Europe and the US exclude China at their peril

The proposed Trans-Atlantic Trade and Investment Partnership (TTIP) is a bad idea, especially in its timing.

Why is it a bad idea? We all know that the world has undergone its most profound transformation in at least two centuries, arguably more. The world economy has been transformed from the quasi-hegemonic dominance of the West to the rise of the Rest, notably China. We know that history shows how dramatic major power shifts can be, even as far back as Thucydides’ chronicle of the Peloponnesian wars in the 5th century BCE as Sparta challenged Athens. Two world wars in the 20th century are a more recent and bloodier reminder. The 12-year depressing history of the World Trade Organization (WTO) Doha Round proves conclusively our inability so far to adjust to the new global realities and the new global players. It is a bad idea under these circumstances for the West to be seen, as it will, to be carving out its own exclusive space. The West should be seeking to engage with the Rest. The West should be aiming to unite, not fragment the global trade regime. TTIP is not the way to go about it.

Why is the timing especially bad? Since 2008 the world economy has been in a shaky condition and immediate prospects are not good. Not only are the industrialized countries seeing more possible downturns, but so are emerging economies, including China, India and Brazil, the three main powers of the Rest. Difficult economic times with accompanying high rates of unemployment, corresponding pretty much to the current universal pattern, provide fertile grounds for political populism which invariably is reflected in protectionism. As the 11th Global Trade Alert Report highlights, recourse to protectionist measures has been the worst since the onset of the 2008 recession. Drawing comparisons with the timing of the notorious 1930 Smoot-Hawley Tariff Act, which plunged the world into trade conflict, greatly exacerbating the Depression and increasing unemployment, may be pushing things a bit far. However, the combination of the West seeking its own exclusive agreement through TTIP and the proposed Trans-Pacific Partnership (TPP) that also excludes China, could easily be seen as a policy of containment.

From Atlantic to Pacific Charter

During much of the first half of the 20th century the North Atlantic powers were engaged in war, with the Second World War having been precipitated by the Depression, protectionism and the rise of unemployment. The trading disorder of the 1930s was a major cause of war. In August 1941 Winston Churchill and Franklin Roosevelt met in Placentia Bay, Newfoundland (Canada), and on the 14^th of that month issued The Atlantic Charter, without doubt one of world history’s most remarkable documents. It sets out eight “common principles”; the fourth reads in part as follows:  “they will endeavour to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity”.

Thus were laid the ideological foundations for the boom in trade and the peace that has reigned in the North Atlantic for almost seven decades now. During most of these decades, in fact until about a decade ago, the West (with Japan) continued to dominate trade and set the rules. In the course of the last decade the Western trade apple cart has been upset by the rise of new trading powers, and especially China.

The West should take a page out of its own history book. The Roosevelt-Churchill meeting occurred as Europe was at war and the US would be in a matter of a few short months. How different history might have been had the Atlantic Charter, instead of the Smoot-Hawley Tariff Act, been issued in 1930. As the philosopher George Santayana wrote: “those who forget history are doomed to repeat it”. So in this context, what should we remember?

1)    When new powers emerge, tensions, potentially leading to major conflicts, with established powers ensue.

2)    The first half of the 20th century was ravaged by protectionism and trade wars.

3)    The second half of the 20th century, in contrast, exemplified the crucial role of freer and fairer trade within a rules-based multilateral regime in generating unprecedented peace and prosperity, especially, but not exclusively, across the North Atlantic. It is difficult to envisage how the NIEs (newly industrialized economies, namely Hong Kong, Singapore, South Korea and Taiwan), which had such a critical effect on the liberalization of trade across much of Asia and the developing world, could have succeeded in their export-oriented policies had the regime been different.

4)    THE key foundation stone of the rules-based global trade regime is the principle of non-discrimination. Though the principle has often been violated in practice, it was absolutely vital to the peace and prosperity achieved.

What do these four lessons of history teach us?

1)    We should assume we are living in a potentially highly destabilizing geopolitical context as global power shifts occur and thereby engage in a policy of engagement rather than discrimination.

2)    We should pay close attention to the trade lessons from the 20th century, especially the 1930s.

3)    An increasingly open global multilateral trade regime is the best guarantor of peace and prosperity.

4)    The principle of non-discrimination should be seen as sacred.

The TTIP has got off to a rocky start. Its success is by no means certain. Even so, it can be seen as an attempt to reject the new realities and to consolidate the West in order to maintain its global economic ascendancy. It is by definition discriminatory. Clearly, what is needed today in the face of the new realities is not to isolate, let alone alienate, China and other rising powers, but to engage globally and multilaterally.

The success of the WTO and its predecessor the General Agreement on Tariffs and Trade was based on the fact that its leaders shared a common vision of what the institution was supposed to achieve. That was the case over the decades when what was referred to as “the Quad” (Canada, EU, Japan and the US) was at the helm. That common vision was to a considerable extent based on a shared historical experience. Today, in the much more complex world of the Rise of the Rest, the common vision is lacking, in part because of quite divergent histories in respect to trade. It is clear that the TTIP is going to demand an enormous amount of energy and attention from the US and the EU. This necessarily will be at the expense of more critical global trade challenges. Efforts should instead be directed at seeking to achieve a common vision for the 21st century global trade regime between the West and the Risen Rest and to build on the basis of this common vision a robust, inclusive, sustainable and equitable global trade order. As the centre of economic gravity moves from West to East, a Pacific Charter might be composed and issued, not to supplement, but to complement the Atlantic Charter.

Author: Jean-Pierre Lehmann is Founder of The Evian Group and Emeritus Professor at IMD, Lausanne and a member of the World Economic Forum’s Global Agenda Council on Global Trade and FDI

Image: A container ship is seen in Calabria, Italy REUTERS/Alessandro Bianchi