How Suspicions About China's Impact and Intentions Have Hampered Faith in "Free Trade"

The global trade landscape is experiencing multiple shockwaves and faith in “free trade” has been declining as the once mighty World Trade Organization (WTO), perhaps the most recognizable intergovernmental organization in the world that regulates and facilitates international trade, continues to experience a serious legitimacy crisis. In the past, China’s initial entry into the global trade system was a welcome development; now, the subject of its impact is the source of ever-growing tension. And let us not forget how the COVID-19 pandemic and the war in Ukraine have exposed vulnerabilities in the global trade system and contributed to plummeting confidence in its ability to weather tense geopolitical rivalries.

According to Stephen Olson, a Senior Research Fellow at the Hinrich Foundation, a Singapore-based non-profit focused on sustainable global trade, the United States’ relationship with the WTO has largely deteriorated because it became evident “that WTO rules were inadequate to cope with the challenges posed by China’s model of state directed capitalism.” Additionally, the global trade system and the rules that sustain it “were founded on the assumption that most major trading nations would be market driven economies in which commercial outcomes were primarily driven by market considerations rather than government fiat.” Indeed, the two decades since China entered the WTO have seen a marked evolution in the West’s belief that its inclusion would prove beneficial; the country’s intentions are viewed with increasing suspicion as it has upended the rules of international trade.

Too many analysts, Olson says, “seem to hope that the current era of trade dysfunction is a temporary blip and that at some point we will get back to the more idealized vision of free trade that characterized most of the post-war era.” But a “temporary blip” this is not—and the way the U.S. has responded to these developments offers some insight into the future of a more fragmented system of global trade governance

Olson’s interview with foreignpress.org is within the scope of AFPC-USA’s partnership with the Hinrich Foundation. The AFPC-USA is solely responsible for the content of this interview. 

The following conversation has been condensed and edited for clarity.

What would you say was the pivotal moment that caused other countries, namely the U.S., to worry about China’s impact on international trade?

Stephen Olson

It was an evolution more than any specific individual moment. At the time of China’s entry into the WTO in 2001, there were high hopes that China’s integration into the global trade system would be extremely beneficial for the US and the West. Access to China’s huge and growing market would be a bonanza for U.S. companies and workers and as China became more enmeshed with the Western world, a certain degree of political liberalization would be inevitable. In the view of the most optimistic – perhaps naïve - observers, China would eventually become “just like the U.S.”

As the years went by, it gradually became clear that things were playing out very differently than expected. In many instances, China seemed to be ignoring WTO trade rules or playing the game of international trade by a different set of rules altogether.  Its model of state-directed capitalism allowed it to tip the playing field against foreign competitors and in favor of Chinese companies. While increased economic integration with China was enriching large MNCs and Wall Street, many middle-class Americans seemed to be taking a beating as previously stable manufacturing jobs increasingly migrated to China. And the rapid economic development China experienced thanks to entry into the global trade system seemed to boost the credibility of its authoritarian system and lead to its deeper entrenchment, rather than political liberalization. In recent years, these perceptions about China’s impact and trajectory have solidified in the US, leading to a reevaluation of US policy towards China.

Can you explain what benefit the Biden administration might see in maintaining former President Trump’s trade actions?

The Biden administration appears to have accepted the growing Washington consensus that integrating China into the global trade system—at least in the manner it was done— was a strategic miscalculation. It has empowered the economic and geopolitical rise of an authoritarian state that holds views and pursues objectives that are often contrary to the national interests of the U.S. Moreover, in the view of the Biden administration, China has not lived up to its commitments under the WTO and has engaged in predatory trade practices. A tougher, more confrontational stance with China was deemed necessary. This means not only maintaining the Trump tariffs—as U.S. Trade Representative [Katherine] Tai has said, no negotiator likes to give up leverage—but in some instances going further, for example, the restrictions on technology trade.

How do you foresee the new Congress challenging President Biden on trade and how could this reverberate internationally?

The one issue that Democrats and Republicans in Washington seem to agree on is the need to take a tougher stance with China on trade. Some Republicans however have pushed for an even tougher approach with China, especially on technology controls. Other members, on both sides of the aisle, think the Biden administration is bypassing Congress on trade and are pushing for a greater voice in U.S. trade policy.

Why did the United States’ relationship with and belief in the WTO ultimately deteriorate?

It gradually became evident that WTO rules were inadequate to cope with the challenges posed by China’s model of state directed capitalism.  The trade system and the trade rule book were founded on the assumption that most major trading nations would be market driven economies in which commercial outcomes were primarily driven by market considerations rather than government fiat. China came into the system playing a very different game but most of its distortive trade practices were either not covered by WTO rules or fell into grey areas. Because the WTO operates on the basis of consensus and has 164 members with divergent views and interests, the organization has not been able to reform itself and update the rule book in the ways that are needed.  The U.S. seems to have therefore concluded that the WTO is not capable of coping with the most damaging trade practices and has been increasingly willing to bypass it.

What is the biggest mistake analysts make when characterizing the state of international trade?

Far too many analysts seem to hope that the current era of trade dysfunction is a temporary blip and that at some point we will get back to the more idealized vision of free trade that characterized most of the post-war era. But that world is gone, and it is not coming back. It’s unclear exactly what will emerge in its place, but it’s safe to say that we are headed towards a more fragmented trade system, increasingly shaped by geopolitical and security considerations.