Who Likes Cooperation? A Long-Term Analysis of the Trade War between the US, the EU and China/Kim Isbirligi Yapmak Ister? ABD, AB ve Cin Arasindaki Ticaret Savasinin Uzun Donemli Analizi.

• Author: Polatay, Selcan Serdaroglu

Introduction

Trade war is a situation in which a nation retaliates against the unilateral protectionist measures of another nation with similar tariff rises and other restrictions on imports. The concept has been on the international agenda since the Trump administration increased tariffs on iron and steel (25%) and aluminum (10%) imports unilaterally, targeting exclusively Chinese and European goods in 2018. China and Europe then retaliated with increased tariffs on the American products. For the targeted countries and the rest of the world, this is another initiative of the declining, self-centered hegemonic power, suffering from the "diminished giant syndrome" coined by Jagdish Bhagwati, (1)or even a typical manifestation of Trumpism. The termination of the Transatlantic Trade and Investment Treaty (TTIP) negotiations with the EU, the US withdrawal from the Transpacific Partnership (TTP), the 'modernization' of the North American Free Trade Agreement (NAFTA - that became the US, Mexico, Canada Agreement (USMCA)), (2) and even the threat to pull the US out of the World Trade Organization (3) (WTO) are other 'revisionist' (4) trade measures of the Trump administration. For the US, such procedures are the proper way of addressing trade distortion and forcing rivals to compensate their losses. They are not spontaneous, but instead the result of a waiting process, as their trade partners did not meet American expectations in specific issues for a long time. In the same vein, the US considers that the dispute settlement mechanism of the WTO is inefficient, thus not suitable for satisfying their demands.

Such 'beggar thy neighbor' strategies involving the state are associated with neo-mercantilism and the concept is widely used to explain the economic welfare aspects of trade war as it means that the foreign base of wealth is targeted through tariff increases. Explanations may also take into account that the interaction of states and firms shapes the global economy after the 1980s. The new trade theory or the strategic trade theory offered multidimensional explanations of changing trade patterns. According to Robert Gilpin, even this transformation was due to "growing dissatisfaction with the inability of conventional trade theory to explain trade patterns" and the "concern about the increasing trade problems of the US, especially with Japan in the 1980s." (5) The new theory, developed by Paul R. Krugman, James A. Brander, Barbara J. Spencer, and Avinash Dixit, among others, focuses, in a game-theoretic framework, on the impact of factors such as increasing returns to scale, imperfect competition, export subsidies, and import tariffs, as well as R&D and technological innovation and how they might distort the trade/become trade advantages as an outcome of the strategic interventions of states. (6)

There are also game-theoretical references focusing on functional explanations (individual rationality versus collective rationality) of trade war, taken as a collective action problem. For instance, Raymond Dacey used the model of 'bully game' in which a hegemonic power acts unilaterally to maximize its gains and other players accept those actions in order to get their second-worst outcome possible. Dacey also states that other players can change the dynamics of the game by implementing unexpected strategies like being 'conciliatory' or 'provocative.' (7) Robert Axelrod's 'tit-for-tat strategy' of cooperative behavior among self-centered players offers an analytical tool for studying trade cooperation problems. (8) To illustrate, Peter van Bergeijk cites the work of Carballo et al., in which the authors distinguish 'hot trade war' and 'cold trade war,' defining the latter as a situation where the "risk of tit-for-tat increases, but without actual trade-distorting measures being implemented." (9)

This article does not deal with implementing a game-theoretic analysis, although it uses some of the related concepts mentioned above. Instead, it makes an empirical study of trade war through a data survey of American, Chinese and European economies from a long-term perspective. The study focuses on relations between these long-term leading actors in the global economy (from the early 1800s until now) in terms of GDP, growth rate, and share in global production. Moreover, they have been the three "largest global players for the international trade", accounting for 45% of the world exports and imports in 2018.

The long-term perspective is used to demonstrate that in the global economy, the implementation of practices seen as elements of trade war is a constant phenomenon. Only, according to the convergence and divergence of manufacturing capacities, the intensity of such practices and those applying them change. The analysis of multilateralism focuses on the level of international cooperation while recognizing that the proliferation of regional trade agreements (RTA) and the attempts to create megaregional blocs are affecting trade governance.

By emphasizing the link between manufacturing outputs and the trade policy choices of the actors concerned, it is argued that trade structure affects their decisional strategies. This structure is providing them with distinct/similar bargaining powers and a 'coercive advantage' to bring others to follow one's terms. The article covers the evolution of multilateralism and historical antecedents of trade war; the current structure of the merchandise trade between the US, the EU and China and how they interpret multilateralism through their use of the dispute settlement mechanism of the WTO. Answers to the following questions will develop the main argument of the paper: Is multilateralism incompatible with international trade? Are unilateralism and multilateralism mutually exclusive if these leading economies apply unilateral strategies, seek bilateral arrangements, or bargain to oblige others to concede while using mechanisms of multilateralism at the same time?

Historical Antecedents of Trade War

This section focuses on whether the evolution of the production structures of the US, the EU and China and their willingness to cooperate/to defect in respecting a rules-based international trade are interlinked. It starts with configuring the evolution of multilateral trade governance and then proceeds to observe in this framework whether their trade policies and understanding of multilateralism change or not according to what and how they produce. It does not intend to summarize their respective economic histories. However, it would be useful to consider the evolution of their economies and exchange relations to understand that war and cooperation are intrinsic to international trade.

The historical analysis is based on data on the evolution of production and trade structures in China, US and Europe since 1860, the year when the British-French bilateral trade agreement was signed, which marks the first adoption of the Most Favored Nation (MFN) clause as the main pillar of the international trade system. The Great Depression year of 1929 is selected since the US chose to close its domestic market by means of the United States Tariff Act of 1930 (also known as the Hawley-Smoot Tariff Act) and analysts have emphasized similarities between this period and current trade collapse after the Great Recession in 2008. (10) The years of 1948, 1986, 1995 and 2001 correspond to decisive moments of international trade regulation: the coming into force of GATT, the launching of the Uruguay Round, the creation of the World Trade Organization (WTO) and the membership of China in the WTO.

Trade Battlefield: The Multilateral Trade System

The long-term assessment of the content and limits of multilateralism in international trade assumes that the evolution of international trade regulation could be explained in terms of international regime efficiency, using the elements presented in Stephen Krasner's canonical definition: (11) principles, norms, rules and decision-making processes. The adoption of the principle and norm that are the fundamental and immutable elements of institutionalized collective action is completed by changeable rules and decision-making procedures that ensure and monitor the harmonization of the behavior of the parties. Based on this hierarchical status of elements, it has been accepted that an efficient regime, on a scale of 1 to 6, would require all four elements with different weights: The principles and norms, being superior requirements of the collective action would be respectively equal to 2 if fully interiorized. The rules and decision-making procedures will each have 1 as their value if fully respected and implemented. Therefore a perfectly functioning regime would be equal to or close to 6. A regime's framework and participants' degree of compliance vary depending on their expectations and the international environment. How different elements of an international trade regime have evolved since 1860 and the turning points in multilateralism are presented in Figure 1.

The Cobden-Chevalier Agreement of 1860 between Great Britain and France laid the foundations of the current system of international trade regulation. Great Britain played the role of the hegemonic power and provided the international trade system of the 19th century based on free trade and the MFN clause. In Figure 1, this evolution is represented by 3. Around 1929, in the pre-crisis period and afterwards, there was no cooperation for rules-based trade because of the 'trade collapse.' (12) That equals 0 in terms of regime efficiency.

After the coming into force of GATT in 1948, the regime is progressively (re) constructed on the multilateral basis. According to Stephen Krasner, between 1945 and the conclusion of the Kennedy Round in 1967, there was 'less protectionism' (13) thanks to trade liberalization (tariff reductions, removal of nontariff barriers, import restriction abolitions, etc). The US has...