The free trade order that has served as the foundation of today's global economy is faltering. This is because the U.S., a longstanding champion of free trade, is now behaving more like a challenger to the established order. To maintain and reinforce an open economic system, it is necessary to build a framework for global cooperation, with Asian and European nations taking the lead in that effort.
One year ago, there were worries that the administration of newly inaugurated U.S. President Donald Trump would plunge the world into a trade war. Fortunately, such fears have not yet materialized. Though Trump withdrew the U.S. from the Trans-Pacific Partnership trade agreement soon after taking office, he has not taken the drastic steps, such as imposing punitive tariffs on Chinese goods, that he had hinted at on the campaign trail.
Nevertheless, there is no doubt that the state of affairs surrounding free trade is gradually deteriorating. The U.S. government is taking a tough stance in talks with Canada and Mexico over renegotiating the North American Free Trade Agreement, demanding, for example, that products contain a certain percentage of U.S.-made parts if they are to be exempt from import duties. Washington is even indicating that it could pull out of NAFTA if these and other demands are not met.
The Trump administration also seems committed to taking unilateral, retaliatory action against its trading partners at its own discretion. Washington, for example, has not backed down from its threat to curb steel imports if it judges the country's dependence on foreign steel to be a threat to national security. The U.S. government is also mulling reprisals against China's alleged infringement onintellectual property rights and other practices, based on Section 301 of the Trade Act of 1974.
The Trump administration's apparent attempts to undermine the functions of the World Trade Organization, such as delaying the procedures for appointing new appellate judges to hear international disputes, must not be overlooked either. Such actions seem to be motivated by the belief that the WTO regularly sides against the U.S., while showing leniency toward Chinese trade practices that are widely seen as distorting markets.
China's behavior is also problematic. Some foreign companies looking to set up operations in the country are effectively required to hand over their technology to Chinese business partners, while the Chinese Communist Party is tightening its grip on domestic companies. These moves are clearly at odds with Beijing's stated pledge to let markets play a key role in the economy.
In short, America, a longtime free trade leader, is now trumpeting a doctrine of putting national interests first, while China, once expected to step up its trade liberalization after its accession to the WTO, appears to be pushing for a state-led economic system. This presents a major challenge for the world economy, which relies heavily on these two countries.
What can be done to remedy the situation? The first step should be to counter protectionist trends by pushing ahead with free trade agreements that meet the needs of a new era. In 2017, Japan and the European Union wrapped up negotiations on an economic partnership agreement, while the remaining 11 signatories to the TPP reached a broad agreement on the pact without the U.S.
Greater progress toward broad pacts that not only reduce tariffs but also set high-standard rules for intellectual property rights and investment will serve to put pressure on the U.S. and China.
The second step is to persuade the Trump administration not to undermine the multilateral, rules-based free trade system, and encourage the Chinese leadership to create a free and fair trade and investment environment that befits its status as a great power. The most effective way to achieve this would be to urge Washington and Beijing to join international efforts to create cooperative frameworks.
Excess capacity in the global steel industry, for example, is a problem that can be addressed through global coordination. More than 30 countries, including China, Japan, the U.S. and European nations, held a ministerial-level meeting last November and agreed on a number of principles to address the issue, such as refraining from subsidies and other forms of government support for the sector.
Efforts are also needed to ease people's discontent and anxiety about their livelihoods, a major factor in the rise of protectionism. It is important to foster stable economic growth that benefits a broad range of people.
Will the open economic order crumble, or will the world find the strength to protect and rebuild it? 2018 will be a crucial year in determining which of these two scenarios prevails.