Wartime World Trade: Fragmentation Thrice Over

Three wars curse the world today, and each has fragmented global trade, writes Raj Bhala.

<div class="paragraphs"><p>Cargo freight containers in the Hong Kong sea port. (Photograph:&nbsp;<br>Timelab Pro/Unsplash)</p></div>
Cargo freight containers in the Hong Kong sea port. (Photograph:  Timelab Pro/Unsplash)

→ Three wars curse the world today, each has fragmented world trade, and bereft of global leadership, fragmentation should be expected for the foreseeable future.

‘Fragmentation’. The Shorter Oxford English Dictionary teaches this noun connotes the “breaking or separating into fragments,” and “separation into parts which form new individuals or units.”

Global trade amidst three wars – Russia’s violent war against Ukraine, America’s trade war against China, and the world’s health war against Covid-19 – is fragmented.

Wartime World Trade: Fragmentation Thrice Over

Russia’s invasion of Ukraine separates much of the world from Vladimir Putin and his allies. America hasn’t united the Indo-Pacific region with a vision for collaborative commercial intercourse. The World Trade Organization has yet to unify around pandemic measures. Absent great statesmanship (India, here’s another chance), wartime trade won’t be defragmented anytime soon.

First Fragmentation: Russia’s Violent War Against Ukraine

What Pope Francis rightly calls a “macabre regression of humanity” that makes him “suffer and cry” also has “barbarously bombed” international trade practice and theory.

Once upon a time, after the Jan. 1, 1995, birth of the WTO, what mattered to businesses, governments, and consumers, and thus what their lawyers practiced, was enhancing market access for goods, services, and foreign direct and portfolio investment, litigating antidumping, countervailing duty, and safeguard remedies, and protecting intellectual property rights. WTO treaties, plus free trade agreements, integrated these specialties into a mosaic.

Now the mosaic has just two pieces: navigating sanctions against Russia as well as China, Iran, and North Korea; and policing supply chains to root out forced labour from the likes of China and Malaysia. Forget about negotiating synergistic win-win wealth-generating deals for clients. Now, trade practice is splintered into zero-sum games of avoiding criminal and/or civil penalties for breaching U.S. Treasury Department measures against Specially Designated Nationals like oligarchs and Russian state entities and Commerce Department export controls on pretty much anything with dual civilian-military use.

Theory, as in peace-through trade, is broken, too.

U.S. President Franklin Delano Roosevelt’s administration energetically gathered the splinters of Depression-era world trade using the Reciprocal Trade Agreements Act of 1934, with the idea that cross-border commercial intercourse could help reflate trade, and maybe engender economic interdependence to disincentivise conflict. Then, amidst the Second World War, FDR and British Prime Minister Winston Churchill chalked out the 1941 Atlantic Charter, which contained the seeds for the 1947 General Agreement on Tariffs and Trade.

But Russia’s war against Ukraine puts paid to the dictum attributed to 19th century French classical liberal economist Frédéric Bastiat: “When goods do not cross borders, soldiers will.”

Oil and natural gas traversed from Russia to the European Union for decades.

<div class="paragraphs"><p>Rusian President Vladimir Putin, French President&nbsp;Emmanuel Macron, then German Chancellor&nbsp; Angela Merkel, Ukrainian President Volodymyr Zelenskyy, at the&nbsp;Élysée Palace, in Paris, on Dec. 9, 2019. (Photograph: Kremlin/Russian Federation)</p></div>

Rusian President Vladimir Putin, French President Emmanuel Macron, then German Chancellor  Angela Merkel, Ukrainian President Volodymyr Zelenskyy, at the Élysée Palace, in Paris, on Dec. 9, 2019. (Photograph: Kremlin/Russian Federation)

Surely, neither would decouple from this mutually beneficial embrace?

For half a century, Germans knew double dependency by the rubric of Ostpolitik (eastern policy, i.e., engagement with the Soviet Union), and accepted its “guiding rationale” was “Wandel durch Handel,” or “change through trade.” Germany and its EU partners embraced the Nord Stream II pipeline.

Surely not.

Russian soldiers have poured into an EU friend, Ukraine, threatens another, Moldova, so the EU is poised to embargo Russian oil by year-end. Oh, well. On April 27, Russia turned off the spigot for two EU members, Poland and Bulgaria, when they balked at Russian demands to pay for hydrocarbons in rubles, contrary to their energy supply contracts. Pulitzer Prize winner Daniel Yergin puts it well: the war “has pulverized” Russia’s brand as a “reliable supplier.”

What about the theory financial interdependence might minimize conflict risk?

Funds crisscrossed borders, with Russian payment messages accounting for 1.5% of SWIFT’s daily 40 million messages. In late February, Russia became the second nation after Iran to be banished from that system. Russia, India, and China are trying to cobble ruble, rupee, and yuan splinters into bilateral payments mechanisms. Good luck, Iran tried.

<div class="paragraphs"><p>Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Chinese President Xi Jinping, on the sidelines of the G-20 Summit, in Osaka, Japan on June 28, 2019. (Photograph: PIB)</p></div>

Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Chinese President Xi Jinping, on the sidelines of the G-20 Summit, in Osaka, Japan on June 28, 2019. (Photograph: PIB)

Second Fragmentation: America’s Trade War Against China

Fragmentation amidst the U.S.-China trade war is manifest internationally, domestically, and linguistically.

Around the world, importers, exporters, and direct and portfolio investors are forced to make choices about whether to reorient their transactions away from China to avoid America’s Section 301 tariffs and comply not only with U.S. Treasury Department SDN designations but also with U.S. Commerce Department Entity List restrictions. That’s not all: should they deal with Chinese military-industrial complex firms? Should they invest in financial instruments of Chinese issuers that might get delisted from U.S. securities exchanges?

It’s ever-less heretical to say the Biden Administration lacks a trade policy. Its Indo-Pacific Economic Framework is nowhere close to the ambitious Free Trade Agreement that is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. IPEF isn’t even an FTA. It’s a vague cacophony of aspirations for a still unfixed group of partners (Taiwan?) to circumvent approval on Capitol Hill. When the U.S. President failed to renew his trade negotiating authority, which lapsed on July 1, 2021, he doomed the U.S. Trade Representative to futz with exercises that conflate motion with productivity.

The productivity in America’s engagement with Asia now is all guns, no butter – evidenced by the expansion of the AUKUS nuclear submarine arrangement to hypersonic missiles. Simply put, the integrated trade-national security strategy that was TPP has fallen apart.
<div class="paragraphs"><p>British Prime Minister Boris Johnson, U.S. President  Joe Biden, and Australian Prime Minister Scott Morrison, at the G7 Summit in  Cornwall, on&nbsp;June12, 2021. (Photographer: Andrew Parsons / No 10 Downing Street)</p></div>

British Prime Minister Boris Johnson, U.S. President Joe Biden, and Australian Prime Minister Scott Morrison, at the G7 Summit in Cornwall, on June12, 2021. (Photographer: Andrew Parsons / No 10 Downing Street)

As for language, the Biden administration pronouncements that 20th-century FTAs are passé and 21st-century FTAs are about intangibles like digital trade and cybersecurity fracture the meaning of ‘FTA’. Since ancient times, the core meaning of ‘trade’ is reciprocal market access on mutually beneficial, and hopefully ethical, terms. The administration dubs IPEF’s as four pillars: “fair and resilient trade,” “supply chain resilience,” “infrastructure, clean energy, and decarbonization,” and “tax and “anti-corruption”. They are, in truth, peripheral supports for this core of what farmers, manufacturers, and service providers most care about as to exports, and what consumers most need as to imports.

Third Fragmentation: The World’s Health War Against Covid-19

Three WTO treaties are relevant to fighting the pandemic: the Agreements on Trade-Related Aspects of Intellectual Property Rights and Sanitary and Phytosanitary Standards, and the General Agreement on Trade in Services, commonly known as TRIPS, SPS, and GATS, respectively.

Under the first treaty, the WTO could waive pharmaceutical patent rights so members with manufacturing capacity could make Covid-19 vaccines and distribute them domestically and to countries that lack this capacity, in a non-commercial, non-profit manner. Under the second and third treaties, the WTO could develop unified, enforceable measures concerning trade, travel, and tourism to inhibit the spread of the virus with minimal damage to economic growth.

No such resolute action has occurred. Over two years into the Covid pandemic, the WTO neither has reached a consensus on a vaccine waiver nor defeated vaccine nationalism and attendant protectionism. The proposed decision drafted by the Quad of the U.S., EU, India, and South Africa, is opposed by several WTO members, plus prominent non-governmental organisations like Médecins Sans Frontières and Public Citizen. It would impose new IP barriers to increasing vaccine production, let stand trade secret barriers, doesn’t cover Covid tests or treatments, and excludes Brazil and China.

If the test for an international organisation’s success is whether it resolves crises afflicting its membership, then the WTO is flunking: it is yet to help 80% of its membership, which consists of developing or least developed countries – the ones the pandemic disproportionately afflicts.
<div class="paragraphs"><p>Informal TNC and Heads of Delegation Meeting, at the WTO headquarters in Geneva, on May&nbsp; 4, 2022. (Photograph: WTO)</p></div>

Informal TNC and Heads of Delegation Meeting, at the WTO headquarters in Geneva, on May  4, 2022. (Photograph: WTO)

Nearly 30 years old, the WTO is fragmented in a way redolent of the 77-year-old United Nations (including its specialized agency, the World Health Organization). No cohesive vision, no shared raison d’être, binds the 164 WTO or 193 U.N. countries. These international organisations ballyhoo their “intensified cooperation,” but aren’t united on combatting the pandemic. National-level policies thus are splintered from China’s harsh zero-tolerance to Britain’s essentially open borders.

Defragmentation Requires Leadership

Where does India stand amidst fragmented wartime trade?

India is criticized for its less than enthusiastic embrace of America’s positions against Russia and China and America’s postures in the WTO. Yet, Americans don’t empathise with India’s vantage point.

America is not the easy ally that Russia is, because America typically seeks a quid pro quo, whereas Russia lets India try to be non-aligned and supplies it with the ordnance it needs to deal with Pakistan.
<div class="paragraphs"><p>Indian Prime Minister Narendra Modi with U.S. President Joe Biden, at the White House, in Washington D.C., on Sept. 24, 2021. (Photograph: PIB)</p></div>

Indian Prime Minister Narendra Modi with U.S. President Joe Biden, at the White House, in Washington D.C., on Sept. 24, 2021. (Photograph: PIB)

India’s failure isn’t its self-interested policy of eschewing side-picking. It’s that India is still India in the pejorative sense. Given its splintered identity-based political economy, the Modi-led world’s largest free market, religiously pluralistic, secular democracy can’t transcend itself to gift the world a statesperson who can defragment global trade.

Where, pray tell, is an Indian leader with the courage, cunning, and piety of Shakespeare’s King Henry V to end wars and reintegrate the pieces?

Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, Senior Advisor to Dentons U.S. LLP, and Member of the U.S. Department of State Speaker Program. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, Dentons or any of its clients, or the U.S. government, and do not constitute legal advice.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.