Via Gulf News (April 13, 2018) – President Donald Trump sees international trade negotiations as if he was living in 1818, when commerce between countries more often than not was conducted bilaterally. He’s proclaimed on several occasions that he can get a far better bargain taking up trade agreements with other heads of state on a one-to-one basis. Indeed, the U.S. Negotiator-in-Chief is ‘Bilateral Man,’ hardly surprising for someone who cut his teeth doing one-off commercial real estate deals within the confines of New York City.
But this is 2018, and trade consummated even between two countries generally is comprised of multiple intermediate transactions mediated across several national borders. Hence, that is why the bedrock rules governing trade agreements today—embodied in the World Trade Organization (WTO), the successor organization to the General Agreement on Trade and Tariffs (GATT), which was founded in 1947—are multilateral in nature and negotiated among sovereign, not business, entities.
It would appear that the modern—and yes, complex–system of trade agreements is far outside of Mr. Trump’s comfort zone, perhaps even his understanding. As indicated by his handling of the trade problems between the U.S. and China—which are indeed serious and haven’t been dealt with sufficiently by earlier administrations—his anathema towards building coalitions among the 162 other countries that are WTO members to improve governance of international trade exposes all of us to significant risks.
In fairness to Mr. Trump, he has asserted he could potentially envision pursuit of broader multilateral trade deals based on the WTO’s ‘Most Favored Nation’ (MFN) principle—where all WTO signatories automatically are afforded uniform, non-discriminatory treatment. Such agreements, of course, stand in contrast to bilateral deals, where, by definition, the included parties treat each other on more favorable terms than either extends to all excluded countries. Hence why they are officially referred to as ‘preferential trade agreements’ (PTAs).
But it really is not the “either or choice” Trump makes it out to be.
The WTO specifically allows for preferential agreements—whether structured on a bilateral or a plurilateral, regional basis–as long as they meet certain criteria specified within the WTO agreement. In fact, with the 2016 bilateral trade agreement between Japan and Myanmar now in place, all WTO members are party to PTA’s in one form or another. But these bilateral deals coexist with multilateral agreements.
But even in the absence of a WTO or its strictures, any intent to govern a country’s amalgam of international trading relationships on a bilateral-by-bilateral basis in today’s globalized economy is short-sighted, if not foolhardy. Every Econ 101 student knows that. Here are several reasons why.
Yes, it is true that every industry engaged in exporting or importing does not necessarily operate in inherently globalized markets. But it is increasingly the exception to find sectors producing even simple tradeable items— whether in manufacturing, services or agriculture—whose fortunes, either on the input or output side, are conditioned solely by bilateral economic relations. Thus, while it may be cliché to state that everywhere competition among firms, workers and customers is inescapably and fundamentally multinational in character in some fashion, it is a fact of life.
In the parlance we veteran international trade negotiators use, in an increasingly globalized world economy, the ‘rules of origin’–which identify the extent to which a good is produced in facilities located in a particular jurisdiction covered by a trade agreement–are notoriously harder to meet for manufactured products because components from third countries are increasingly common in all bilateral trade.
At the same time, it is far more cost-effective to have world trading rules that are harmonized with the true multilateral nature of the global economy, rather than an artificial hodgepodge of separate bilateral trade agreements that superimpose fragmented rules on a game that is less and less fragmented.
It is for this reason that small entrepreneurs as well as large corporations abhor a series of bilateral agreements compared to one multilateral trade regime. In a nutshell, no one with real experience in international commerce responds well to overly complex and often overlapping multiple trading rules with which to comply.
Moreover, in light of the huge differences among countries in terms of economic size, small states—most of whom are developing countries—usually find negotiating on a bilateral basis with larger countries a truly unappealing enterprise. To this end, most developing countries long ago embraced the principle of multilateralism for structuring trade agreements inasmuch as there is power in numbers. Their leaders weren’t—and still aren’t—dummies.
Indeed, multilateralism was the core impetus for the creation of the GATT, which was an effort spearheaded by the U.S. and the other large trading powers just a decade after the Great Depression. Back then our leaders were enlightened enough to recognize that without creating incentives for developing countries to integrate into the world economy, global growth would be fundamentally handicapped and ultimately all countries would be worse off. Today, emerging markets are the engines of the globe’s economic growth. This certainly makes the obsession by the Trump White House with bilateral trade deals ironic.
Previous U.S. Presidents have come to the White House with seemingly strongly held notions about how they want to do battle on the international trade front, only to learn in time that their strategies needed to be modified. Indeed, the bilateral approach has been tried before, particularly in the George W. Bush administration. But in the end no big
economies were interested. Preferring bilateral deals sounds nice on first blush, but it’s a recipe for no significant agreements.
Let’s hope Mr. Trump becomes open to making that conversion.
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About Harry Broadman
Harry Broadman is an expert practitioner in international finance, investment and trade, business growth, risk-mitigation, innovation strategy, and corporate governance. One of the earliest serial entrepreneurs, he’s re-invented himself more than a handful of times not only in an interdisciplinary fashion, but also across greatly differentiated senior roles in the private sector, interspersed with stints as a high-level policy maker. Broadman has emerged as a genuine thought-leader on the unforeseen dynamics that have changed the underlying structure and character of world markets—long before the term “globalization” was commonplace.
These insights shaped his career focus on structuring cross-border transactions, especially in high-growth emerging markets, the parts of the world toward which Harry has always had a strong predisposition. Illustrative of this, he’s worked on-the-ground with businesses large and small in more than 75 such countries across 5 continents. With an innate sense of how business functions, Harry’s professional journey has been propelled by an intense personal inquisitiveness about the elements that shape how successful firms grow rapidly, excel at remaining more competitive than rivals, reduce exposure to risks, and constantly innovate.
Harry’s accomplishments have been marked by successively creative approaches to identifying and seizing ‘first mover’ market advantage; structuring robust transactions for new product market entry, geographic expansion and agile supply chains; executing novel, multidimensional risk-mitigation strategies; incorporating productivity-enhancing changes in technology into operations; and enterprise restructuring to achieve superior management of net assets to enhance investment returns.
He is a seasoned decision-maker, especially in fast paced, high pressured, risky business and policy environments, and a tactful, creative negotiator of multi-party investment and trade transactions, particularly with foreign enterprises and governments. He has been a driving force advising, helping to create or establishing afresh highly successful enterprises positioned at the leading edge of their markets, and the builder and leader of globally dispersed, large, multi-cultural teams of professionals.
Broadman brings to C-suites and boardrooms a unique combination of fundamentally insightful and pragmatic views about how commercial, financial and policy changes that drive international markets impact workers at the factory floor upwards to the executive management team—and the reverse. He has the rare ability to frame the most salient business issues from a perspective rather than simply a ‘rear-view mirror’ vantage point and do so through a prism that recognizes the ‘non-linearities’ of changes in business environments.
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