Stop Weaponisation Of Trade

An open, transparent, rules-based trading system remains crucial for driving economic development. Such arrangement is also important for addressing global problem like climate change. Under multilateralism, global trade is operated adhering to certain internationally agreed principles and regulations. Multilateral trading system originated with the conviction that trade and interdependence foster peace and prosperity. The World Trade Organisation (WTO) was set up in the 1990s as a successor to General Agreement on Trade Tariff (GATT), which until then regulated the world trade activities. Compared to GATT, WTO is more empowered to penalise those trading partners which violate its rules.

However, rising populism especially in the West, the COVID-19 pandemic and Russian invasion of Ukraine, among others, have cast a shadow on multilateralism. This decade has been difficult with erosion of global trade principles, rules and multilateral institutions. Against the backdrop of Ukraine crisis, we can witness how destabilisation of global relations affects the world economy. World economy is under heavy strain as global trade has been impeded due to sanctions against Russia, the major exporter of food and energy. Trade restrictions are the hallmarks of economic sanctions.

Rising inflation 

While sanctions are imposed to deprive Russia of revenues from its major exports for the latter’s invasion of Ukraine, the same measures have paradoxically ruined the global economy through increased inflation. Ukraine war has reminded that trade and economic interdependence can be weaponised but at the cost of world economy as shortages of food and energy have pushed the inflation to its limits. Such effects have been felt everywhere though the consequences are more severe in the poor communities.

Trade has now become more common instrument of weapon among the big powers in the recent times, the economic implications of which are significant not only for those engaged in trade war but for others as well. In this regard the latest chip war between the US and China has attracted global attention. A full-scale economic war between the world’s two largest economies is underway with the announcement by the US Commerce Department of severe new restrictions on sales of advanced semiconductors and the US high-tech goods to China. Termed as Technology War by some commentators, this conflict is bound to be consequential. New US restrictions on sales of chips to China have been in practice since October.

There is no doubt that semiconductors are, and will remain, at the heart of the 21st century economy. This is why US President Joe Biden signed the CHIPS Act in August, which includes subsidies and other measures to bolster America’s domestic semiconductor industry. The role of microchips is immeasurably significant in this age of growing automation. Any form of automation is unthinkable without microchips. No cars can move, no smartphones be functional and communication networks wouldn’t be operational without automation. Hence, controlling the design, fabrication, and value chains that produce these increasingly important components of our time carry the utmost importance.

Despite the fact that semiconductor value chain is hyper globalised, the US and its allies play the key roles. Chip design is heavily concentrated in the US and production of semiconductors would not be possible without advanced equipment from Europe and fabrication of the most advanced chips is located exclusively in East Asia, especially in Taiwan and South Korea. In its pursuit of technological supremacy, China has become increasingly reliant on these chips. Its government has been effortful to boost domestic production and achieve self-sufficiency. In recent years, China has invested massively to build up its own semiconductor design and manufacturing capabilities.

A sign of technology war between the US and China was evident two years ago when America banned all sales of advanced chips to the Chinese Telcom giant Huawei, which was China’s global technology flagship at the time. The decision has damaged China economically as the telecommunications giant lost almost 80 per cent of global market share for smartphone. America’s latest move of restricting sales of semiconductors to China intends to do the same to the whole country which it did to Huawei in the past.

The official aim of the US policy is to deprive China’s military of advanced chips to halt its modernisation drive. Indeed, the real effect of the restricted exports of chips will be to impede China’s development in the sectors that will be critical to national power for many years to come. Analysts opine that China will certainly respond by developing its own capabilities though its additional efforts to gain competitive strength will take time to bear fruit.

Far-reaching implications

Seen from the standpoint of new chip war one may argue that a broader Sino-American decoupling is in the offing. Should this materialise, it will have far-reaching implications not only for the trading partners but also for the rest of the global economy. Continuation of a trade policy that seeks to weaponise trade to achieve strategic aims harms all. No single country benefits from trade decoupling that may be one of the outcomes of trade war be it in technology or in any other item like food or energy. To avoid trade being weaponised, we need deeper, more diversified, and more deconcentrated world markets. Only such markets can withstand any shocks and are harder for any country to weaponise trade. 

To attain this, we need a strong and effective multilateral framework of rules to govern markets. The 12th Ministerial Conference of the WTO has revived the hopes of strengthening the multilateral framework of global trade. During that meeting, the ministers struck a compromise on a long-debated proposal to waive intellectual property protection related to COVID-19 countermeasures. It will contribute to deconcentrate and diversify vaccine manufacturing capacity. Disagreement among WTO members to provide waiver to the above right was a setback when the world was faced with the shortage of COVID-19 vaccines. A revived WTO can play a significant role in preventing the weaponisation of trade.

(Thapa was a former Foreign Relations Advisor to the Prime Minister 2008-09)