From time to time, everyday people become part of history in the making without realising it. On a dark night in November 1938, a Berliner peers out her window, disturbed by the smashing of a shop window, the beginning of the Crystal Night as Nazi supporters attack Jewish shop owners with impunity. At 8.15am on the first Monday of August 1945, a Japanese mother helps her child get ready for school, only for both of them to be vaporised in a nuclear blast 44 seconds later. In 2012, a Filipino fisherman, eking a living for his family, casts his lines, as he has long done, only to be stopped by Chinese coast guards pointing guns at him, 1,000 kilometres from their mainland.
In the aftermath of the second world war, the leaders of 23 countries resolved to do everything possible to prevent a third world war. Their shared idea was that rather than invade each other they should trade with each other. They reasoned that if all nations’ economies were integrated, the rewards from attacking each other would be diminished and the bounty from peaceful coexistence immense.
And so, on 30 October 1947, the General Agreement on Tariffs and Trade – the GATT – was signed. Proudly, the United States led the establishment of the rules-based global trading system.
Over the years, members have mostly complied with the agreed rules, but if a member decided to breach the rules it could, legally, ignore decisions reached under the GATT’s dispute-settling procedures.
But when the 123-member World Trade Organization (WTO) superseded the GATT in 1995 decisions on disputes were made binding on members. Disputes are now adjudicated by panels whose decisions can be appealed to the appropriately named Appellate Body.
During a recent visit to Australia by Jim Bacchus, a founding member and chairman of the Appellate Body, I asked what he considered the primary purpose of establishing the rules-based global trading system after World War II. His reply was stark: “To avoid World War III.”
The Appellate Body normally has seven members. But the Trump Administration has been vetoing the appointment of new members to replace mandatory retirements. Only three members remain – the minimum for hearing an appeal. The terms of two of those three will expire on 10 December this year, making the Appellate Body inoperable.
Various proposals and compromises have been developed to reform the dispute settlement processes of the WTO and to satisfy the United States. The Trump Administration has rejected them all. Grievances of the United States and other member countries about the way the dispute-settling procedures have been operating have some legitimacy, but the appropriate response is to reform the system not destroy it.
A glimmer of hope appeared in the G20 leaders’ statement released over the weekend, where leaders agreed to work constructively with other WTO members with a view to reforming the dispute settlement system.
But there are no signs of the Trump Administration reversing its tariff increases against China, the EU and numerous other countries, which are clear violations of WTO rules.
If the United States continues to apply tariffs unilaterally, against WTO rules, and to veto appointments to the Appellate Body, its actions will constitute a return to a world where might is right – where economically and militarily strong nations wield their power to serve their own interests at the expense of the less powerful.
And if Democrat presidential candidates are unhappy about Trump’s disregard for the rules-based trading system, they are keeping it a closely held secret – with the possible exception of Beto O’Rourke.
It’s all part of a wider problem from an American perspective – China’s rise, or more accurately, its re-emergence. Until the early 1800s China was the world’s largest economy. Americans celebrate their exceptionalism – that their democratic market system must always outperform state-directed capitalism and all others.
Meanwhile, China is determined to consign to history the Century of Humiliation, when an enfeebled, inward-looking dynasty proved incapable of preventing British and American gunboats navigating up their rivers and claiming parts of China as their own, seizing Hong Kong along the way.
The cost of America’s destruction of the rules-based trading system would lie not only in reduced trade and rising tensions among nations, it would also heighten investor uncertainty at great cost to a global economy that is already struggling.
China is challenging the global, rules-based strategic system, which it considers is stacked against it, while America is challenging the global, rules-based trading system, which it considers is stacked against it. We are witnessing history in the making.