As trade barriers go up in the West, the rest are ‘reglobalising’

The West is dismantling the free trade order it created and propounded, even as the rest of the world pushes for more trade and opening up
Trade will emerge profoundly different, more complex and diffused. Chest-beating isolationism can’t change how the world is growing more interdependent

Andrew Sheng

Published: 3:30pm, 23 Feb 2024

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Back in 2021, amid a raging pandemic, the US National Intelligence Council warned of a more contested world in its Global Trends 2040 report. It highlighted the themes of global challenges, fragmentation, disequilibrium, contestation and adaptation.

Post-Covid, a world that has experienced vaccine and digital divides between the West and rest does appear to be fragmenting into blocs reinforced by nationalism and polarisation and which feature deepening inequalities, failed international cooperation on issues such as climate change, and the rise of non-state actors such as terrorists, drug lords and rich foundations.

As decoupling and “de-risking” dismantles global supply chains, the fragmentation of globalisation is looking more likely. Is Asia prepared for such a deglobalisation scenario?

The reality is that the rich West is turning inward, building up fences along trade, finance, digital, migration and military lines. The EU Carbon Border Adjustment Mechanism, to be implemented by 2026, is an example of new barriers being erected, even though the idea of putting a fair price on the carbon emitted by producers exporting to Europe is laudable.

Another example is the sixfold jump in US tariffs on Chinese imports since 2018, which have, ironically, reduced US jobs and output. US imports from China have fallen but imports with substantial Chinese inputs from countries such as Mexico and Vietnam appear to be taking up the slack. Nevertheless, the onshoring of essential production vital to national security, such as semiconductors and defence equipment, will not be reversed.

The irony is that the West is dismantling the free trade order it created and propounded, even as the rest of the world pushes for more trade and opening up.

The rest have bought into trade blocs – such as the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – and free-trade areas such as the one proposed between Asean and China. The US is not a member of either regional group, and neither the Democrats nor Republicans have the appetite for major trade reforms.

Why are we in such systemic gridlock? Robert Lighthizer, the Trump administration’s trade negotiator, laid it out: “I believe trade policy should help working-class Americans find and maintain good-paying jobs. But for decades, it has instead centred on price optimisation, efficiency and corporate profits. The result has been the loss of millions of jobs, the destruction of thousands of communities, and the accumulation of trillions of dollars of trade deficits. This policy has made the country weaker and poorer.”

The blame for the working-class impoverishment has been laid at China’s door, but China and the rest of the world cannot influence US domestic tax and labour policies on how to narrow the gap between its rich and poor. The real barrier to change is the political gridlock whereby domestic politics and vested interests are unable or unwilling to break the bureaucratic silos that protect their own turf.

Inevitably, over time, many global leaders have adopted a presidential style of governance, gathering more executive power into a central core that oversees not just policy formulation, but also execution and funding. Indeed, some of the stronger leaders have eroded checks and balances by the legislative and judiciary branches, displaying autocratic tendencies rather than the democratic tradition. It is unsurprising that many who lead the largest and most powerful nations are men over 70 years old – Indonesia’s newly elected president Prabowo Subianto is the latest example – displaying right-wing, centralised forms of leadership.

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At the same time, the nature of trade has changed profoundly. Trade thought leader Richard Baldwin argues that the future of global trade is in digital services, not physical goods.

Even if the supply chain reconfiguration is distributing production out of China, there is growing trade among the rest of the world while intra-West trade is in decline. The rise of digital platforms, such as those that enable individuals and small businesses to clear payments directly with each other, will facilitate B2B (business to business) and C2C (consumer to consumer) trade, reducing the role of multinationals.

Asia’s rising economies are more than ‘China Plus One’ destinations

Furthermore, the trade in goods and services, including trade conducted by small and medium-sized enterprises, would increasingly have to meet environmental, social and corporate governance (ESG) standards.

Despite the geopolitical differences that border on existential decoupling, all sides agree that preserving ESG-compliant trade by SMEs would help create domestic jobs. The big fight will be how to create the standards, processes and trustworthy trade, clearing and payment systems that would enable consumers, companies, financial institutions and nations to be the winners in the changing trade landscape.

Much of the trade will still be denominated in dollars, euros or the yuan, but there will be more alternatives such as digital tokens, stablecoin and new forms of cryptocurrency.

Despite talk of de-dollarisation and deglobalisation, the shift out of dollars and global trade will not be easy. But the more sanctions are imposed, the greater the incentive for member of the Brics bloc (originally Brazil, Russia, India, China and South Africa) and others to use their currencies and digital assets to enable trade that is not transparent to Western surveillance.

In sum, the rest of the world still buys into the idea of using open trade to uplift economies and create jobs, with greater awareness that the rich West may become more protectionist and isolationist in subtle forms. Instead of deglobalisation, there is “reglobalisation”, meaning that trade will emerge profoundly different, more complex and more diffused. The world is becoming more entangled, interconnected and interdependent. No amount of chest-beating isolationism can change that.

Andrew Sheng is a former central banker who writes on global issues from an Asian perspective