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Trade and Power: how the world has changed...

What have the start of the World Cup, the G7 meeting, the Trump-Kim Summit, the rebellion of 90 Labour MPs against the party whip in a Brexit vote and global trade got in common?

 

 The simple answer is, an age-old struggle for power and control that is increasingly being fought through non-conventional means.

Since the Brexit vote and since Donald Trump came to office, the world has changed. Relations between allies and foes alike have deteriorated;  the rules-based international order is creaking under the pressure of bilateralism;  digitisation and the shift of economic, social, political and even military worlds into cyber-space threaten national and personal security.  After the Global Financial Crisis, there was a cry for new leadership to carry the flag of globalism and multilateralism. The vacuum is currently being filled by blatant nationalism: while violations of the ceasefire in Ukraine escalate, the World Cup will be a triumph of Russian soft power;  Mr. Trump’s America First agenda will continue to undermine long-held strategic alliances;  and in the absence of any meaningful opposition, the uncertainty surrounding the UK’s exit from the EU will continue.

Trade is pivotal to all this. Globalisation has meant that the economic power that the developed world has on paper at least has diminished.

For example:  the US share of world exports has dropped by over a third;  Germany’s share by 23%;  France’s share by nearly 44%;  and Japan and the UK’s 52% each. In contrast, China’s share has grown by 163% and South Korea’s by nearly 20%.   More than this, China used to export intermediate manufactured goods which were part of supply chains that originated in the developed world. Its exports of computers have declined since the financial crisis in value terms as the technology itself has advanced. Instead, China’s growing exports are in goods that can be used for civilian or military purposes and which have high technology components: transmission equipment that has grown at an annualised rate of 10% since the financial crisis and is now worth $188bn.

It is little surprise that the world’s largest economies feel under pressure as their dominance of world exports, and world technology appears in decline.

The G7 Summit clearly demonstrated that the US is worried about this. Size matters to Donald Trump and whether it’s nuclear buttons or trade balances, the ‘Make America Great Again’ fulcrum of US foreign policy means that trade is being used as a weapon of coercion and influence around the world. While it seems a life-time ago, it was only last year that Trump railed against China’s trade with North Korea with those immortal lines: “I am very disappointed in China. Our foolish past leaders have allowed them to make hundreds of billions of dollars in trade a year, yet they do NOTHING for us with North Korea, just talk. We will no longer allow this to continue. China could easily solve this problem.” 

This use of trade to achieve bigger strategic targets is now the sub-text to the current “dispute” about iron, steel and aluminium tariffs. The use of national security as a means to justify tariffs creates confusion, because invoking it suggests that the US is suffering an existential threat to its security because of the actions of its allies. While this is clearly not the case, there are two clear strategic objectives:

The first is to test resolve to address the issue of Chinese iron and steel surpluses using WTO safeguarding rules, which protect countries against dumping on national security grounds. These checks and balances are weak, and the US is clearly testing them. If the EU or Canada retaliate then on similar “national security” grounds then it is them that has triggered a trade war, not the US. But equally if the “G6” use the WTO mechanisms to align with the US on Chinese dumping then the US itself will be compelled to work within multilateral rules. This explains why the EU has been so keen to use WTO dispute resolution systems to pursue both the US and China.

The second reason is contributions to NATO. The US has long complained about how most of the European nations contribute less than the recommended 2% of GDP to the NATO budget. The sub-text evident in press-briefings and tweets over the G7 gathering was that the trade surplus was unacceptable to the US, not just because it was “unfair” but also because Europe did not contribute enough to NATO budgets given its surplus. Germany contributes the second largest amount to NATO, and has committed to spending more as a proportion of its GDP; it also has the largest trade surplus and is the focus of US ire but has the biggest bargain chip as a result.

So where does this leave the UK? The UK meets the 2% of GDP guidelines. The UK has recently had a mild surplus with the US but the US contests this saying it has a surplus with the UK. Unique Coriolis data suggests that the surplus or deficit issue is resolved by taking into account trade in unclassified goods - that is goods that pass through customs as “unknown” but are correlated with movements in arms and oil trade. These are accounted for differently in each country and averaging them out balances trade between the two countries. But the net effect is that we have little or no bargaining chip with the US.

The world is in a period of transition. The emerging era will be more rather than less inter-connected:   it will not be possible to prevent technology, intellectual capital or financial capital from transferring across borders. Howsoever the US may want to fight its wars through trade-based sanctions and tariffs, the global economic system has changed too much for these genies to be put back in their bottles. There is little appetite for war of any kind, but while the world works itself through this transition, it is likely that we will see more trade war rhetoric and not less.

The defence of multilateralism is key to this if the UK is genuinely to show itself to be a global champion of trade. But maybe policy makers need to accept that we are in a very different global place compared to where we were when the Brexit vote took place. The public is owed an explanation of why multilateralism is worth defending because we are stronger as part of a bigger bloc than by ourselves. This might mean re-casting the Brexit debate. But that is a price worth paying.

 

 

 

 

 

 

Rebecca Harding, CEO, Coriolis Technologies Ltd

Women in FinTech Powerlist, 2017: http://womeninfintech.co.uk/wp-content/uploads/2017/11/wif_2017_powerlist.pdf

“The Weaponization of Trade: the Great Unbalancing of Politics and Economics” 
Rebecca Harding and Jack Harding.  London Publishing Partnership; October 25th 2017 * 170pp paperback *£9.99; ISBN 978-1-907994-72-2 ORDER HERE: http://londonpublishingpartnership.co.uk/weaponization-of-trade/

Coriolis Technologies Ltd is a UK registered business no: 10755395, Registered address: Bennett Brooks and co Ltd, 50, Eastcastle St, London, W1W 8EA; VAT no: 268929050