The world trading system is dying: You should fear its replacement

Too few Americans may understand what Canadian prime minister Mark Carney is talking about when he refers to a “system of global trade.” Too few may grasp what we are losing and what we are likely to get as a replacement. Whatever its faults, this system has fostered global prosperity and political stability. Both are at risk as the current administration deliberately torpedoes a rules-based global order that America created out of the ashes of the Great Depression in the 1930s and global war in the 1940s.

The US president claims that massive increases in US tariff barriers will “make us rich again,” restoring US preeminence to what he imagines prevailed under President William McKinley in the 1890s. In fact, the tariff rates introduced last week and put on hold when the financial markets began to quiver exceed Smoot-Hawley levels from 1930. As extreme tariffs take effect, especially on imports from China, higher prices will slash the average family’s income and could trigger a recession.

Moreover, the 1890s were not the high-water mark of US economic and political influence. The US position in the world reached its height following the Second World War, after America built a global trading system that depoliticized trade policy.

The administration has seized control over tariff-setting from a compliant Congress. This new-found leverage is being used against countries and even against specific firms in order to reward friends and punish enemies.

The rules-based system that the administration seems hellbent on demolishing was forged in 1947, when 23 nations came together in Geneva to sign the General Agreement on Tariffs and Trade (GATT). A burst of global economic growth followed the birth of this system.

This GATT system was based on two important rules. The first is “non-discrimination.” If a nation has a 10 percent tariff on wine, that tariff should apply to every other member of the group. Yes, there are exceptions to this rule for things like free trade areas and remedies against market disruption, but this first rule tells countries how they should treat other countries in the system.

The second rule is “national treatment.” This rule tells nations how to treat foreign companies operating within their home market and how to treat foreign goods that are legally sold at home. The federal government cannot, for instance, place special taxes on BMW’s operation in Spartanburg, South Carolina that it doesn’t impose on Ford in Detroit.

These simple principles embody what most people think of as fairness. Treat other countries equally, and treat foreign firms like you treat your own. More than fairness, it’s self-interest, rightly understood. We benefit when foreign nations accord us non-discriminatory treatment, just as they benefit when we return the favor. Mutual trust is strengthened when these principles are embodied in international law and when that law is backed by joint enforcement using clear procedures that give everyone a fair hearing about disputes. This was the role played by the World Trade Organization.

Instead of these rules, the president takes a different approach. He has set aside multiple US trade agreements to centralize discretionary power in the executive branch. Discretionary power allows us to target foreign nations individually and to give firms and whole industries selective tariff relief if they do “our” bidding. America is now master of the shakedown. It’s how the strong bully the weak. This is how we now approach dealing with everything from universities like Columbia to nations like Vietnam. The death of rules and the ascent of executive discretion personalizes policymaking. This opens the door to corruption on a scale not seen since Tammany Hall ran politics in 19th century New York City. The president’s suggestion that he might give tariff concessions to individual firms could be a preview.

We may be able to bully small nations that depend on us, but in the international power game the European Union, China, and Japan will push back with bad consequences for America. We risk reigniting the kind of zero-sum international trade aggression that characterized the period between the First and Second World Wars, a time when militarism led to a global cataclysm.

As a taste of what is to come, the European Union may abandon national treatment as a way to target individual American firms like Tesla or Google to inflict maximal political damage. China will discriminate against America by selectively refusing to sell important raw materials and by imposing its own high tariffs just on US exports, especially agricultural commodities like soy that are centered in rural red America. Business uncertainty about the policy environment is not conducive to investment. In fact, uncertainty over tariffs was a contributor to the market crash and economic recession of 1929 that later blossomed into the Great Depression that shook the foundations of the world order.

Congress should reassert its traditional control of tariff policy by limiting the use of exceptional measures invoked by the president. If Congress does not act, the scope for corruption through a tariff structure based on whatever offers the greatest personal or political advantage has no bounds.

David H. Feldman teaches in the economics department at William & Mary in Virginia. You can find him on Bluesky at @dhfeldman.bsky.social. Gary Clyde Hufbauer is a nonresident senior fellow at the Peterson Institute.