How to rebuild global trade

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0:41So keep an eye out for that, and I hope you enjoy this week's show. The president of the United States wants very badly to reshape the global economy. He said that foreign manufacturing and industry jobs need to come back to America. And the last 30 years of free trade needs to change. And he wants to do it fast. Now, he's not the first to criticize the World Trade Organization or American companies that make their products overseas. But nothing has come close to what Trump is doing to end the status quo. So what does the new status quo look like?

1:24This is Swamp Notes, the weekly podcast from the Financial Times, where we talk about all of the things happening in U.S. politics, finance, and the economy. I'm Mark Filippino, and this week we're asking, what will become of the global trading system? Here with me to discuss is former U.S. trade representative under Barack Obama and current president of the Council on Foreign Relations, Michael Froman. Michael, thank you so much for being here. Thanks for having me. And we've also got Alan Beattie, the FT's senior trade writer. Hi, Alan. Hey, how are you doing? Good. So, Michael, you wrote a piece that was published in the CFR's magazine, Foreign Affairs, recently, in part about Trump's changes to global trade.

1:59The first sentence reads, the global trading system as we know it is dead. Can you tell me why you think that's the case? That got your attention, is that right?

2:07Michael Froman: Yeah, it really did. Well, look, I think the demise of the global trading system, the multilateral rules-based system, predates Trump in many respects, but I think he really put the final nail in the coffin. For a number of years, you've had China in many respects following its own set of rules, sort of stretching the limits of what the multilateral trading system could tolerate. Now you have the U.S. following its own set of rules, imposing tariffs bilaterally, ignoring various procedures and dispute settlement mechanisms. If you have the two largest economies in the world going by their own set of rules.

2:48Michael Froman: I think the question is, what happens to the rules-based system? Will the other countries continue to follow it, or will they imitate the U.S. and China? And they, too, act in their own unilateral self-interest, regardless of what they've agreed to before. And I think the reality is it's going to be very hard to get back to a world where we think about big multilateral agreements being reached to by consensus of 160-plus countries at the WTO and instead a much more fragmented kind of global trading system. And I want to get into what that looks like in a bit. But first, I want Alan, for you to jump in.

3:25Do you think free trade is dead? Does that point of view hold water? Well, I mean, it massively goes against my personal grain to be optimistic about anything. But I kind of feel the system, for the start, the system was never perfect. It was always a sort of patchwork of stuff. The World Trade Organization itself, created in 1995, has never, not once, overseen any major negotiated agreement. So from that point of view, there's not a huge amount they're ripping up. I kind of feel it's dead when everyone says it is. And at the moment, it's really only the US that says it's dead. Now, the hugely important thing here is China.

4:00I understand entirely what Mike says, which is China doesn't play by the rules. OK, that's their point of view. That's the US point of view. It's not everyone else's point of view. it's certainly not everyone else's point of view to the extent that they're prepared to give up on the wto you know china is still a member of the wto it adheres to the dispute settlement system which the other countries set up after the u.s froze the current dispute settlement system most countries kind of think particularly if you're a small country you get more protection from the wto rules even with china imperfectly very imperfectly following them than you would from outside so i think before we started to talk about creating a new system everyone has to agree the current one is dead.

4:39And I really don't think they're there yet. Well, let's dig into the current system a little bit. I mean, what are the protections that are offered by the WTO that some of these smaller countries that you alluded to feel protected by? So, I mean, you know, the fundamental rule is what they call the most favoured nation, which is that you have to extend the same tariffs to everyone unless you sign a preferential trade agreement. That's what the Trump administration is just really blatantly violating. But, you know, Most countries feel that actually does provide them some protection. In general, they do get the same tariff treatment that much bigger countries do.

5:15And I think in particular, it's small countries like MFN. And the dispute settlement system, you know, it does have some impact. It's never been a firm court. It's never been hard law. But I think a lot of countries still think it's there and it does have some hold.

5:29Michael Froman: I think Alan is absolutely right. I think for smaller countries, they really look to the WTO as providing those kinds of protections. It creates a level playing field for them where every country has one vote and a veto over anything that can happen at the WTO and where a small country can bring a big country to binding dispute settlement. That's the way it was designed, which is precisely why the U.S. and China tends to ignore it and tends to undermine it, because as big countries and powerful countries, the view of the Trump administration, but not just the Trump administration, is we're the largest market in the world.

6:05Michael Froman: And if we can't make progress on the issues we want to make progress on a multilateral level, we have to find other ways of doing so, whether it's unilaterally, bilaterally, or what I argue in the piece, plurilaterally, where you bring together countries of like-minded dispositions to work on issues of common interest. Your argument in your paper is basically a global trading system of different spheres, right? Why don't you unpack that a little bit? So I think, as Alan said, under the WTO, we haven't had any meaningful, significant, fully multilateral trade agreement negotiated. It has been left to groups of countries to come together.

6:46Michael Froman: The EU has a series of FTAs around the world. The U.S. engaged in the Trans-Pacific Partnership, ultimately pulled out of it, but it continues to exist. And the U.K. has joined that. And other countries continue. that Africa has a continental-wide free trade agreement. So there's lots of trade integration going on around the world, but it's going on underneath or separate from the WTO and the multilateral trading system. And I think that's an indication that we can't really rely on 160-plus countries to come together and reach consensus. Some countries will want to see progress on trade liberalization, and they'll go and negotiate further regional, bilateral, free trade agreements.

7:31Michael Froman: Other countries might use the plural lateral approach to restrict trade, to think about how to use export controls in a coherent way and how to create cooperation around that or how to put some guardrails around industrial policy and subsidization so that it's not distortive of trade. So there are a lot of different ways we can continue to build rules, even in the absence of the rules-based system that we created after the WTO. So, Mike, I want to bring up something that one of your colleagues at the Council on Foreign Relations wrote, Inu Monik, wrote in the FT that Trump has not remade the global trading order.

8:08I want to quote something that they wrote, the only obvious results from all of Trump's dealmaking to date are higher prices due to an average tariff rate that takes us back to the 1930s, uncertainty and a lack of trust stemming from the ever-changing nature of the tariff regime. How does this argument sit with you? while Trump might want to achieve this, quote, reshaping, he's actually accomplished little of it.

8:31Michael Froman: Well, I think he is fundamentally reshaping it. I agree with her that there is not yet a new system in place. We're still in the process, or the Trump administration is still in the process of disrupting and dismantling the old system. And I think, again, the question is what comes next, whether it's during this administration or during a future administration, because I don't think the pendulum is likely to swing all the way back to where things were in previous administrations. I think we're going to have to adjust to a new reality and figure out, okay, where is the room for working with other countries on rules so that there isn't complete chaos or anarchy?

9:09I mean, to some extent, we've started to see that already, right? This week, we saw the Canadian industry minister paying a visit to Sweden and Finland, hoping to build a non-US trading partnership. You had the India-China summit this week, too, done for similar reasons. This seems to me as evidence of the beginnings of the type of system that you've outlined, Mike.

9:30Michael Froman: Well, I do think that countries will, in the same way that they began to diversify away from China, they are likely to find themselves diversifying away from the United States. The United States is still a very attractive market. We'll see how attractive it is at 15 % plus tariffs. But I think they're likely to find, try and look for other markets to sell their products to and to develop closer relationships. I'm not sure we should overstate the degree to which, I mean, Canada, you know, has the misfortune of being located, you know, just north of our border. And so it can't move itself. I think something like 70 or 80 % of its population lives within 100 miles of the U.S.

10:13Michael Froman: border. And we should also point out that these are countries that are tariffed extremely high by the u.s right canada's 35 india's 50 that's right that's right but their their economies are highly dependent they have been highly dependent right i think there probably are some limits to the degree to which they can completely diversify away from the united states but there will be some efforts i believe to develop closer relationships among other countries alan what do you think are these pieces of evidence of a move toward the type of system that michael's outlined so here i'm happy to say i go back to my natural pessimism about everything which is no i see a lot of chatter i see a lot of talk and i think there's a sufficient amount of tension but what i don't see so far is people overcoming sort of entrenched interests and entrenched reluctance in order to do so exhibit one the european union right the alleged geopolitical European Union, this would strike me as an excellent time for the EU to sign a trade deal with a large block of emerging market countries, which has not in fact signed a meaningful, not really a meaningful deal with any other big block, that being the Mercosur block in South America, which it has done, but it has not ratified it.

11:28So, you know, I personally have set this as a bit of a test as far as I'm concerned about how much is the EU prepared to make sacrifices to become a geopolitical force. And if you cannot ratify the exposition of deleted Mercosur deal, you're not actually very serious right now. I have a sense Mike is going to agree

11:48Michael Froman: with you. I 100 % agree with that. I think on one hand, I think it's remarkable the degree to which Europe has shifted under the combined pressure, for example, of President Putin and President Trump when it comes to defense and overall levels of defense spending and coherence around security issues in new ways, as we saw earlier with the meetings in Washington with President Zelensky. On the other hand, my litmus test, Alan, yours will be Mercosur. Mine will be whether Europe makes the very hard decisions about consolidating their defense industrial base in order to really have a degree of strategic autonomy and European security pillar that means something.

12:34Well, I mean, I'd like to talk about this dysfunction because I mean, whether or not you're talking about Mercosur or what's going on in the new U.S. tariff regime or Brexit, nothing happens overnight. And I think that's one thing that we really need to make clear to our listeners is that trade deals, they have been known to happen very slowly. What's the timeline here for some sort of new global trade order to actually emerge?

12:57Michael Froman: Well, the Trump administration famously said they wanted to have 90 deals in 90 days. That didn't happen. There were a number of frameworks that were, that have been negotiated, but the devil is really in the details. To your point, Mark, is that one reason traditional trade agreements take a long time is that there's an excruciating amount of detail to sort through. How do you define what a product is for the purpose of a trade agreement? How much content needs to come from the country at the table? How much content can come from elsewhere? What happens to that content? I mean, there are all sorts of issues.

13:34Michael Froman: And as I was reading the latest announcement of what was supposed to be a more detailed version of the U.S.-EU agreement, there's still a lot of details to be fleshed out. And those details are important because it's actually how it gets implemented. What does a customs agent at the border do? What tariff does he or she apply? It will depend on what the details are. Guys, I want to leave you with one last question. What are you looking out for in terms of the new global trade order or even on the WTO side as we move through this new unprecedented period? I mean, from my point of view, I don't think there will be a new global trade regime like that.

14:13In the past, we're used to there being the sort of obvious landmarks and turning points. So the signing of the General Agreement of Tariffs and Trade in 1947, the creation of the World Trade Organization, I can name the date, right? January the 1st, 1995. I don't think there will be another one like that because there isn't anything like enough consensus. this what you will just see is people bumbling along the wto playing some role maybe on the settlement side a sort of patchwork of deals elsewhere preferential deal trade agreements informal stuff everyone just trying to buy the u.s off and increasingly trying to bypass the u.s so if anything i think we should the first thing we should do is stop using the word system the world trade organization will have a system in the way that my desk has a filing system right you know it has a whole bunch of stuff piled on it but it was not done systematically there was no particular time when it was done and you know i have to admit it will never get better it's never

15:11Michael Froman: going to get better so michael you know i would what i'm looking out for is the politics of trade in the united states the challenge of globalization was that the benefits were broadly shared but invisible. As a consumer, nobody walked out of a Walmart in the United States declaring, thank goodness for the World Trade Organization. Under globalization, the costs were acutely felt by a limited number of workers in a limited number of industries and geographies. It was very acute when the only steel factory in town closed and reopened in Mexico. The community, in many cases did not see any new investment come in and disintegrated.

15:55Michael Froman: President Trump has flipped this on its head. And with these tariffs being put into place, I think it's quite likely that the costs of the tariffs will be felt by everybody and will be highly visible because there's so much attention to it. And the benefits, if President Trump is right, that you put up a wall of tariffs, companies will ultimately move their production and their supply chains to the United States, that will only happen four, six, eight years from now and will affect relatively few workers in relatively few industries and relatively few geographies. And that's a really interesting political economic question to manage, because if all the pain is felt now by everybody and the benefits are felt by few many years from now, that's a tough file for a politician to manage.

16:40I want to thank our guests for an excellent conversation. Michael Froman, he's president of the Council on Foreign Relations. His article in Foreign Affairs is called After the Trade War, Remaking Rules from the Ruins of the Rules-Based System. We'll have a link to that in the show notes. Michael, thank you so much. Thanks for having me. And Alan Beattie, he's our senior trade writer. Thank you, Alan. Thank you. We're going to take a quick break. And when we come back, we're going to do exit poll. This week's question is about, well, polls.

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17:44We are back with Exit Poll, where we ask an FT journalist about one of your questions. This week, we have Steph Chavez. She's the FT's U.S. defense correspondent. Hey, Steph. Hey, Mark. How are you? I'm doing well. Thank you for joining us, Steph. You're here to answer a question sent in by Bettina from Germany. Bettina writes, what does the U.S. public think about global politics? Are they worried about Ukraine and Russian President Vladimir Putin? Obviously, Steph, this is top of mind because of the Alaska summit between Putin and U.S. President Donald Trump last week. Why don't you walk us through what the data says about how popular Trump's approach to the war in Ukraine is?

18:22Sure. But just first to just kind of answer Bettina's first question. Generally speaking, opinion polling has showed that Americans prioritize domestic policy over foreign policy. But that, of course, doesn't mean that Americans aren't engaged with the topics of geopolitics and have opinions about foreign policy. So when it comes to the war in Ukraine, a majority of Americans say they are not confident that Trump can make wise decisions about the conflict. So 59 % of Americans said that recently, according to a poll from the Pew Research Center. And I should note that this poll was put out just before the Anchorage summit between Trump and Putin, and of course, the multilateral between Trump, Zelensky, and all those European leaders that came a few days later.

19:06And the poll also found that Americans were more likely to say that Trump is favoring Russia too much versus favoring Ukraine too much as he kind of tries to broker a peace deal between the two countries. And, you know, this could well be an important moment for public opinion on the war and Trump's handling of U.S. foreign policy overall. You know, with all these meetings, we're kind of collecting so-called data points right now that people will form opinions about. Steph Chavez is the FT's U.S. defense correspondent. Thanks, Steph. Thanks, Mark. Thanks for having me. And Bettina, I hope that answers your question.

19:39If you listening right now have a question about U.S. politics and the economy, send me a message at my email in the show notes. Make sure to include your name and where you're from. And if you send us a voice memo with your question, we love those, by the way, we might play it on the show.

20:01This was Swamp Notes, the U.S. politics show from EFT. If you want to sign up for the Swamp Notes newsletter, we've got a link to that in the show notes, too. Our show was produced by Henry Larson and mixed by Sam Giovinco. Special thanks, as always, to Pierre Nicholson. I'm your host, Mark Filippino. Our acting co-head of audio is Topher Forges. Original music by Hannes Brown. Check back next week for more U.S. political analysis from the Financial Times.

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