It's the end of the liberal economic order as we know it

THIS week has been pretty big for news, and it is only Tuesday. On Monday, The Washington Post reported one heck of a story about the myriad ways that US officials spanning three administrations lied to the public about the war in Afghanistan. And the Justice Department's inspector general released his report on the origins of the Russia probe: While finding serious fault with the FBI's handling of Carter Page's FISA ( Foreign Intelligence Surveillance Act) requests, it exonerated the bureau of all - repeat, all - of President Donald Trump's conspiracy theorising. (One way to tell that the report was clear in that respect is that it inspired very angry responses from Mr Trump, Attorney General William Barr, and Mr Barr's hand-picked prosecutor in the case.) We learned that Christopher Steele and Ivanka Trump were friends. Oh, and I believe some impeachment resolutions were also drawn up.

In the grand sweep of history, however, I suspect this week will be remembered for something more significant: the actual end of the liberal economic order. The most important thing was that the World Trade Organization's (WTO) appellate body winked out of existence. The Trump administration had vetoed any new members to that body for the past three years, arguing that the body had too much power (to be fair, this started under the Obama administration so it bears some culpability as well). This ensured that as of this week there was an insufficient number of members to adjudicate trade disputes. As Krzysztof Pelc and Joost Pauwelyn explained last week in the Monkey Cage, "Without a functioning Appellate Body, countries can block progress on disputes between the organisation's 164 members simply by filing an appeal." This means, in essence, that the gold standard for dispute resolution in the global economy has ceased to exist.

Critics on the left and the right have embraced the end of the WTO's enforcement capabilities, but this move is mystifying in multiple ways. The US was one of the bigger beneficiaries of the WTO's dispute settlement understanding. Mr Trump claimed that "We lose the lawsuits, almost all the lawsuits in the WTO", but in fact the US won far more cases than China. The benefits of trade liberalisation under the WTO's auspices were massive. For all the hostility directed at the appellate body, it's not even clear that it was the appropriate target of US ire.

As Bloomberg's Bryce Baschuk reported last month, the Trump administration's bargaining position was epitomised by US Trade Representative Robert Lighthizer, who prefers using Section 301 of the 1974 Trade Act, a measure that "offer the US a faster and more effective way to penalise other countries". The thing is, this isn't obvious at all, as the lack of US victories in the trade wars becomes clearer with each passing day. Section 301 might enable the US to coerce smaller countries more effectively. Against the European Union or China, it doesn't do much but damage the US economy. A WTO system that permitted multiple parties to join a dispute might take a bit longer but also has a much better chance at success.

Crippling the WTO makes sense only if you believe that "protection will lead to great prosperity and strength" and that "trade wars are good and easy to win". Both of these assertions are false, but such is this president's blinkered vision of the global economy.

At the same time the WTO was fatally struck, Democrats announced that they had struck a deal with the Trump administration for Nafta II, also called the USMCA (US-Mexico-Canada). After the Trump administration negotiated the deal this year, it had to negotiate with the Democrats to revise the deal yet again. The revised agreement of the revised agreement of Nafta has enough labour and environmental protections to earn the endorsement of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), which hasn't happened for a trade deal in nearly a generation.

On the one hand, this might be a more sustainable equilibrium for trade agreements. As Bloomberg trade reporter extraordinaire Shawn Donnan tweeted: "Richard Trumka and Donald Trump both backing Nafta is not something I ever expected." On the other hand, every analysis of this deal I have read to date suggest that it is Nafta minus - that is, less liberalising than the original agreement.

Neither the end of the WTO's appellate body nor the awkward rebirth of USMCA is a particularly liberalising trade move. Whether a phase one trade deal with China is reached before Dec 15 or not, the outcome there will be all that liberalising either. To the extent that the US is still the manager of the global rules of the game - a debatable proposition - it is hard to say that the liberal international order is still alive.

It's not the end of the world, but there will be less growth, less dynamism, and a greater probability of armed conflict.

Welcome to the post-liberal world. WP