Rumours of the trade deal’s death are greatly exaggerated
In some parts of the world, not least America’s capital, “trade” is a dirty word. Both Donald Trump and Joe Biden now champion protectionism, and neither president signed a single new trade deal. The World Trade Organisation (WTO) is a shell of its former self. So you might think that trade deals are history—but in fact, from South Asia to Latin America, dealmaking continues apace.
To understand the new landscape, start with the birth of the modern trade deal. The first half of the 20th century saw escalating tariffs and two world wars. Then, in 1948, the General Agreement on Tariffs and Trade (GATT) was signed in an effort to temper zero-sum competition. The construction of the World Trade Organisation (WTO), which formalised continuous negotiations, followed in 1995. One of its core principles is the “most-favoured nation” clause: if you change tariffs on one country, you must do so for all the others, too.
The one exception is the free-trade agreement (FTA), through which countries can gain access to each others’ markets by cutting tariffs and aligning standards. Such deals proliferated after the fall of the Soviet Union, with an average of 13 a year struck in the 2000s (see chart 1). That was until China’s rise led many to rethink the system. The WTO was accused of ignoring China’s distortive trade practices, and Mr Trump blocked new appointments to the WTO’s dispute-settlement committee, in effect defanging the organisation (a practice that Mr Biden has continued). All the while new FTAs have become rarer, with just three signed in 2023.
Yet despite the headline numbers, interest in strengthening trade links is not dead. Dmitry Grozoubinski, the author of “Why Politicians Lie about Trade” and a former trade negotiator, observes that dealmaking is slowing in part because countries have signed so many already. With 370 deals currently in force, there are few new potential partners left to court.
Meanwhile, some countries are actively pursuing negotiations. Data from the WTO show that eight major economies—Australia, China, the EU, India, Indonesia, Israel, South Korea and Turkey—have each put at least three new trade deals into force in the past five years (see chart 2). Different governments are pursuing different strategies. The EU has been striking “everything deals”, with chapters covering both trade and topics ranging from climate to gender.
India is pursuing more targeted and streamlined deals. It took less than a year to complete one with the United Arab Emirates, signed in 2022. A deal with Australia, also signed in 2022, avoided many of the extra provisions the EU is keen on. A third, with a bloc comprising Iceland, Liechtenstein, Norway and Switzerland, created targets for these countries to invest $100bn in India and create 1m jobs. If these are not met, India can renege on some of its tariff cuts. India’s approach, says one of its government’s former trade economists, has been to sign deals that open up complementary sectors in each country, to avoid hurting existing exporters.
Many emerging economies’ interest in new deals stems from a desire to attract businesses that want to be less exposed to China. “The less people trust your system, the more signing trade deals can lock in elements of your business climate and provide investors [with] certainty,” observes Mr Grozoubinski. He points to the Gulf states as especially active in this regard. The Gulf Cooperation Council (GCC) has recently signed deals with South Korea and Pakistan, and is negotiating with Britain and China. “The Emirates, Saudi, the GCC…they’re in negotiations with…nearly everybody,” Mr Grozoubinski says.
Alongside such traditional deals, trade policies that skirt the typical FTA framework are becoming more important. For many countries, “there’s a sense that the WTO is not doing it for them, that FTAs can be too much work and attract too much attention”, says Kathleen Claussen of Georgetown University. Average WTO tariff levels are already less than 10% globally, so “there’s not much juice left to squeeze,” she adds.
Even Uncle Sam has been quietly forging new trade links. Under-the-radar “mini-deals” focus on non-tariff barriers and do not go to Congress for approval (though many such deals are not legally enforceable). A common approach is the mutual recognition agreement, under which countries promise to rubber-stamp products certified by each other’s regulators. In a paper published in 2022, Ms Claussen counted some 1,200 mini-deals on America’s books. The same year Mr Biden unveiled the Indo-Pacific Economic Framework—not a trade deal, but what American officials call an “arrangement”.
Mini-deals can plug gaps in domestic policy. America’s Inflation Reduction Act included exceptions to its “Made in America” requirement for subsidies, for countries with which it has an FTA, but neglected to include important allies such as Japan and the EU. So America later signed a “critical minerals agreement” with Japan and classified it as an FTA, despite the deal hardly resembling one. “Mini-deals are sort of becoming a form of insurance against protection,” says Mr Grozoubinski. Negotiations for a similar deal are under way with the EU.
Other countries are using mini-deals, too. Japan has an expedited process for passing trade policy that does not alter domestic law, as does the EU. A paper by Lucian Cernat of the European Commission, published in 2023, counts some 2,000 mini-deals struck by the EU since 1962, dwarfing the 40-odd FTAs it has in force.
Such deals can have a significant macroeconomic impact. Another paper by Mr Cernat observes that mutual recognition agreements have historically boosted exports of affected products by between 15% and 40%, more than many FTAs. America and the EU are negotiating an agreement that would cut certification costs by more than the cost of many tariffs, and would affect some $200bn in annual trade flows, far more than the total affected by FTAs between the EU and many smaller countries.
In much of the world, non-traditional deals are likely only to grow in importance owing to the rise of the digital economy, says Devon Whittle, a former trade negotiator for Australia. A health-care firm operating across borders, for instance, may face many different data-privacy rules that are hard even to catalogue. Removing such barriers is a huge part of modern trade negotiations, and does not require an FTA. In recent years, countries including America, Japan and Singapore have pursued standalone deals for digital services.
Some would like to formalise the new system of targeted deals that often skirt the WTO. A recent essay by Peter Harrell, a former official in Mr Biden’s administration, argues for sectoral agreements in which like-minded economies strengthen supply-chain links to reduce their dependence on adversaries. This would supercharge what is already happening through some mini-deals in fashion today. It might also violate WTO rules. But as Mr Whittle says, “some governments may be willing to push at the boundaries”. After all, if Mr Trump returns to the White House, plenty more rules will be broken anyway. ■
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