This is an audio transcript of the Rachman Review podcast episode: ‘Bidenomics and global trade

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Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. This is the second in our series of podcasts on Bidenomics. My guest is Ngozi Okonjo-Iweala, the director-general of the World Trade Organization. President Biden’s new industrial strategy is, naturally enough, designed with American needs in mind, but it has huge global implications. There are many people who fear that the double whammy of President Trump’s tariffs and President Biden’s subsidies pose a real threat to the world trading system. So what does Bidenomics mean for the wider world?

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Brian Deese
I think there was a missed opportunity to say, OK, this is historic progress because the United States is now leading in the fight against climate change. Now we have to work to make sure that this works for the world and importantly, works for the global south.

Gideon Rachman
That was Brian Deese, the former director of the White House’s National Economic Council, speaking in last week’s podcast. The Biden administration argues strongly that the world should welcome America’s huge public investments in clean energy. But the reaction of many foreigners to Bidenomics was sceptical, even hostile. Here’s a report on France 24 television explaining the objections made by President Emmanuel Macron on a trip to Washington this year.

News clip
One example: electric vehicles. Customers here in the US will get a bonus if they buy American cars. That means that it will prevent French cars or European cars from making business here. And according to the French and the Europeans, it’s unfair competition. It actually violates World Trade Organization terms on some levels.

Gideon Rachman
The argument that Bidenomics violates World Trade Organization rules puts the WTO and its director-general right in the middle of this debate. Ngozi Okonjo-Iweala knows the US well. She spent 25 years at the World Bank in Washington before serving two terms as finance minister of her native Nigeria. She became head of the WTO in 2021 at a difficult time. Bidenomics is not the only challenge she’s facing. The week we met, the EU had just announced an investigation into Chinese subsidies for electric vehicles, which could be a prelude to tariffs. I interviewed Ngozi Okonjo-Iweala on stage recently at the World Trade Organization’s open forum in Geneva. I began our conversation by asking if rising geopolitical tensions are making her job much more difficult.

Ngozi Okonjo-Iweala
Quite difficult. I think one would not be understating it by saying that the geopolitical tensions of the times that we see and the fact that there is also a war going on in Ukraine, all this makes for a very difficult environment for the job. But that also means that it forces us to look at what are the exciting and hopeful possibilities out there. So, yes, it’s difficult navigating all the tensions, but so far we are managing to do that. But it’s worrying.

Gideon Rachman
Sure. We’ll talk about the possibilities as well, but for a moment, let’s focus on the difficulties because the US in particular, at times when you talk to the Biden administration, it’s almost like they think that even letting China into the WTO was a mistake and that they have major, major reservations about the global trading system and they’ve launched a big programme of domestic subsidies, the Chips Act, the IRA and so on. How possible is it to reconcile Bidenomics, if you like, with the global trading system?

Ngozi Okonjo-Iweala
Well, let’s put it this way. I think if you look at the essence of Bidenomics, which cares about people, you know, building from the middle out and from the bottom up and focusing on creating good jobs for people, I think in essence, we can say that the WTO and the world trading system, the central purpose for which it was created is to do some of that. So you don’t see a contradiction in terms of the objectives. If you look at the Marrakesh Agreement says that the purpose of the WTO is to help enhance living standards, create jobs and support sustainable development, which is all about people and people-centred. So I see objectives of what the US is trying to do and what the purpose of the organisation has not been really opposed to each other. I think the issue is how the instruments that are used and countries are free of course to develop whatever domestic policies that they find best to enable them to move forward so long as they do not militate against competition from other countries and trying to stay away from protectionist measures I think is what is needed.

All this being said, I do want to point out one thing that we should look at, and that is sometimes that the rhetoric goes faster than the actual numbers. And it will be important to remember trade between the US and China is at an all-time high in value terms. As you know, the Commerce Department’s figure $690bn for last year was at a peak. Same with EU, more than $800bn. So on the ground the trade is continuing, but they are worrying signs of some of the measures being taken by countries, you know, now beginning to change trading patterns.

Gideon Rachman
Right. Before we talk about the actual trading patterns, again on the philosophy. If the US, say, puts big subsidies in for domestic chip production and then the EU follows with its own Chips Act and they will say, well, China’s been doing this forever, they also subsidise. How compatible is that with free trade?

Ngozi Okonjo-Iweala
Well, we know that we have a subsidies and countervailing measures agreement at the WTO that tries to put disciplines around subsidies. We know that members have complained about each other’s subsidies and there have been complaints by some of the countries like the US, the EU against industrial subsidies in China. China has complained about agricultural subsidies in the US, EU and other countries. So members have different complaints about each other’s subsidies.

What we say is that a subsidy race to the bottom is not really what the world needs. You know, the idea that we should have open, fair competition and a level playing field is what the whole system was built on. And the idea of trade-distorting subsidies undermining that does not go well with what the WTO is about. There are some kinds of subsidies that work. If you want to subsidise research and innovation, that’s how we make discoveries and get things done. But we just have to watch out that whatever we are doing is not trade-distorting, does not militate against competition and it doesn’t matter which member is doing it, it just does not really work well.

Let me end that by saying that rich countries can play the subsidy game. Poorer countries cannot afford it. They don’t have the fiscal space. So you’re basically saying we’ll subsidise our way through production and it doesn’t matter what it does to poor countries, they’ll never be able to compete. They will begin to see they are also part of the international market. They’ll begin to see their position as being very negative and that does not persuade them to be part of the integrated multilateral trading system. So it’s definitely, I would say, harmful if we go into this kind of subsidy race.

Gideon Rachman
And do you think that on a practical level, in a couple of years’ time or maybe even sooner, this place, the WTO, is gonna get a deluge of cases as everybody challenges everybody else’s subsidies?

Ngozi Okonjo-Iweala
Well, that may well happen. We see signs already of investigations being done. The EU is launching one on electric vehicles from China. Others are looking at different aspects. We may well do that. But I think that what we do offer at the WTO also is a forum for dialogue and exchange and information. And what we’re trying to say, there’s really no point having a deluge of cases that comes before the dispute settlement system, which we are trying to reform and get it back into shape, you know, because we need a credible enforcement mechanism.

We’re also saying that, look, all the disputes need not result in cases at the WTO. We’re not really keen to get cases. What we are keen is to see members try to resolve these issues with each other. More and more of that is happening. We see the US negotiating with India, with the EU, with various others to try and resolve disputes. We see Australia negotiating with China and trying to resolve disputes. This is all very, very good. So no, we don’t want a deluge of disputes here. We will try to work with and encourage members to talk to each other and to resolve these disputes through dialogue and as smoothly or amicably as possible before it has to come to WTO.

Gideon Rachman
Yeah, although, as you say, the last resort, the WTO is here. And you mentioned reforming the dispute settlement mechanism. Now, one of the most controversial things that the US has done — and it’s a continuity from the Trump to the Biden administrations — is essentially refusing to accept new judges to the appellate court and therefore blocking it. How big a problem has that been? Because some people said, oh, well, that’s the end of the WTO if you don’t have the court. But things seem to be going on, as you say; trade’s at record volumes in some respects. Does this need to be resolved?

Ngozi Okonjo-Iweala
Gideon, absolutely does need to be resolved. But let me also pick you up on what you said. I think there came a time when WTO became equated with its dispute settlement mechanism and people forgot that there are other things going on at the WTO. And the organisation has been working. Last year, we had a wonderful ministerial where we reached several multilateral agreements. After quite a bit of time of not reaching, those members were able to come to agreement on a food security declaration, on trying to help the World Food Programme, make sure it gets access to no export restrictions on its buying food at this time when there are many people who are going hungry in the world. We’re able to make a fisheries subsidies agreement, a multilateral agreement that will stop illegal, unreported and unregulated fishing in our oceans. Our oceans are 50 per cent overfished. All that is going on. So that dispute settlement mechanism does not define the WTO. Our members are working really hard on that and other reforms.

However, it is true that when you make agreements, you also need a credible enforcement mechanism. And the dispute settlement system is working at the panel level. There are two tiers. The first tier is working cases that come in. Seventeen cases last year, some of them with panel reports already and others ongoing. But then, what it means when the second tier doesn’t work is that if you get a ruling or a judgment, the party that will had the judgment against an appeal into the void and nothing happens. That is why we need to make sure that we reform and get the second tier working well again.

Gideon Rachman
Any chance of that happening though? There doesn’t seem to be much progress.

Ngozi Okonjo-Iweala
No, there is actually. People are not aware because WTO members have been working on this very quietly and slowly, and the United States has been quite constructive in working and trying to put forward its concerns, its proposals. The US is not the only member that has concerns. Developing countries, especially the least developed, feel the system is not as accessible to them and it’s quite costly to deal with. So that also is being looked at. In essence, we now have an informal process going on where members are tabling their concerns and putting forward proposals to how to amend the system. And we hope that this will culminate in a reform of the whole system and we are looking towards our ministerial to see how far we get with that.

Gideon Rachman
I suppose in the end, taking a step back when I talk to people in Washington and so on, they feel, I think, that in the end, although they’d like to reach an agreement at the WTO, these are such fundamental concerns about what they see as reindustrialising their countries, saving the country from a slide into extremism — the confrontation with China — that if they decide that they have to do a policy and that it’s WTO incompatible, they’ll just do it anyway is my feeling. Is that how you see it?

Ngozi Okonjo-Iweala
Well, I want to make one or two points. We see that some of the most open economies today as also some of the most equal economies. You look at Germany, Latvia, some of the European countries, some of the Scandinavian countries, they are very open, but they are also not as unequal as some others and you have to ask yourself why. Trade is not a magic bullet that solves everything. You have to also admit that in trade there can be winners and losers. And this was well recognised when the trading system was put in order.

The question is, when you are entering this, do you also have active labour market policies? Do you have social policies that can complement as the instruments what is happening with trade? Because there may be jobs lost in one sector, manufacturing for instance, but trade is leading to gains in jobs in services. And this is something that is not really well looked at. So what happens is that you’ve got to have those active labour market policies and social policies to cushion those who have lost and shift them, or create new jobs that they can participate in. There are countries who will spend more as a percentage of their GDP — some of the Scandinavian countries as well — on these kinds of policies if you look at the numbers and others who don’t.

I don’t want to keep naming names, you know, but if you don’t invest in those kinds of policies, then yes, certain parts of your population and countries will fall further and further behind. And that also leads to the populism and the nationalism. I don’t think you can blame trade for all of it. Technology is also important. There are places where technological change is leading to loss of jobs and that is blamed on trade sometimes. You also need to look at what the government is doing, what instruments are they deploying? So I think to sit back and say trade is responsible for all these woes, it’s really not correct most of the time.

Gideon Rachman
Yeah. And yet, you know, I’ve concentrated a lot on what America is doing because it’s the world’s largest economy and they have had a big shift in policy. But if anything, the rest of the world seems to be moving, or at least here in Europe, in a kind of American direction. We’re meeting in a week in which the Europeans have just announced potentially a very significant investigation into Chinese production of EVs, electric vehicles, fears that their market will be flooded by them. What’s your initial reaction to that EU investigation?

Ngozi Okonjo-Iweala
I think the world is at a worrying moment because of the vulnerabilities that have been exposed during the pandemic. Supply chains were shown to be vulnerable. Some countries have excessive concentration of certain products in their countries. Certain pharmaceuticals, for instance, concentrated exports in 10 countries. So when you look at this, you say, well, if something happens, we are really vulnerable. And it’s understandable, the sentiment to say, well, I really need to look after myself. I need to create jobs for my people. That is the way politicians will react.

However, we also need to remember that this system that was created was created for a reason. It was seen that interdependence and trade could help lead to peace, avoidance of war and to prosperity if there’s more integration. That system has delivered for 75 years and that fact should not be forgotten.

Another thing not to be forgotten is that right now as we speak, 75 per cent of world trade still takes place on WTO MFN, most-favoured nation, terms. Seventy-five per cent! So those are facts on the ground. Can you imagine, Gideon, if we continue in this direction and we become more and more protectionist? Everyone is investigating everyone, the members are putting subsidies and so on. If we continue in that direction and the trading system begins to unravel, it will be anarchic. I think people are taking what they have built for granted.

Gideon Rachman
You made the point that trade and peace were always seen as connected and that more trade made the world more interdependent and more peaceful. Is the implication of what you’re saying that the costs of the unravelling of that system aren’t just necessarily economic? They could be war and peace.

Ngozi Okonjo-Iweala
Absolutely. Look, right now, what we have found in the world trading system is over-dependence. What we want is interdependence, not over-dependence. And so we need to look at ways there over-dependence in certain sectors and on certain countries for critical products and solve that problem. And I think we should.

Gideon Rachman
So like the paradigmatic would be 95 per cent of advanced semiconductors coming from Taiwan.

Ngozi Okonjo-Iweala
Absolutely. All rare earths are minerals, the majority being processed or produced in China. We need to look at that. Pharmaceuticals, as I said, 10 countries exporting 80 per cent of all. So let’s look at where there’s over-dependence that is not resilient for the world and solve that problem. But starting to now say the whole system doesn’t work will produce more problems than it’ll solve. That is very clear. We need this interdependence. And can you imagine if the world trading system moved away from the WTO terms, this 75 per cent of trade that is occurring? And I think that we need to speak up loudly so that people in the world will know that their living standards and the world system will be impacted. And that’s what we’re trying to say. Let’s not overreact to some of the things we say and destroy a whole system that has kept the world going, has lifted billions out of poverty, has made living standards viable, even in rich countries that have benefited from that because we have problems to solve.

I’m not running away from the problems in the trading system. I see them. Our report has spelled them out. Over-dependence is not a good fit. Let’s build resilience in our supply chains and use that as a means of bringing countries that were left out and regions that were left out of integration into the fold. Let’s not react by saying, well, this system doesn’t work so we throw away everything, maybe subsidise our way out of our problems if we have money or we punish others or throw in tariffs. It will just be a tit for tat toward that to lead the world into the wrong direction. And it is costly if we fragment. We keep saying it. We have done the work here, the WTO, and the IMF has repeated the same work with similar results. We’ve done the work to show that if the world fragments into two trading systems, it will cost the world a 5 per cent loss in the longer term, in real global GDP. The IMF comes up with 7 per cent, double-digit losses for poor countries. Why do we want to go in that direction?

Gideon Rachman
So we talked about the economic costs and also the great power tensions. But another thing that I think is a big pressure on the global trading system is global warming and the sense that a lot of environmentalists feel that the current system of globalisation has become unsustainable and is actually a big contributor to climate change because as they see it, goods are travelling to greater distance, air travel, container ships, you name it. You know the arguments. Do we not need to localise in the interests of the planet and therefore really change globalisation?

Ngozi Okonjo-Iweala
I think ultimately, you know, the transport and logistics of trade is always seen as part of the problem. Yes, they do contribute to global emissions and we know we had three sessions, Iata public forum, precisely looking at these issues, how do you decarbonise transport and logistics? And if you talked to all those there. We had the CEO of DHL there, we had the CEO of Agility, Ikea. We brought heavyweights here to talk about how they are running their businesses and what they are looking at in terms of net zero. So we know that the shipping industry and aviation, they are looking at how to use alternative fuels. And that problem has to be solved. Let’s admit that. It may indeed result in more regionalised trade in some instances, you know, shorter distances depending on the fuels that are used and the type of shipping that is done and containers, how they are redesigned. So we will see some of that. That’s only one aspect of what trade contributes to climate change.

But I think the other aspect that is not thought about is as we try to solve the problem of decarbonising the world and moving to net zero by 2050, what role does trade have to play? How do you move green technologies from where they are made to where they are not made? Not everyone can manufacture solar panels, wind turbines. Not everybody has the capacity. So if you said stop trading, let’s just do it in a local way, how will those people get what they need? You will defeat the purpose of trying to green the world. That is as simple as that. You cannot mitigate or adapt without trade.

Let me walk you into also some of the more specific areas. We have some agreements here that can also help towards going green. We have the government procurement agreement that tries to open up procurement and show good governance so that members can bid in each other’s procurement markets following some rules. And government procurement in the world is a $13tn affair. $13tn, 13 per cent of global GDP. Can you imagine if you use that as an instrument to force procurement towards greening goods and services? They’re very powerful instrument. So I can give you many examples of ways that trade can make a positive contribution and actually, we’re working right now on a set of policies that members and countries can integrate into their nationally determined contributions for COP 28 to help them use trade in a positive fashion to go green and to use the WTO and its agreements in a similar way.

Gideon Rachman
OK. Well, that’s an interesting example of a more positive aspect. So let’s end on that. I mean, I guess my questions have been mainly about the WTO trying to defend the system. And you’ve spoken very eloquently about why we mustn’t throw away what’s been gained. But are you here playing an entirely defensive role or are there also things that you can do that are more positive, that are expanding trade and thinking about it in new ways that will do what the WTO’s, you know, really wants to do? Expand trade.

Ngozi Okonjo-Iweala
Thank you for asking that question, because you know the conversation about trade these days, it’s about the tensions, but there are actually some exciting things happening in trade. Just one sample is what is happening with digital trade. We believe and we see that digital trade is the wave of the future. Trade in digitally delivered services is growing at 8 per cent a year in the past couple of decades. It’s now almost $4tn out of $31tn total. And we see growing in leaps and bounds faster than goods trade, faster than even other services trade. So this is one area where the world needs to turn its attention and say, how do we support digital trade? How do we support digitally delivered services trade? It could be that this is the next wave of disinflationary impact of trade that we are looking at. And so that is very exciting. Do we need ground rules that underpin digital trade? And here at the WTO, we are already working on that. There is a plurilateral set of negotiations where about 90 of our members looking at this and trying to come up with rules to underpin ecommerce. So that’s very exciting.

There are other things happening with respect to trade. We are looking at inclusion. What do we have to do to empower women and help them participate better within the global economy and micro, medium and small enterprises, both supply-side interventions as well as other types of interventions? What rules do we need? One area we’ve found is that reducing the cost of trade helps improve and expand trade, and we’ve got some agreements here that are saving the world billions. The trade facilitation agreement, we think looking at it, has already saved about 300-plus billion in trade costs. That facilitates trade. If countries implement it, if 80 per cent implemented now, but least-developed countries are only half of that, 43 per cent. So if they can implement this agreement, they can reduce trade costs. Why is it so important? If you look at trade costs, you see that low- and middle-income countries, their trade costs are like 27 per cent higher than those of high-income countries. That’s like an equivalent tariff. So one hopeful area that we see is to reduce these trade costs. It will allow poorer countries to export more if they can work on it and it will help increase world trade. So I can go on and on. There are exciting new things that are happening in trade which we see that the world can build on to better deliver for people.

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Gideon Rachman
That was Ngozi Okonjo-Iweala, the director-general of the World Trade Organization, ending this edition of the Rachman Review. Thanks for listening and please join us for the third and final episode in this series of podcasts on Bidenomics next week.

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