Trust in International Trade

Trust, trade policy uncertainty, and the weaponization of interdependence

Trust has always mattered in international trade, but it is discussed more often now precisely because trust in institutions is eroding and firms and governments are increasingly having to rely on trust in counterparties. Amid trade policy uncertainty and the weaponization of trade, countries increasingly speak of trading with partners they trust, rather than relying on the rules-based system itself. The central thesis of the research is that trust is not only important for trade, but can also be a consequence of it: trade with another nation can help build trust, rather than requiring trust as a precondition. Institutions, treaties, and dispute settlement systems determine how cheaply that trust can be produced. It is the erosion of trust in institutions such as the World Trade Organization (WTO) and the wider rules-based order that is driving economic exchange to retreat into clubs of trusted, like-minded counterparties, with the endpoint of this trajectory being a world in which trade simply follows the flag, determined by geopolitical alignment rather than market forces.

U.S. Treasury Secretary Janet Yellen, who developed the idea of friend-shoring, spoke of favoring the friend-shoring of supply chains to many trusted countries. Australia’s former Trade Minister Daniel Tehan spoke of countries that share Australia’s democratic values, and of investment in and trade between trusted partners. Japan’s former Minister of Economy, Trade and Industry, Yasutoshi Nishimura, spoke of strengthening supply chains with reliable partners and like-minded countries within the Group of Seven (G7). The European Union spoke of trusted and like-minded partners in the context of Canada, and of reliable trading partners globally to reduce dependence on just one or a few countries, language echoed by European Commission President Ursula von der Leyen.

Measuring the pervasiveness of “trusted partner” rhetoric: constructing an index

To capture how important this rhetoric has become, the research project, undertaken with colleagues at The Australian National University, constructs an index of “trusted trade” language, currently limited to the official speeches and documents of trade and economic ministers in Australia, Canada, Japan, the European Union, the United Kingdom, and the United States. Documents are scraped and classified using keyword searches, then processed with GABRIEL, an open-source library that converts unstructured data, images and text into structured, analysis-ready data, with human and AI sense-checking of the results.

A document is coded as promoting “trusted trade” if it advocates organizing trade, investment, or supply-chain relationships with trusted, reliable, allied, or like-minded countries, including framing that emphasizes vulnerability to weaponization by states that do not share similar values. Documents that merely promote trade, investment or supply chains in general terms are not coded, since the index isolates a retreat from multilateralism specifically, which is a framing that existing uncertainty indexes do not capture.

The resulting data show a clear uptick in this rhetoric across most countries in 2023: a large increase for Australia that year, a rise for Canada that did not subsequently fall away, continued important use by the European Union, and a jump for Japan to six documents in 2023, though only three in 2024. As a share of trade-related documents, Japan reached 12% in 2023, Canada remained high, and the European Union stayed above 15% in the most recent year, while the pattern for the United States shifted with the change in administration. The near-absence of this framing before 2023 in most countries, and its sudden prominence since, is itself a striking finding.

The erosion of trust in the rules-based trading system

The research interprets this as evidence that trust in the rules-based system itself has eroded: countries and traders no longer discuss trusting the WTO or its dispute settlement system as they once did, and have shifted instead toward discussing trust in counterparties. On top of major policy shocks and the return of geopolitics, the WTO’s dispute settlement system has been paralyzed, and security exceptions—particularly the national security exception under Article XXI of the General Agreement on Tariffs and Trade (GATT)—are being invoked far more often, including to justify tariffs on allies, alongside expanding export controls which are increasingly difficult to distinguish from ordinary protectionism. Interdependence itself is being weaponized, prompting talk of trusted partners, like-minded countries, reliable suppliers, and friend-shoring.

The turn to friend-shoring and trusted supply chains may be a deliberate, first-best redesign of globalization for a riskier world, or a revealed response to declining confidence in trade rules and institutions; the research holds that both can be true, but that the latter is currently a more significant factor, meaning a worsening situation lies ahead.

To illustrate the costs of retreating into blocs, the research points to two extreme historical cases: the interwar period, especially the 1930s, a case of absolute fragmentation in the absence of a rules-based system, in which countries used economic weaponry against each other in ways that fueled rivalry and ultimately conflict—a trajectory the postwar Bretton Woods institutions were designed to avoid by embedding liberalism, development, and equal treatment through most-favored-nation status; and the Cold War division between the countries that signed onto the GATT and the Soviet bloc that did not, with the Iron Curtain representing a tariff equivalent of 48% in 1951 and later estimates suggesting it roughly halved East-West trade flows and caused substantial welfare losses in the Eastern bloc.

Model-based estimates point to similarly large costs from renewed fragmentation today: the International Monetary Fund estimates losses of up to 7% of global gross domestic product (GDP) depending on the scenario, decoupling into two blocs could cost about 5% of global real income, and friend-shoring could cost up to about 5% of GDP in some countries. As the research suggests, friend-shoring pays a permanent premium in every state of the world to hedge against a rare event, and the poorest countries are paying the most of that premium.

A taxonomy of trust: object, nature, and direction

The research proposes a taxonomy of trust along three axes. The first is its object: trust in a specific counterparty, meaning belief that a particular partner or firm will honor its contracts, versus trust in an institution that constrains counterparties’ behavior generally; the world has been moving away from the latter and toward the former, precisely because trust in constraining institutions is eroding. The second is its nature: reliability, meaning whether commitments will be honored even if a government changes, which is what rules-based institutions are designed to solve; or alignment, meaning whether trade will be weaponized on geopolitical grounds—no treaty by itself makes countries into friends, but for countries bound by the same multilateral rules, alignment matters far less. The third axis is direction of trust: whether trust is a precondition for trade, or a consequence of it. Trust functions as a precondition where institutional trust is lacking, but trade itself, once underway, can start to build trust.

Trust in institutions—confidence that a common commitment to rules and their enforcement will constrain opportunism—allows countries or firms that do not know each other well to trade, just as trust in the rule of law allows strangers to trade domestically; this is, in essence, the story of economic development itself. Most-favored-nation treatment functions as a depoliticization device, making a trading partner’s flag less relevant to the terms of a contract, illustrated by China’s 2001 accession to the WTO, after which trade with the European Union, the United States, and the rest of the world expanded rapidly. This can already be seen reversing at the margins in goods such as rare earths and critical minerals, which have been weaponized; carried further, it would mark the end of concepts such as seikei bunri, the separation of economics and politics, which has underpinned the economic relationship between Japan and China and had a positive spillover effect on their political and security relationship. Evidence from recent decades shows that as trade policy uncertainty rises, trade with “friends” or allies increases while trade with non-friends falls, and that political alignment affects expectations about sanctions, export controls, procurement, and finance.

This is why institutions remain essential: rule-based systems with third-party adjudication, such as the WTO’s dispute settlement system, made the question of which flag can be trusted a second-order issue, a function performed by the GATT/WTO system and the agreements built on top of it, although such ancillary bilateral or regional agreements alone will be insufficient without the underlying structure in this new environment. Institutions can be understood as technologies for reaching and sustaining bargains that leave all parties better off, through deliberation, bundling, and enforcement, solving the underlying prisoner’s dilemma that produced the fragmentation of the 1930s. Better contract enforcement allows countries to specialize in more complex, skill-intensive products. Institutions determine how cheaply trust is produced, which is why their erosion is driving the retreat to clubs.

Case studies: institutions enabling trade to begin, and to survive, without trust

The research illustrates these dynamics with two examples from Australia’s own trade relationships. The first is the 1957 Commerce Agreement between Australia and Japan, whose 70th anniversary falls next year. The agreement was signed just 12 years after the two countries had been at war, at a time when there was no trust between them; thanks to important political leadership, the treaty was signed and started the trading relationship. The treaty itself did not, and could not, create trust directly, but it sent a signal that validated participation in trade, lowering the threshold for both countries to begin such interactions, after which decades of honest dealings raised counterparty trust and brought further gains. By the 1970s the relationship had become an anchor for both economies’ broader trade, with Japan becoming Australia’s largest trading partner and Australia becoming the main supplier of Japan’s strategic raw materials and energy, a case in which an institution allowed trust to become the consequence of trading, rather than its precondition.

The second example is the 2020 episode of Chinese trade sanctions against about a dozen Australian export goods worth around 20 billion dollars, at a time when China was by far the largest market for those goods and Australia’s largest trading partner overall. Bilateral counterparty trust collapsed, yet the two countries continued to trade: the Multi-Party Interim Appeal Arbitration Arrangement (MPIA), a workaround developed at the WTO by countries committed to having disputes resolved under enforceable rules, functioned as the diplomatic and legal off-ramp. China eventually removed the duties and the disputes were resolved, though the process took time; throughout, iron ore—Australia’s largest export to China, for which China depends on Australia for 60% of its externally procured supply—was left unaffected, reflecting a much more symmetric interdependence with no available substitute. Judicial process, in other words, delivered what counterparty trust alone could not. Australia’s appeal to this multilateral institution succeeded and helped restore trade.

Lessons: moving from clubs back to a system of rules

The research argues that the world is moving toward a world of clubs, raising the question of how to move back to a system of rules. There is no need to rely on nostalgia for universal rules, which never worked perfectly, nor to surrender to pure club power, which produces a poorer and less safe world. A real option exists to re-institutionalize trust among the willing, without waiting for a multilateral revival that simply will not materialize. Clubs may seem the easiest option, offering high counterparty trust among like-minded members, but they introduce three problems—exclusion, discrimination, and fragmentation—all of which push the world into rival blocs with high economic and political costs. If this fragmentation deepens, the negative security externalities of economic exchange threaten to dominate the peace dividend of trade.

The strategic policy question, therefore, is what defines a club that steps back toward an enforceable system of rules, rather than one that steps further into a bloc? The research proposes three criteria. The first is open accession, meaning membership is earned by meeting objective standards rather than being determined by ideology, identity, or geopolitics—a question that comes into sharp focus around new members acceding to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), where a geopolitical veto would harden it into a closed club, which would work against the entrenchment of global rules. The second is non-discrimination against non-members of the kind built into forums such as the Asia-Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN), and this will be matter more within open regionalism as the discriminatory among some parties increase. The third criterion is a system of rule enforcement for members, of which the MPIA, offering independent third-party dispute resolution, is a prime example.

These three criteria mark the difference between clubs that widen and open up toward a multilateral system and clubs that wall off outsiders. A club that builds internal trust by raising barriers may rebuild enforcement locally, but it lowers trust system-wide. Trust will not return in the perfect, universal form the world enjoyed for roughly 80 years under the postwar system; the real choice now is whether clubs of like-minded countries widen back toward courts and institutions, or close off into a fragmented world.

Comment

TOMIURA Eiichi:
The presentation cites remarks by senior political figures, constructs a unique index measuring trusted-partner rhetoric, develops a taxonomy of trust, and derives lessons on the risk of retreating into clubs and the distinction between clubs that widen and clubs that wall themselves off.

First, distinct nuances appear across the cited political remarks. Some, such as Minister Nishimura, spoke of “like-minded countries,” a category that need not exclude dissimilar nations, such as democracies vs, dictatorships in terms of sharing a policy orientation. Others, including Secretary Yellen and President von der Leyen, spoke of “reliable” or “trusted” partners, centered on predictability and keeping promises. Minister Tehan’s remarks, by contrast, invoked shared democratic values directly. Which of these concepts should be the focus when discussing the grouping of countries, since they introduce different emphases on sources of potential friction?

Second, the new index shows a sharp spike in 2023 followed by a decline, rather than a long-run upward trend, with the European Union an apparent exception. If trust is understood to be eroding as a long-run phenomenon, how should this be reconciled with an index showing a spike concentrated around one specific year?

Third, trust in a counterparty and trust in an institution can be difficult to disentangle in practice. When an institution does not function well, parties may be forced into bilateral bargaining with a specific counterparty, absent of the protection of that institution, especially in cases of bilateral monopolies where suppliers are limited. Given that dispute settlement does not appear to be functioning well at present, how could the two be separated?

Fourth, on trust as precondition or consequence, the 1957 Australia-Japan Commerce Agreement is offered as an example of trust following trade. Yet Nathan Nunn’s research on contract enforcement suggests that absent sufficient trust, it is more difficult to trade complex goods that are sensitive to institutional quality than primitive commodities. This latter aspect is particularly clear, as world economy has shifted toward fragmented, outsourced production of parts and components. It is then difficult to accept that trust is only a consequence of trade; in part it must also be a precondition. While two-way trade may nurture further trust, we currently observe an enormous and artificially inflated trade imbalance based on non-market forces.

In closing, the presentation carries an important policy message, and the new index represents an ambitious undertaking, with remaining questions concerning trade in complex goods and services, the relationship between institutional and counterparty trust, and what role shared values should play in these calculations.

Shiro ARMSTRONG:
The distinctions between “like-minded,” “reliable,” and “trusted” are significant, and it may be worth developing separate indexes for each. “Like-mindedness” language may be increasing partly because it has become harder to discuss trust in relation to the United States under the Trump administration, pushing countries toward more vague terminology—a dynamic that may also help explain the 2023 spike, though further work is needed across the differing patterns visible across countries.

On disentangling institutional from counterparty trust, the two are closely interdependent, and the distinction needs careful conceptual development before empirical testing. On trust as a precondition for complex-goods trade, the issue is whether institutions can actually generate enough confidence to permit trade between countries that lack high counterparty trust; even when the WTO functioned well, its rules were already outdated across services, trade, and investment, and today’s economy adds further difficulty in areas such as complex goods, dual-use technologies and electric vehicles.

On shared political values, this framing becomes more prominent as institutional trust erodes: countries that signed onto the GATT and later the WTO traded extensively with partners such as Vietnam despite differing political systems, precisely because trust in the institution made a counterparty’s political system a secondary consideration.

Q&A

Q:
Is there an alternative trade framework in mind, given that the WTO has been paralyzed?

Shiro ARMSTRONG:
The WTO is not dead; it continues to function, and neither the United States nor China has left the organization. China has a strong stake in the system, since it protects China’s economic security as the world’s largest trading nation, despite its tendency to occasionally bend or abuse the rules. There is no need to invent an entirely new system from scratch, since doing so would be highly disruptive. Existing clubs such as the CPTPP, the Regional Comprehensive Economic Partnership, and the new Digital Economy Partnership Agreement are engaged in rule-making that should help build the system rather than fracture it. The MPIA, under which a third of WTO membership has agreed to be subject to dispute settlement, served as the exit ramp in the Australia-China dispute discussed earlier, and it serves as a positive beacon.

Q:
How does the proposal for stronger discipline on subsidies relate to the expanding-club framework described in the presentation?

Shiro ARMSTRONG:
Industrial subsidies of all kinds have grown out of control, and no strong multilateral disciplines currently constrain them. Countries need to agree on what distinguishes reasonable subsidies—supporting the green transition or generating positive research spillovers—from beggar-thy-neighbor protectionist subsidies, and this is needed even within green transition and similar subsidies. Such rule-making will likely need to happen within clubs, including clubs whose members lack high counterparty trust in one another, since a shared interest in any particular, significant issue can be sufficient grounds for progress.

Q:
What advice could be offered to Japan on how to approach this challenge?

Shiro ARMSTRONG:
Japan is a critically important middle power. Unlike the United States and China, which can unilaterally alter the status quo, Japan cannot do so alone, but it is large and influential enough to lead middle and smaller powers in rule-making efforts that can protect the system. Japan rescued the Trans-Pacific Partnership and transformed it into the CPTPP, and has long been a champion of multilateralism. Leading such efforts requires overcoming collective action problems, since many countries will be tempted to free-ride, but Japan has experience navigating these challenges through APEC and concerted unilateralism. Working with partners such as Canada, South Korea, ASEAN, Australia, and the European Union, Japan can help shape the behavior of the major powers and keep the system alive for an eventual return by the United States.