Last year’s flirtation with protectionism has caused a structural shift from sweeping, multilateral trade pacts to comparatively modest, bilateral deals.
The rise of international trade during the past three decades trained large companies to think globally when developing new products and services and act decisively when new markets present opportunities, whatever they may be.
This has had myriad benefits, from cheaper goods for consumers to lower rates of poverty for the world’s most vulnerable populations, and of course, better profits for the shareholders of multinational companies. But more recently, the cloud of protectionism caused companies to momentarily question whether these opportunities will exist in their current form moving forward.
There are reasons to anticipate that globalization will continue to face pressure from competing ideologies. But despite two nudges towards protectionism in 2016—Donald Trump’s election in the United States, and Brexit in the United Kingdom—the world is not in the throes of a structural shift towards it.
Case in point: Emmanuel Macron’s decisive victory over nativist Marie Le Pen in France’s presidential elections in May.
And if that wasn’t enough, finance ministers from Japan, China, and South Korea recently signed a pact to resist all forms of protectionism.
So those invested in global trade can breathe a sigh of relief, as long as they do so with a bit of caution. Actively making it harder for businesses to leverage new markets and use the collective resources of the planet well is not the new normal.
But 2016’s flirtation with protectionism does have one immediate consequence that is set to alter trade in a historic way: a structural shift, not from globalism to protectionism, but rather from sweeping, multilateral trade pacts to comparatively modest, bilateral trade agreements.
President Trump has expressed a preference for bilateral trade deals over multilateral ones, citing his ability to negotiate better terms for the United States. While the United Kingdom’s way forward is still being mapped out, it will most likely involve country-by-country negotiations since, as we noted in last month’s column (June 2017 American Shipper, “Post-Brexit trade policy roadmap,” pages 29-30), retaining single-market status with the European Union is unlikely. And although the Trans-Pacific Partnership (TPP) may lurch forward in name, it will not be the sweeping, pan-Asia agreement meant to blunt China’s soft power over the West that U.S. policymakers originally envisioned.
In other words, protectionism has changed the global trade game, even if most governments and businesses continue to lean toward globalization. And, for two distinct reasons, a world in which bilateral trade agreements drive international trade is inherently more risky and more uncertain than a world in which multilateral agreements that include the world’s dominant economies do.
The first reason is logistical. As trade practitioners know, bilateral agreements can intertwine with existing or proposed agreements, creating confusion and contradiction. Known as the “spaghetti bowl effect,” this is the primary reason trade practitioners prefer that new agreements harmonize rules of origin requirements and other standards with existing ones.
The second reason is practical.
Because modern media is a borderless, 24/7 construct, constantly churning out news content, parties with a vested interest in trade policy outcomes are able to leverage and at times exploit media channels to benefit their respective legislative interests. A recent CNBC report, for example, stated that Japan is “only pretending” to negotiate a bilateral trade deal with the United States. Perhaps this is the plain truth, but it’s also possible it is a strategic message designed to strengthen the negotiating position of one party or another.
This is not to imply the media can’t be trusted. Rather, it’s to acknowledge that many governments compete for the most advantageous trade policy, that there are ways to negotiate in part through media instead of traditional diplomatic channels, and that transactional reporting affects how facts are reported. This all makes it tough to make realistic predictions when it comes to prospective trade deals.
The “spaghetti bowl” phenomenon in trade agreements creates risks, while the notion of not being able to forecast which bilateral deals might go into force years from now creates uncertainty. And while the difference between risk and uncertainty might seem like a rhetorical quibble, it’s really quite profound.
…While the difference between risk and uncertainty might seem like a rhetorical quibble, it’s really quite profound.
Risk exists when one has a set of known information and a set of unknown information, and knows the possible outcomes. A good blackjack player can calculate her odds of winning if she has 11 against the dealer showing seven, and that should help her decide how aggressive to be. Hopefully, she doubles down.
Uncertainty, on the other hand, exists when one has a set of known information and a set of unknown information, and it therefore becomes impossible to predict every potential outcome. If that same player doubles down and the dealer flips over a card with a unicorn on it, all bets are off. The player’s calculations have been rendered completely useless because she and the dealer are not even playing the same game.
Simply put, risk can be managed, while uncertainty cannot.
It is likely that more bilateral deals, particularly by the countries that have recently flirted with protectionism, will over the long term create both new risks and new uncertainties for businesses relying on cross-border trade. If the United States, for example, moves forward with bilateral deals, one obvious uncertainty is which countries, and on what terms, the country might (or might not) do business with moving forward.
And let’s say Japan, which paid a significant amount of political capital to shape TPP in the first place, takes up leadership on what remains of the agreement. That would in all likelihood create new contradicting trade linkages—i.e. new risks—for companies that have supply chains or customer bases that span both hemispheres.
This risky and uncertain environment makes it all the more important for trade teams to think and act strategically when it comes to assessing and seizing new opportunities.
Haurie is vice president of business development for ONESOURCE Global Trade at Thomson Reuters. He can be contacted at email@example.com.