Traditionally, the United States has been a powerful ally of the global economic institutions that have shaped international free trade since the Second World War. Some analysts fear that the Trump administration’s foreign policy will undermine those institutions. The trade war with China represents a significant movement in this direction.
There are three main steps to this argument. The first step is the claim that strong global economic institutions are good for the world. This is because economic institutions promote a global order built on a shared set of rules, rather than an order structured around military strength and allegiance.
This ensures that countries are treated fairly on a wide range of economic issues, including market access and the protection of intellectual property rights. These are fertile conditions for investment and growth.
An additional reason to celebrate global economic institutions is the shared facilities they provide.
These facilities lubricate commerce, with systems that handle currency conversion, enforce customs rules, and/or allow for dispute arbitration.
Free-flowing international commerce is good for businesses and consumers worldwide.
The second step is to recognize the centrality of the U.S. in bolstering global economic institutions. The U.S. was a central figure in the creation of the Bretton Woods institutions, including the International Monetary Fund and the World Bank (and what would eventually become the World Trade Organization). Some analysts attribute this involvement to the strategy of liberal hegemony, i.e. that the U.S. would strengthen its global position by the proliferation of market-oriented democracies.
The U.S. also plays a significant role in holding these institutions together in the current day and correspondingly has the ability to seriously trammel their operations (more on this below).
The third step is to understand the trade war with China as emblematic of a broader foreign policy direction by the Trump Administration. President Trump’s “America First” rhetoric, and the isolationist logic it embodies, represents a rejection of the rules-based global economic framework on the basis that they are ‘bad deals’ for the U.S. (in his words).
Among other things, he has threatened to withdraw from NAFTA.
He has also vetoed the appointment of judges to the WTO’s Appellate Body (severely hampering its functioning).
The U.S. is uniquely poised to damage global economic institutions because it can directly interfere with their operations (as with the WTO), and it can undermine confidence, diminishing buy-in and participation.
This is why the trade war with China is significant. Taken in isolation, it might be construed as a bilateral dispute without further consequences elsewhere. In context, it is a significant step in a broader foreign policy that seeks to undermine global free trade and the institutions which secure its smooth functioning. For example, the WTO is intended as a dispute-resolution mechanism for international trade.
By engaging in a trade war as a means of dispute resolution outside of WTO arbitration, the U.S. undermines faith in the WTO's ability to fulfill its function, thus diminishing buy-in and participation.