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The writer, an editor of the FT, is a former chief economist at the Bank of England
The recent World Trade Organization ministerial meeting ended in disgrace as it failed to reach an agreement on e-commerce tariffs and discuss much-needed reform of the WTO itself. This was a fitting end to a disastrous decade for global trade.
That decade began with Brexit and the tariffs of Donald Trump’s first presidency. Global trade was then rocked by the acute supply chain disruptions caused by Covid-19 and Russia’s large-scale invasion of Ukraine. It will end with US tariffs at their highest levels since World War II and significant supply chain disruption in the Middle East.
In the post-war golden age of globalization, world trade exceeded world growth by a factor of three. That era is over. For companies and countries, resilience rather than efficiency is now central to trade decisions. Some fear the death of globalization; others, a rupture in the world order and an associated decline in world trade, as in the 1930s.
To avoid that outcome, we must first understand what is driving this deterioration in trading sentiment. This lies in two catastrophic acts of willful blindness during the Golden Age: first, due to the negative social consequences of free trade and second, due to the inherent fragility of global supply chains.
Tellingly, it was these same mistakes that caused the rift in global finance during the global financial crisis. It was inequality that fueled the accumulation of excessive debt (particularly in housing). And it was the fragility of the complex credit chains that razed this debt house to the ground.
Less than twenty years later, the global financial system has been rewired and restarted. Credit has been diverted away from banking bottlenecks to improve system resilience. Breaks in the credit supply – currently think of private credit – rock the boat, but no longer sink the ship. Contrary to concerns at the time, resilience did not predict cemetery stability.
There are good reasons to believe that world trade this century is more likely to follow the path of global finance than that of world trade in the 1930s. Path dependencies matter. The cradle of global supply chains is so deeply entrenched in business models that unraveling them would be catastrophically expensive.
It would also be unnecessary. Rapid trade diversion is now muscle memory for companies and countries. This was illustrated after Trump’s imposition of tariffs a year ago, despite which trade volumes have continued to rise. The recent de facto closure of the Strait of Hormuz is causing a similar rewiring.
The ability to reconfigure quickly, if at a price, is the key to resilience. The solution to the vulnerabilities of the global supply chain lies in flexible trade models and diversified trading partners. For the WTO, success may lie in recognizing that these objectives are often easier to achieve through bilateral or plurilateral means.
A second reason for optimism about trade is the necessity of the circumstances. The world faces two acute challenges: lower living standards and higher costs of living, both exacerbated by events in Iran. The budget lacks space to address both problems. But hiding in plain sight is a tax-free way to kill both birds with one stone: trade.
Research shows that a 1 percentage point increase in trade intensity could increase national income by 0.5 to 1 percent and permanently reduce price levels by 0.1 to 0.5 percent. If Britain had a Nordic level of trade intensity, it would increase GDP by as much as a fifth and reduce prices by as much as 10 percent.
It is difficult to imagine many policies delivering such a double dividend at such a low cost. And the penny starts to drop. Necessity is the main reason why we have reached “peak tariff” in the US and why 1930s-style tariff retaliation has been rejected. It is certainly why Britain is accelerating its efforts to repair EU trade ties.
Yes, deepening trade can have inequality costs. But, marked by experience, policymakers are now more aware of these costs and, crucially, that they may be better addressed through active industrial strategies rather than defensive trade policies.
All this makes me think that obituaries on globalization are premature. Any breach in the world order is for the Achilles tendon, not the aorta – painful, not fatal. Perversely, today’s challenges are helping to renew the case for trade. Just as the global financial crisis ushered in a resilient new financial order, the ‘disastrous decade’ could herald the same for global trade.
