Making Sense of Trade Turbulence: Responding to uncertainty, complexity, volatility, and ambiguity

The only thing we seem to know for sure is that a pall of uncertainty has been cast over the global trading system. In light of this, I think we need to dust off a useful strategic framework that helps us think through the nature of the challenge before us, and plan for whatever may come: volatility, uncertainty, complexity, and ambiguity (VUCA).    

Volatility

President Trump can be expected to continue imposing—or threatening to impose—tariffs or other trade-restricting measures on U.S. trading partners. These tariffs, and the volatility around them, will continue to strain political relationships and disrupt trade. Like a storm, governments may not know how or when tariffs might be applied, but they should expect it might happen.

The classic strategy response to volatility risk is investing in preparedness, calibrating how much you invest in alternatives with the level of risk you face. The EU’s pursuit of a quick conclusion to its trade deal with India—one of the world’s fastest-growing consumer markets—is a good example; it builds alternative markets for EU exporters. Canada’s tariff retaliation plan is another. The fact that Canada was clear and firm about its preparedness tactic probably helped dampen the effect of the volatility for affected businesses. Countries that are not (yet) the target of U.S. tariffs are, in some cases, lowering their own tariffs unilaterally, apparently to manage the impact of increasing global prices on Brazilian consumers (see Brazil) or to get ahead of expected demands from the United States for tariff reductions (see India).

Uncertainty

We can predict the likely impacts of some decisions:  U.S. tariffs will probably raise domestic prices. But the extent of the price increase and long-term impacts of tariffs are more difficult to determine: will they bring production to the United States as the Administration hopes? Or reshape supply chains in other ways? The strategic response to this sort of uncertainty is to invest in information. The Internet is awash with analysis of what the impact of this year’s tariffs could be for the countries on whom tariffs are imposed.  What is (at least to me) just as important, but harder to find, is information about what the broader impacts of the tariffs could be for the rest of the world, such as the  International Food Policy Research Institute’s note on the impact of tariffs on South American agricultural producers.

The system isn’t broken if one player (albeit a very large one) ignores the rules. But it will be broken if everyone ignores the rules.

Alice Tipping, Director, Trade and Sustainable Development, IISD

Complexity

The impact of major disruptions in the biggest economy in the world—which is also the global reserve currency—will reverberate through global supply chains for goods and services as well as financial and debt markets. The normal response to complexity is to skill up, bringing in experts who can parse out impacts and weigh them to build an overall picture. Analysis will need to look at the impact of tariffs on the economics of different industries and the range of supply chains within those industries. It also needs to consider what the impact of tariff-led trade policy could be on the U.S. dollar and on countries with debt denominated in U.S. dollars.  There is good overall analysis out there on key industries and financial markets, but more granular data can be expensive and requires its own investment of time to grasp.

Ambiguity

Ambiguity, in the context of this strategic framework, means that the relationship between cause and effect isn’t clear. Over the last few weeks, it has not been clear what different responses to President Trump’s tariffs would achieve (if anything). The strategic approach is to test different options and see what happens, to infer from that what action causes what kind of reaction. This seems to be what governments are doing: actions to address U.S. concerns about border control have yielded only temporary relief, in Canada and Mexico’s experience. Similarly, complaints about the impact of tariffs from domestic politically powerful sectors (like the auto industry) appear to be able to get short exemptions. Targeted retaliatory tariffs, like the EU’s, seem to escalate the situation, but not indefinitely—there have been off-ramps. Not imposing retaliatory tariffs (the British approach) is a further option but hasn’t been in place long enough yet to gauge its effectiveness. An option floated in the commentariat but not yet tried is to use retaliatory measures other than tariffs, such as suspending intellectual property protections.

Why the Rules-Based Trade System Still Matters

All of the responses outlined above are unilateral actions, of course. A handful of thoughtful articles on possible multilateral actions have been penned by experts, including Ignacio Garcia Bercero’s note on the importance of the rules-based system (albeit with some needed reforms) and Joost Pauwelyn’s ambitious idea of a new Trump Round of tariff-reducing negotiations at the World Trade Organization. There has been less thinking, however, about how governments that would like to preserve an open and predictable global trading system can work together in the face of a trade policy environment that is volatile, ambiguous, complex, and uncertain.

One step that several are now taking is to bring disputes about U.S. tariffs to the World Trade Organization, underscoring that they still believe the rules apply and must be followed. A second—noted in Ignacio Garcia Bercero’s article (linked above)—is for countries to keep their retaliations consistent with legal obligations as far as possible. A third, which I’ve advocated for, is to keep looking for opportunities where cooperative trade policy makes sense despite the uncertainties.

The rules-based trading system, for all its faults, is a better structure for protecting and advancing the development interests of smaller and less powerful countries than a purely power-based system. It is also important to remember that the system isn’t broken if one player (albeit a very large one) ignores the rules. But it will be broken if everyone ignores the rules.