Globalisation, which was meant to ensure lasting peace, threatens to start a trade war

Globalisation has been a tool to contain Communism as much as it has been for global peace and prosperity. Eight decades after two leaders, Franklin D Roosevelt and Winston Churchill, laid the foundation for it, braving Hitler’s U-boats in the Atlantic, a Communist nation that gamed the system has become the bugbear for the crusader of capitalism, threatening to blow up the world order.

Financial markets are swooning. Corporations are running helter-skelter to ensure their factories are humming. Political leaders are scrambling to avoid a social breakdown, thanks to the indisc r i m i n a t e t a r i f f s t h a t U S President Donald Trump levied on goods across the board.

“This level (of tariffs) amounts to 10 times what Trump did in his first term and is similar to the peak of the Smoot-Hawley tariffs almost 100 years ago,” says Rob Subbaraman, economist at Nomura. “Whether deals are struck or retaliation intensifies, the outlook remains extremely uncertain.” That Trump put most of the tariffs on hold for 90 days, except on China, tells a story not just of the trade war, but something beyond, which historians call the “great power politics”.

China, the trading partner with which US runs the biggest deficit, is the only major economy that has retaliated with counter tariffs on US. The world is watching as to who would blink first. Whoever blinks, global trade may not be the same again.

ROAD TO GLOBALISATION
The 20th century may have been the most pathbreaking in the history of mankind as scientific advancements and inventions brought prosperity and pleasure, but it also showed the barbarism of men, with two World Wars killing millions.

As troops battled it out, British prime minister Churchill set sail to meet US president Roosevelt off the Canadian coast, which led to the Atlantic Charter, a document that was never signed. Apart from its political agenda, it had two important proposals that put free international trade as the cornerstone for lasting peace. The 1941 charter became the foundation for economic policies along with the Marshall Plan for rebuilding Europe.

Apart from the Bretton Woods twins—the IMF and the World Bank – nations evolved a trading system under the General Agreement on Tariffs and Trade (GATT), which culminated in the World Trade Organisation. “Non-discrimination” was the fulcrum of WTO. Nations were supposed to extend benefits that they showered on a country to all the member countries.

Every imported product was supposed to be treated as a national product. WTO set the rules with participation from member states and is the arbiter of disputes. Since its birth in 1995, it had been at the forefront of global trade. But over the last decade, it is increasingly losing relevance as regional trading blocs emerge. POLITICAL TOOL To be sure, globalisation was not born after World War II.

The Harappan civilisation had trade links with the Sumerians in Mesopotamia; the Cholas with the Malays; and the famous Silk Road that explorer Marco Polo linked Venice to China existed. But the latest version was supposedly a rule-based one. For a substantial part of the world which was economically poor, WTO and its predecessor GATT were replacing the gunboat diplomacy of the colonising Europeans.

The membership to the club was restricted only to democracies; countries governed by Communist Party were denied entry, at least in early days. Developed nations invented many things that could improve the material welfare of people, but they were soon running out of market with their low population growth.

WTO was a tool for them to make developing nations open up their economies for overseas goods. In terms of development, countries such as India, China, Indonesia and Vietnam did not have private sector enterprises that could match a General Electric, or a Siemens, or a Ford, in the 20th century. It was an uneven playing field. But developed nations too gave some concessions under the Generalised System of Preferences that gave room for differential tariffs for goods originating from developing nations which didn’t matter much.

Trade zoomed. Between 1995 and 2023, total world trade—goods and commercial services—grew at an average rate of 5.8 per cent, which translates into a nearly fivefold increase, data from WTO shows. Global tradeto-GDP ratio soared to 29% from 20% in the same period. The IMF and the World Bank were also at their disposal to push through the agenda of opening up marketsthat helped MNCs more than the locals, and often heaping more misery on people.

ENTER CHINA
While the WTO system of global trade is presented as a fair and just order, many developed countries manipulated the provisions designed to limit damage from unfair competition and protect some local industries.

“While they (West) preached developing countries should not subsidise their industries, they continued to provide billions in subsidies to their own farmers, making it impossible for the developing countries to compete,’’ Nobel laureate Joseph Stiglitz wrote in Globalisation and Its Discontents.

“While they preached virtues of competitive markets, the US was quick to push for global cartels in steel and aluminium when its domestic industries seemed threatened by imports.” Rules of the game were changed to suit not only the economic needs of the advanced nations, but as well as their political goals. China, a Communist Party-run country, was admitted to WTO in 2001 on a campaign it would move towards democracy and open up its markets for the rest.

Twenty-four years later, it is the opposite. China reneged on its commitments. It did not open up its markets and put restrictions on operations of global companies, including Google. It forced multinational corporations to go for joint ventures with locals that triggered a wave of charges of stealing intellectual property by the Chinese partners. That enabled them to produce copycats and sell in Western markets at a fraction of the prices.

The state-administered economy subsidised businesses and manipulated the currency to gain competitive advantage over others while US officials kept threatening punishment but nothing materialised. Its trillions of dollars of trade surplus became a springboard for its political ambitions—like the Belt and Road Initiative, a project that built infrastructure in many poor nations, buying their support. Its rising economic power not only weakened the US economy but also threatened the American hegemony.

As history shows with France, Germany, UK, and US, it’s the economic strength that translates into military dominance. Trump is probably trying to retain the edge by weaponising tariffs.

“A rising China will have strategic interests outside of Asia,” writes John Mearsheimer in The Tragedy of Great Power Politics. “China will have good reason to interfere in the politics of the Americas so as to cause Washington trouble in its own backyard. China will have powerful incentives to forge ties with Canada and Mexico.” Trade policies often have less to do with trade and more to do with politics.