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The writer is an FT contributing editor, chief economist at American Compass and writes the Understanding America newsletter
The collapse of the World Trade Organization’s framework for the global economy began in 2016, when the UK voted for Brexit and US presidential candidates Hillary Clinton and Donald Trump rejected the Trans-Pacific Partnership then under negotiation by the Obama administration.
Subsequent actions by the first and second Trump administrations have paralysed the WTO’s appellate body, destabilised relations with China, abrogated existing agreements and begun the process of negotiating new ones — most notably, the US-Mexico-Canada Agreement, whose review, initially scheduled for 2026, is already under way.
A new USMCA is of utmost strategic importance to the US and would be the linchpin of the administration’s efforts to reset the international economic order on more favourable terms. But the deal will look nothing like the “preferential trade agreements” of the WTO era, which sought to build upon a vision of frictionless market efficiency.
While WTO members could maintain tariffs, so long as the same rates were offered to everyone, PTAs sought to bring those rates towards zero through direct negotiations. The assumption was that tariff reductions and regulatory harmony would boost growth, employment and incomes.
The balance of trade, meanwhile, was seen as irrelevant. Whatever pattern of trade resulted from removing barriers was, by definition, the best. “Trade deficits”, the Nobel laureate Paul Krugman declared, “are self-correcting.” And concerns about countries such as China dominating vital supply chains were dismissed as outdated nationalism superseded by the global market being stitched together.
History has since undermined these assumptions. Trade deficits are not self-correcting, competition among nations has not ceased and arrangements that efficiently lower prices by hollowing out a nation’s industrial base do not boost its fortunes. Recognition of all this must be the basis for a new and sustainable framework supportive of genuine free trade. USMCA should be the test case.
First and foremost, the agreement must centre on the substantive commitment to balanced trade that ensures all parties benefit. The WTO model attempted to override domestic politics and foreclose the strategies that countries rationally pursue for their own advantage. A commitment to balance focuses on what matters and then leaves each country to decide how to get there.
If Mexico, Canada and the US commit to maintaining balanced trade among themselves, labour and environmental standards need not be so carefully policed. Each country will have an incentive to manage its currency in a co-operative manner. An agreement would establish protocols where imbalances do emerge. Tariffs could increase or decrease accordingly — a safety valve to open and shut, rather than one unscrewed and tossed aside.
The second novel principle for a new USMCA should be an emphasis on sovereign control rather than the physical presence of companies and a common external boundary rather than global integration. In the old WTO framework, “rules of origin” were vital. A car produced by BYD in China and then imported into Mexico for cosmetic adjustments would not qualify for the low tariffs that the US applied on cars produced in Mexico. But if BYD set up shop in Mexico and produced under USMCA-negotiated rules, its cars were welcome in the US market.
But BYD building in Mexico does not alter the fact that it is controlled and subsidised by the Chinese Communist party. What are needed, therefore, are rules of control. Mexico, Canada and the US should jointly commit to a policy of “China out”, and extend it to other countries that integrate their supply chains with China’s.
A USMCA premised on balanced trade and the exclusion of non-market economies would represent a revolution in trade law and international relations, establishing the framework to which other developed market economies would have to accede as the condition of joining a US-led bloc.
Negotiating it will require a clarity of vision that the Trump administration has struggled to demonstrate thus far, with the president pursuing a China deal and haphazardly raising tariffs on allies while his team tells those same allies to lower their tariffs and push China away. Economists and negotiators steeped in the old ways will need to replace their obstinacy with creativity in execution. But with the WTO model in ruins, all sides share an interest in building a better replacement.
