Trade policy is more difficult today that it was three months ago, and significantly more so than five years ago. The former is due to the actions of the new US administration, but the latter is a more complicated story that has dramatically changed trade policy across the world.

Over the last 30 years or so trade policymakers have largely focused on efficiency gains – more open markets leading to better productivity and economic growth. This was more or less taken for granted, backed by considerable evidence. The distributional implications and broader concerns beyond economic growth have been seen as beyond the purview of trade policy, perhaps too easily. Once again, trade policy makers and analysts either took for granted that these issues were not so important in the trade context, or if they were, they would be dealt with by other areas of government policy.

However, in today’s world even efficiency and equity considerations fail to adequately capture the concerns of trade policy. Unforeseen events – Covid-19, the Russian invasion of Ukraine, extreme weather, and semi foreseen events such as Trump tariffs – have underpinned increasing concerns about economic security, supply chain resilience and national security, and the threats to the rules of the multilateral trading system.

The integration and specialisation at the heart of the promoted free trade have created vulnerabilities for individuals and national economies. Then there are rapid advances in technology, which are impacting patterns of specialisation and creating risks, plus the existential need to address climate change. Additionally, there’s the diminished authority of the World Trade Organisation and increased public scepticism regarding the benefits of globalisation and concern with issues such as the environment and workers’ rights. On its own this heady mix of factors risked upending trade policy and its intended purpose. And that’s before getting to Trump’s tariffs, which present even more challenges.

Trade policy and industrial policy are now being used more actively in ways that were virtually unthinkable five years ago. No longer just to promote growth, but to protect and promote domestic industries, to tackle climate change, to regulate digital trade flows and to manage supply change resilience and economic security. And now, they are being used by the US administration for economic coercion, on very flimsy and economically illiterate grounds.

There is a plausible narrative along the lines of ‘higher economic growth through the domestic development of green services and industries, in which we embrace digital technologies, reduce supply chain vulnerabilities and become globally competitive – but government support is needed’. However, the risks in this narrative are the mistaken view that this needs to be achieved at the expense of others – taken to extremes in the ‘Trumpian’ take on trade – and that it provides easy justification and support for government intervention.

It is tempting to say that we got the approach to trade policy wrong and that we are witnessing the inevitable upending of the institutions underpinning the multilateral world trading system – which we have also taken for granted. However, that would be a mistake. It is more that all the consequences were not thought through, and the upending is only partial.

While for the US, the era of integration and adherence to the multilateral rules-based system is over (at least for now), for most trading nations it is not. Despite commentary to the contrary, we do not have a global trade war. The US accounts for about 13% of world imports of goods and 8% of world exports. What we have is a trade war between the US and the rest of the world. This will inevitably mean the diminished importance of the US in the global economy and for most trading nations. The rest of the world must deal with this and resist the temptation to immediately respond to Trump‘s provocations, as doing so may not serve their interests.

Trade policy needs to navigate its way through these challenges. The path is tricky, and it is easy to get blinded by the US administration’s fireworks – however ephemeral.

This navigation needs a clear strategy for trade with well-defined principles closely aligned with industrial strategy. Policy needs to address economic growth but, at the same time, embrace equity and economic security. Governments must remain open and transparent about their priorities, whilst recognising that there will be trade-offs. It is important to lay out the key principles for intervention, both domestically but also internationally, and to resist beggar-thy-neighbour policies. This requires maintaining close understanding and cooperation with ‘like-minded’ countries bilaterally and plurilaterally, as well as mitigating the risk of the unintended consequences on each other of responding to or accommodating Trump. Indeed, countries should actively consider the benefits of a coordinated retaliatory response. This would send a powerful message.

It remains the case that liberal, predictable open markets support economic growth, equity and economic security. They’re also good for society more broadly. However, it is much easier for countries to cooperate in a world of positive reciprocity, than in the current state of interventionist retrenchment. Policymakers need to resist the pressures and temptations for interventionist retrenchment, which complicates sensible trade policymaking.

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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