The allure of global commerce and exploration has continuously intrigued the psyche of mankind throughout ages. Tales of Alexander the Great and Marco Polo, or historic events like the establishment of the Silk Road and East India Company, illustrate the fascinating interaction between trade and human civilization. But, it is noteworthy that for a significant part of human history, the dynamics of trade were more in favor of power than equity. Yet, this scenario witnessed a transformation with Adam Smith and David Ricardo. They demonstrated the adverse economic effect of tariffs, which increase the burden for importers, force the redirection of production towards countries with higher costs, curtail innovation and breed monopolies and corrupt practices.
The international trading panorama underwent a radical change in the aftermath of World War II. The United States, having emerged as a potent economic and military superpower, majorly influenced the global trading system. The formation of the General Agreement on Tariffs and Trade and its subsequent evolution into the World Trade Organization, had far-reaching benefits not just for the US but also globally. This marked the start of phenomenal economic growth spanning eight decades.
Gradually, trade barricades were diminished under the stewardship of the WTO, which favored open global trade, regulated disputes, and facilitated reciprocal negotiations for reducing tariffs and eliminating other trading hindrances. This system enjoyed a reputation of immense success till about ten years ago. However, the 2016 US presidential election marked a turning point.
In the first term of the then president, the trading equilibrium witnessed a significant disruption. Many of the freshly introduced trade policies were retained by the incumbent administration. At present, any good imported into the US attracts a tariff of 10% as standard, with a 90-day negotiation window to avoid further rate increase.
The recent trade policies, however, have been erratic, leading to a climate of overall uncertainty. The focus of the current administration seems to be more towards maintaining global dominance, but the outcome so far has been a tumultuous trading atmosphere in contravention of the foundational principles of the WTO.
This upheaval in policy has resulted in a highly volatile trading milieu. When the stability of market access and predictability of future tariffs are uncertain, importers and exporters are less inclined to venture into long-term investments. This situation might lead to a noticeable dip in global growth prospects.
If individual nations react by attempting to cater to these unclear and fluid demands, a split in the world economy could result, characterized by decelerated growth rates and increased instability. Given these circumstances, some nations are contemplating the establishment of a new trade conglomerate that respects WTO principles but operates independently of the US.
Discussions are under way to form an international trade entity that would smooth the process of dispute resolution, consequently minimizing US bargaining power. This proposed entity might be referred to as the Minus US Trade Organization (MUTO). This concept is not entirely innovative.
Indeed, numerous countries agreed to resolve their trade disputes amongst themselves using WTO processes when the dispute resolution mechanism of the WTO faced a deadlock. If a significant number of countries assert their commitment to tariff and trading rules within a proposed MUTO framework, it could lead to a diminished US influence and trigger a resurgence of an open multilateral trading system.
The proposed changes have promising implications for the global economy if effectively implemented. If nations who are the target of new trading procedures can manage a quick and unified reaction, it might kick start an improvement in the global economic outlook.
However, if the present scenario continues unabated, the economic development achieved over the past eight decades may suffer significant setbacks. It is essential, therefore, to consider the implications of these ongoing shifts in international trade policy, and to explore alternate frameworks that promote stability and growth in global trade.