Preserving World Economic Order

Panel Presentation to World Peace Forum, Tsinghua University, Beijing, 3 July 2025

The post-World War II world economic order, under which so many of our countries have flourished, to the great benefit of our populations in both the developed and developing world, has in recent times been taking a severe beating. And as painful as it is for its longstanding allies and partners to acknowledge it, the primary culprit has been the United States.

The international order that the US and its allies built out of the ashes of world war – institutionalised around the UN, IMF, World Bank and GATT (later the World Trade Organization) – was based on cooperation, not coercion, and its rules were generally accepted as working to everyone’s advantage. The neo-liberal shift of the 1980s – with its focus on austerity, deregulation and structural adjustment policies – did generate significant backlash. There has also been evident for the last three US presidencies, not just the current Trump administration, America’s own growing, domestic-politics-driven, disaffection with free trade.

But there was no real sense generally that the system as a whole was totally incapable of the reform necessary to reflect changing world power relativities and new policy challenges, and certainly no sense that the world as a whole would benefit from its breakdown.

But that breakdown is exactly what President Trump and his administration seems now intent on achieving. Part of the problem has been his comprehensive distaste for the UN and all its agencies. And there has also been his disregard for the IMF and World Bank – which have hardly been seen by anyone as acting to America’s disadvantage over the decades: with the President accusing them of “falling short”, and demanding that they align their agendas with his own, whatever that might prove to be on any given day.

But obviously the overwhelming concern, currently is the lunacy of the tariff war on the world launched by President Trump on so-called ‘Liberation Day’ in April this year. This defies any rational explanation, not least because of the harm it was bound to do to America’s own economy, and its political standing in the world. Where was the political logic in allies and partners, and potential supporters in troubled regions, being treated equally or worse with perceived adversaries?

And when it comes to economic logic, where does one start? Where was the beginning of any understanding of economic history, and the massive contribution made by the beggar-thy-neighbour American Smoot-Hawley Tariff Act of the 1930s to worsening the Great Depression, raising as it did duties to protect domestic jobs and provoking a wave of global retaliation that choked international trade? Where was the beginning of an understanding of the basic principles of comparative advantage and the gains that we’ve all enjoyed from international trade? Where was the economic logic in calculating his ‘reciprocal’ tariffs in the surreal way he did, supposedly based on the size of America’s trade deficit with each country? If deficits were the rationale, what was the reasoning behind the common tariff of 10 per cent being applied to a country like mine, Australia, with which the US enjoys a huge trade surplus? (Not to mention the penguins of Heard Island in the Antarctic, with whom there was no trade at all?)

And what was the economic logic in applying, at least initially, a set of tariffs on China so high as to amount to a de facto trade embargo, with all that that implied for empty shelves, higher prices and massively disrupted supply chains in the US?

Even if there is eventually a massive “TACO” retreat on all these fronts by the Trump administration when the scale of its nonsense eventually sinks in, the ego-driven fecklessness of the President means that even his closest advisers have no idea what will come next. The costs of this uncertainty to global trade and incomes will become more manifest day by day. It certainly provides no basis for building any lasting trust or confidence with the rest of the world.

China is, understandably, not entirely unhappy with this state of affairs, appreciative of the opportunity the US has so generously provided to display Beijing’s own trade and multilateral credentials.

But I do think it important that policymakers here recognise that many other countries around the world still have very real concerns about the extent in practice of China’s commitment to a completely free and open rules-based trading system. The list of complaints is a familiar one, including the past use of trade coercion for political purposes, the use of state subsidies and other support mechanisms in key industry sectors, questions about currency manipulation, insufficient respect for intellectual property, and generally excessive and unjustified discrimination against foreign competitors – with, e.g., China being the subject of nearly half of all trade complaints in the WTO in 2024.

Some of these charges are certainly outdated (like allegations of currency manipulation) or overdrawn (like the charge of artificially maintaining production capacity in the EV manufacturing sector). But if China is genuinely to be seen as a leading champion of fair and equitable world economic order – picking up the pieces that US behaviour has now shattered – it is obviously important that close attention be paid to getting its own house in unchallengeably good order and working with others to lead reform of the global trade rules.

To briefly conclude, how should all of us in the rest of the world be responding to the stress the world economic order is currently under? I think three kinds of response are crucial here.

First, at the national level, we should focus on keeping our own internal economic houses in order, and do everything we can to stop the Trump tariff contagion from spreading: we should resist the urge to impose retaliatory tariffs of our own against Washington and, in dealing with Washington, be party to no settlement that discriminates against other partners. We should also avoid the temptation to impose new protective tariffs on each other – that way lies a destructive downward spiral to a smaller world economy.

Second, we should work together to strengthen global institutions and processes, and certainly not succumb to any pressure, to do bilateral deals with the US that will contribute to any further unravelling of the multilateral system. For the WTO, the Multi-Party Interim Appeal Arbitration Arrangement, for all its limitations, has been an example of the kind of workaround against US disruption of the rules, more of which will be needed if the system is to survive. The G20, difficult as this will be with the US holding its presidency next year - must remain a crucial cooperative policymaking vehicle, as it was in response to the 2008-09 Global Financial Crisis, finding then a common voice for all the world’s leading economies on fiscal and monetary stimulus, toxic asset management, future regulatory reform, and renewed commitment to free trade.

And finally, within our own Asia-Pacific – or, if you’d prefer, Indo-Pacific – we should be working together to strengthen regional institutions and processes. Restoring some real traction for leader-level policy dialogue mechanisms like APEC and the East Asia Summit will be important. But perhaps even more immediately useful in promoting closer regional economic integration, and avoiding disintegration of the wider trading system, will be the mechanisms in which the US has either declined or not been offered a seat at the table - RCEP (Regional Comprehensive Economic Partnership) and the CPTPP (Comprehensive & Progressive Agreement for Trans-Pacific Partnership).

As to RCEP, talk of a leaders meeting this year offers the prospect of a platform for finding common cause on the principles necessary to meet the challenges of Trump’s trade war. And as to the CPTPP, this is a serious free trade agreement, which would be dramatically further strengthened by China joining, as Beijing applied to do four years ago. Its disciplines on support for SOEs, and labour issues and the like, have so far been presented as a barrier to that happening. But with China obviously wanting to burnish – add some shine to – its free trade leadership credentials at the time as its great strategic competitor is burning its own, a good place to start might be to address those internal reforms which would give clear the way to its membership. Difficult yes, but potentially game-changing.