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Another Economic Defense for the Multilateral Trading System

Cho_Sungjoon thumbBy Sungjoon Cho [originally posted on the International Economic Law and Policy Blog on January 7, 2020]

Stephen Roach (Yale) has recently published a must-read (“US, China and the Myth of Global Decoupling”), which refutes the logic of trade wars.  Here are main observations.

Today’s global economy is far more integrated than ever before. (…) The tighter that trade is woven into the fabric of global commerce, the tougher it will be to disentangle those linkages (…). —and the lower the odds of a more pervasive and disruptive decoupling. (…)

This diffusion of bilateral trade through multi-country supply chains would dampen the effects of a bilateral decoupling of any two economies, no matter how large.

Without addressing the US saving shortfall, raising tariffs and other barriers on China will simply divert trade away from Chinese sourcing toward America’s other trading partners. Bilateral decoupling does not mean global decoupling; it means trade diversion.

The trade diversion arising from bilateral decoupling would mean that US sourcing would migrate from low-cost Chinese production platforms to a broad constellation of foreign producers. (…) The bottom line is a likely shift to higher-cost production platforms. Ironically, that would be the functional equivalent of a tax hike on US companies, workers, and households.

These observations offer yet another powerful defense for “an integrated, more viable and durable multilateral trading system,” as stipulated in the WTO Charter.  As the WTO panel report on Section 301 highlighted, any unilateralist policy, such as a trade war, has “indirect effect (…) on individuals and the market-place, the protection of which is one of the principal objects and purposes of the WTO.” (para. 7.86).

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