood the function of trade and the WTO. They ignore the rules, not just at their peril but to the detriment of the entire global economy. A government that gets this wrong can crash its economy. It’s hard to argue that now is a good time for investment, if you cannot know whether tariffs will apply to your imports or exports, at which levels, or on which goods.

On a more positive note, new foreign investment screening rules proposed or implemented in the US, Germany, the UK, the EU and elsewhere are overall a positive development, despite being sometimes incorrectly bracketed with tariff barriers as protectionist policies. Some economies have perhaps been more open to strategic investment by third countries than they should have been.

Having sensible rules that look not just at national security concerns, but also regulate the terms under which third countries can buy strategic and technological assets, protect free market principles as much as individual nation states. Reciprocal market access is also necessary for a level playing field.

Our recent Global Transactions Forecast with Oxford Economics shows how a functioning rulebook to govern global trade matters. We predict a global trade war would knock down global transactional activity by a third, wiping out $1 trillion worth of deals. It’s a sobering thought, and one we must all take seriously.