Regional conflicts, bottlenecks in maritime transport and wars of industrial repositioning between large economies add to the near future of world trade more and more variables of uncertainty. “Since the Second World War the world has evolved towards increasing interdependence. This trend will continue, despite the presence of moments of discontinuity, generally coinciding with the major issues of geopolitics. The world has not opted for trading blocs, not yet, no one has announced plans to abandon the global multilateral trading system. Furthermore, all regional and bilateral trade agreements are still based on global rules." Alan Wm. Wolff he is a visiting fellow at the Peterson Institute for International Economics in Washington, in the past he was a very high official at the WTO (World Trade Organization). After working in the US government for a dozen years, he had earned a reputation at the WTO as one of the most skilled trade negotiators in the big circle of international institutions. He recently published “Revitalizing the World Trading System” with Cambridge University Press, selected by the Financial Times as one of the best books of 2023.
Professor Wolff, could the Red Sea crisis and the blockade of the Panama Canal represent a new fracture in international logistics, speeding up the reorganization of global value chains?
“No one knows how long the Houthis will be active in interfering with shipping in the Suez area. It is also difficult to understand how much this situation will remain connected to the war in Gaza. However, I do not foresee that the partial interruption of transits in the Red Sea will be long-lasting. In any case, structural changes in supply chains require a long time and a lot of investment. The lack of water in the Panama Canal could instead be a more decisive issue."
Does China look favorably on this further new factor in the global trade crisis?
“I don't think China, as the world's largest trading country, appreciates disruptions that damage trade. I remember that the Chinese have only one military base abroad and it is the one in Djibouti, which is used precisely to fight piracy off the coast of Africa".
The trade deficit between the United States and China is slowly decreasing. This seems to indicate a decoupling of the two economies, originally also resulting from the tariffs imposed in 2018 by President Donald Trump on Chinese imports.
“There is more de-risking going on than decoupling. It is impractical and undesirable to have a peacetime decoupling of the world's two largest economies. The bilateral balance is not an accurate measure of the degree to which two economies separate or remain intertwined. Even as the bilateral balance shrinks, U.S. imports from countries with which China trades heavily are still increasing. This shows that their interdependence has not decreased dramatically. Essentially, Chinese goods arrive in the United States through third countries."
What could happen in the future?
“This is a trend that will continue to evolve. More generally, the two great world powers must reach a new modus vivendi, a new point of balance."
Are you worried about the trend of the Chinese economy?
“It's still too early to tell. In the last great conflict between the West and the Soviet Union, the Washington Consensus, or the liberal international order, prevailed. It was the economic strength resulting from a superior economic model that was the main factor by which the Cold War ended without a shot being fired between the main protagonists. I still have faith that the Western economic model proves superior to more statist models. It is true that China is now a mixed model, but there are important differences between the two economies. Currently, I would classify the more market-oriented model as much more efficient than the more interventionist one. The Chinese leadership takes the opposite view. Time will tell."
Will the additional costs of bringing strategic industrial production back home, or to nearby regions, represent an element of tension on the inflation front in Europe and the USA?
“Restructuring supply chains to increase resilience will increase production costs in many industrial sectors, which will in turn impact prices for end consumers. So the on-shoring process will certainly have inflationary consequences, but for this very reason it will have limits."
Will there be greater or lesser trade intensity between the USA and the European Union in the future?
“Trade between the US and the EU will continue to grow. It will be accelerated by the geopolitical rivalry between the United States and China, to the extent that this rivalry in many sectors can no longer be contained. In any case, self-sufficiency will not be the dominant feature of the future of the world economy, unless at unacceptably high costs. However, the strong trade between the US and the EU does not exclude growing trade with other producers. For example, trade in business services will grow substantially across countries with similar time zones, as Richard Baldwin of the Graduate Institute in Geneva suggests.”
From a perspective of growing conflict between powers, what will then be the new guiding principle of international trade?
“The movement towards de-risking will continue, both in national security goods and services and in technology. But even in the event of wars there will not be total decoupling between global economies. There will certainly be greater use of the national security exception compared to WTO rules. This will allow us to deviate from the commitments undertaken, such as the level of access to markets and the possible application of the principle of non-discrimination. The WTO must return to its roots, that is, maintain a balance of concessions that lives up to the principle of reciprocity. The practice should be that for every exception you have to pay a price in terms of compensation or you have to expect retaliation in terms of impositions."
Earlier you mentioned the progression of interdependence in the tertiary sector and digital services. Will there be two economic agendas in the future: one of the nation states and one of the globalized citizens?
“Much will depend on the direction that governments decide to take in their trade relations when they are real rivals. For example, access to the most used apps internationally may be increasingly limited by individual national security policies."
Will politics therefore return stronger than the market?
“Let's be clear: communications will be increasingly regulated while sports footwear will be marketed freely, even as the level of hostilities increases. Cross-border service provision and investment will be subject to worsening relations, along with sensitive goods. Global rules are based on convergence: if this process stops, or reverses, trade frictions will increase and will also prevail over the preferences of businesses and consumers."
