Leibowitz on Trade: What Went Wrong with China and Russia?

In other words, he predicted that humanity would never come up with a better system for organizing the world than “Western liberal democracy.” 

That was a remarkable (and controversial) statement when it was made more than thirty years ago.  Now it looks rather inaccurate. 

The rise of disruptive and autocratic, even totalitarian regimes since the early 90s that explicitly reject liberal democracy as a guiding force (China, Russia, Iran, Saudi Arabia, Hungary in the EU, to name a few) and challenge Western ideals as well as Western power have to give us pause. 

Yet, in those heady, early days, Western leaders seem to have believed it. That is why the trading system, especially the World Trade Organization, was created and then expanded to include countries such as Russia and China. The hope and belief of those leaders were that those traditionally non-democratic countries would recognize that expanding trade would be the path to perpetual peace. Economic competition and mutual benefit would lead countries to respect the sovereignty of other countries and they would learn not to promote world revolution and change the international status quo by force of arms.

How has that worked out – just kidding.

The strategy of integrating authoritarian governments into the world trading system was based on integration leading to shared values and less confrontation and conflict. In hindsight, there were plenty of clues that this strategy had problems – Yugoslavia’s breakup, 9/11, the Iraq war, Afghanistan, the Asia financial crisis, and many more. But Western leaders and their voters did not want to presume that confrontation and conflict were inevitable. It was worth a try.

Give credit where credit is due – Donald Trump was one who, sooner than most, gave up on global integration as a broad strategy. He imposed steel and aluminum tariffs, and more importantly hit China with tariffs and Safeguard remedies on solar panels and residential washing machines.

He blocked the WTO from making decisions adverse to the United State by neutering the Appellate Body. He negotiated a revised NAFTA agreement that sharply tightened rules of origin on autos, the most important sector of North American trade. 

And, while Trump’s opponents criticized those measures, his successor has kept them all. Now there is little support for global integration as a step toward lasting peace.

On President Biden’s watch, the withdrawal from global integration continued and expanded. Afghanistan was abandoned by the United States, and then Russia invaded Ukraine. NATO got together and expanded with the addition of Sweden and Finland, two long-time neutral nations. 

The world is reverting to a situation reminiscent of the 1930s – armed conflict and conquest. This time, at least so far, victory by the aggressor has not been as swift as it was in those days. But the theory of peace through global integration and interdependence has suffered perhaps a mortal blow.

The next few months will determine how far down the path of conflict the world will go. Will the West appease the authoritarians in Russia, China, Iran, and elsewhere? Or will it confront them, through arming target countries and perhaps by promising to come to their aid if attacked. That is not entirely clear so far, but there are some signs.

Congress is considering bipartisan legislation (the Taiwan Policy Act of 2022, cosponsored by Sen. Menendez of New Jersey and Sen. Graham of South Carolina) to protect Taiwan against possible invasion by China. This comes in the wake of the threat by the Chinese Defense Minister to “smash [Taiwan] to smithereens.” The bill would sharply increase US military aid to Taiwan.

In Ukraine, the war slogs on. The US and Western allies have continued to send aid, both military and humanitarian to Ukraine, and have imposed heavy sanctions against Russia and Russian leadership including the oligarch class. Ukraine has publicly speculated that a counteroffensive against Russia could happen soon, although where and when remain uncertain. 

The energy situation in Europe is a major and immediate crisis. As winter approaches, Europe must get by on less than half the customary deliveries of natural gas from Russia. The US is rushing supplies of liquified natural gas to Western Europe. Although permanent facilities to receive LNG, re-gasify it, and place it in European pipelines are years away, temporary equipment is being put in place now to increase the supplies of LNG for the coming winter.

As the war drags on, these adjustments to the energy supply will be locked in. The equipment required to receive, process, and transport LNG is very expensive, and the end of the Ukraine war will not remove incentives for Europe to disengage from reliance on Russia for energy. That means that trade flows of oil and gas will more change in the long term. Russia will find new markets for its oil and gas, and the US will need to increase production to replace Russian supplies to Western Europe. 

All this suggests that we may be in for a period of “antiglobalization,” where trade with trusted allies will increase, but trade with adversaries will be sharply limited. We are just beginning this process; but as long as the world situation continues to worsen, it’s hard to see the US and its allies returning to “friendly competition” with countries that are challenging the world order. 

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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