Trade War & WTO Governance

The free world countries are becoming increasingly worried about the U.S.  protectionist policies that initiating chaos in the international trades and weakening the global institutions such as the World Trade Organization(WTO), and International Monetary Fund(IMF).

These institutions were established in the 1940s to regulate, monitor, and expand the international trades. They have governed the international trades since then and have become powerful and well settled global organizations. But President Trump’s Anti Global and “protectionism policies are challenging the governance and authority of these institutions. So, the concern about the sustainability of the current world order is increasing due to the imminent clash between institutionalized globalists and the US protectionists such as President Trump. 

US administration is talking about fair trade vs. free trade and unilaterally push for renegotiating the multilateral trade agreements such as NAFTA. It is claiming that it has been taken advantage of by almost every country during the last decades which must be stopped and compensated Although most of the analysts believe that the Trump protectionist views will not prevail, but they might also ignite a trade war and ends to chaos in the world order and hurts the consumers particularly those in the small countries.

Soon after his inauguration, President Trump withdrew from Trans-Pacific Partnership (TPP) and started talking about fair trade vs. free trade, criticizing the multilateral agreements, saying they have hurt American interests for decades and asking for bilateral agreements and renegotiation the existing agreements such as NAFTA.

On Thursday, March the first, Mr. Trump suddenly announced 25% tariff on steel and 10% on imported aluminum. This announcement was not welcomed by the US allies and some influential cabinet members. The US allies warned of a trade war. The secretaries of state and defense warned that it could endanger the US national security and his chief economic advisor “Gary Cohn “resigned in opposition to the president style of "Protectionism".

But he did not back off, and on the 8th of March, he signed an "executive order” based on which a broad tariff on imported steel and aluminum was initiated unilaterally. A controversial move that threats the world trade order and if continues it might create a deep global chaos. Canada & Mexico were exempted temporarily to see if he can get a good deal with NAFTA negotiations. The US administration also left the door open for its allies to negotiate for tariffs exemption. Apparently, he has taken the tariffs as a hostage to push for bilateral new agreements.

The World Trade Organization is the largest organization in the world with 164-member countries. Its main mission is to ensure the global trades are running smoothly and freely and all members are complying with the rules. WTO is the only authorized institution that settles the disputes between the parties in case a country violates the rules. Naturally, the "protectionism" policies tend to ignore the international trade rules monitored by the world trade organization(WTO) and unless for any reason the Trump’s " protectionism” policies stop, the WTO will have to engage and stands against the US policies and protect its member countries which will be in dispute with the US administration in the coming months.

 If the Trump's " Protectionism" model and the world "Anti Globalism" movements help the populist nationalist leaders to gain power in the coming years and if they also choose to change their trade policies and get out of the international trade treaties. Then the global institutions such as WTO and IMF will face a big governance challenge and the globalists who have been running the global economy for the last 75 years will have to compromise and let a different regime of global economy replaces the current one. But during this economic regime change, the world could reasonably expect all kind of financial and national debts and currency crises as well as economic recessions and global depression. In other words, if the current global trade order changes, the global economy will experience a period of chaos and faces different crises before the new regime of international trade is fully operational.

However, the institutionalized globalists are very powerful, and it is hard to imagine that one single country such as the US could threaten the world trade order. A coalition or group of many countries might be able to change the current world trade order, but most of the countries are satisfied with the current trade order and reluctant to change it.  

while no one could guess how far the trade disputes could go in the future, but the US trade policies surely influence all kind of financial and physical asset prices in the coming months, so we should stay alert and monitor the asset prices trends and unusual fluctuations to avoid any financial loss and take advantage of the asset price fluctuation in 2018

March 12, 2018

Mahmoud Gonabadi

Ph.D., FCSI, CIM, FMA

Fund & Wealth Manager