Trade wars, the transformation of trade policy, and the UK response

This roundtable was convened jointly by the Centre for Inclusive Trade Policy and the Global Trade Policy Forum, Chatham House and was held on 26 September 2024.

Background

Government intervention in trade and industrial policy is on the rise worldwide. This is being driven by a mix of geopolitical and environmental concerns, be this with regard to rapidly changing technology, or worker and human rights. An oft-cited justification for intervention is ‘economic security’. A particular concern is China, and for example, since 2018, the U.S. has imposed a variety of tariffs primarily on Chinese imports, as part of its reshoring strategy. Similarly, the EU, through its new decarbonisation strategy, has imposed tariffs on Chinese-manufactured electric vehicles (EVs) following an investigation into unfair subsidies provided by the Chinese Government. This was done to stimulate domestic production and reduce dependence on low-cost Chinese imports.

In the face of concerns about ‘economic security’ - be this, for example, to do with technology or economic coercion - this roundtable set out to consider the issues and options for UK trade policy in responding to these developments.

The discussion was wide-ranging, yet, certain themes clearly emerged. This summary is not intended to suggest that there was a consensus of view, but provides an overview of the key issues raised, some large unanswered questions, and possible recommendations for inclusion in the UK Government’s forthcoming trade strategy.

Definitional challenges

There is no agreed definition of economic security. The term is used in different ways, to justify different actions and for different reasons across countries. On the one hand, it can be used as a justification for disguised protectionism and as a means of supporting domestic industries (for good or bad reasons); and on the other hand, to protect a national security interest eg. in critical technologies. As one participant commented – politically this makes it a great catchphrase, but also makes it easy to justify in various ways, and in turn makes it difficult to manage and contain.

Participants identified the desirability for coordination/collaboration across countries to understand and define economic security, as well as acceptable policy interventions. However, differences in countries’ perceived national imperatives and the use of the term in practice and its overlap, and at times conflation, with consideration of national security make this very difficult. There was some scepticism as to whether substantive collaboration was indeed possible.

The UK has yet to clearly define its approach to economic security broadly and with China which is its fifth-largest trading partner. Nevertheless, defining the boundaries of what constitutes ‘economic security’, and thus where intervention may be justified, even if only at the national (UK) level was deemed important.

The external dimension

One of the factors driving economic security concerns is the growing importance of China in the world economy, growing dependence on Chinese products, coupled with rising tensions between China and partner countries - notably the US - and in turn the policy responses by the US and the EU. However, it was also noted that fears of a new Cold War, this time with China, may well be exaggerated, considering that China is a trading partner to around 120 countries and a significant partner for many of these. Decoupling is thus not realistic.

In the face of this, there was substantial discussion on how the UK can interact with partner countries in framing its trade policy around economic security. This led to several areas of discussion:

While cooperation on economic security is needed, there is a paradox that economic security policies are typically there to defend against / protect against / respond to the policies of other countries – be this the US (eg. the Inflation Reduction Act) or China (unfair competition). This raises complex questions as to economic security against who, and how collaboration can be achieved in a context of rivalry.

Is there a possibility of cooperation on trade and economic security between the UK and the US? To some degree, there is uncertainty in this regard given the forthcoming US election. Nevertheless, it was clear that whatever the outcome of the election the broad negative approach of the US to free trade agreements is unlikely to change. With the forthcoming U.S. presidential election, trade policies are being shaped by what resonates with voters.  Those domestic political constraints evince a lack of support if not antipathy towards trade among core US voters. At the same time, the U.S. is moving away from the use of conventional trade policy tools in addressing challenges such as competitiveness, climate change, or human rights. There may be some scope for closer cooperation between the UK and the US on specific areas of policy (such as competition policy, digital trade, or climate policy), and it was suggested these may be more likely in the event of a Harris administration.

The topic of UK relations with ‘like-minded’ countries, and other middle powers centred on the resetting of relations between the UK and the EU. Much of the current debate amongst commentators on the UK-EU reset is focussed on how to improve bilateral relations such as having a veterinary agreement. In contrast, the discussion at this roundtable was more on the wider benefits of a UK-EU reset, suggesting that one of the gains for both the UK and the EU in improving relations could lead to working together on common positions where their approaches are probably already closely aligned, such as economic security, and to provide balance in international fora, such as the G7, and thus in relations with third countries.

It was felt that as a major trading economy, with an independent trade policy, there is the potential for the UK to play a more significant role in the international economic order. In particular, several participants identified how the UK could play a coordinating role with like-minded countries such as Canada, Australia or Japan to reinforce a liberal world order and tackle pressing issues such as economic security, climate change and human rights. The point was made that the ability to influence policy will be much greater if countries work together as opposed to unilaterally.

Economic insecurity stems from rivalry for dominance / hegemonic power. The threat to the hegemon (the US), risks the hegemon behaving in ways that make international cooperation more difficult. This makes it more critical for other countries to identify and address supply chain vulnerabilities through soft law and international frameworks. This is where institutions like the World Trade Organization (WTO) could play a role in mitigating these risks. However, the WTO has been criticized for its inefficiencies, particularly by the U.S. and other countries that view it as outdated and inadequate. Some nations, including China, are accused of skirting WTO rules through state-owned enterprises, product dumping, and intellectual property theft. There were concerns regarding the limitations of the existing economic toolkit (such as trade defence instruments) for dealing with the issue of economic security.

For some, the World Trade Organisation rule book does not appear well suited for dealing with the types of policy interventions being used. This raises the challenge of how to widen the scope of intervention without abandoning the existing rules-based system, while also suggesting the need for new disciplines, notably on state-owned enterprises and subsidies.

The internal dimension

Leaving aside the issue of how to cooperate with third countries on economic security, the UK needs to make decisions on its own domestic policy actions. Several participants stressed that policy on economic security should in the first instance be driven by domestic priorities and objectives. Traditionally, the objectives and justifications for policy intervention by governments have been to improve economic efficiency or to address distributional issues, such as issues of equity, within a country. In recent years, and with growing interdependence between countries, the dimension of economic security has become just as important. Interestingly, without much stretch, this can be seen to be reflected in the mission letter for the new EU Commissioner for Trade and Economic Security (note the addition of ‘economic security’ to the designation) which identifies the objectives of policy being that of competitiveness (which is ultimately to do with efficiency), sustainability (which is a form of equity), and security.

For the UK, the current principal aim of economic policy, as frequently articulated by the new government is to raise productivity, economic growth and competitiveness – hence there appears to be more of an emphasis on the efficiency objective. One approach or suggestion would be to identify the technologies and/or sectors which are seen to be critical for economic growth, and then consider how vulnerable these may be from an economic security perspective. What are the risks of disruption, are there policy interventions that can mitigate those risks, whether or not there are market failures that need addressing, and thus whether and what forms of intervention may be desirable?

Self-reliance is clearly infeasible if not very costly in many circumstances, yet interdependence brings with it risks. Hence there was some discussion regarding the need for clarity about the forms of interdependence with other countries, and supply chains which are acceptable, the acceptable levels of risk, and what policies may be needed for risk mitigation. There may also be trade-offs between the objective of economic security and the objective of higher economic growth. Where this occurs, it raises questions as to how much economic security is to be valued over higher economic growth. What sacrifices in efficiency may be acceptable to move to a world which is more economically secure? What sort of state of globalisation might this lead to that is acceptable, and how does the UK get there?

Given China's dominance in critical raw materials, the UK is heavily dependent on it for a range of key supplies. To establish economic security, it is crucial for the UK to diversify its supply chains to mitigate the risk of disruptions that could threaten national security. Stable trade flows are essential for the UK as it charts an independent path post-Brexit. Participants emphasised that businesses must also be incentivised to ensure that economic security leads to substantial outcomes, and thus that policy interventions need to align with business incentives, whilst recognising that typically businesses prefer carrots to sticks.

An example cited was the U.S. Inflation Reduction Act, which offers subsidies and other incentives to businesses if their products are not sourced from China, but rather from the U.S. or other countries with which the U.S. has free trade agreements (FTAs). This approach underscores the importance of reducing reliance on singular trade partners, especially for critical resources, while fostering trade with trusted allies.

The discussion also identified the need for the UK to diversify its supply chains to guard against future vulnerabilities and shocks, and part of this should involve building alliances with the Global South. There was acknowledgement among participants that the UK’s comparative advantages and the efficacy of its supportive institutions can be leveraged to nurture closer bilateral relations with countries and regions in the Global South. These partnerships, participants argued, would not only serve to diversify the UK’s trade relationships but also offer a more resilient and sustainable trade model, particularly in times of global uncertainty.

As the UK navigates its newfound autonomy, it must carefully assess the risks and determine appropriate actions, considering the current geopolitical context and its implications for economic security. A key question remains: What does economic security mean for the UK? Can the UK afford reshoring and self-sufficiency like the U.S., or is it more essential to ensure stable trade flows?

Other issues raised

• Economic security is about having good intelligence and intelligence sharing between countries on issues such as export controls and investment screening. The intelligence sharing needs to be expanded and institutionalised.
• Firms and industries are very adaptable and are good at adjusting to shocks. Therefore, just because there is a potential vulnerability, does not necessarily mean that policy intervention is needed as this may lead to unintended consequences which could impinge on economic security.
• Technological change and in particular AI and digital trade is leading to new forms of economic dependencies and thus vulnerabilities. This should not be underestimated.