For as long as I can remember, most of the world’s big political and economic questions were framed as struggles pitting government against private enterprise and the West against the Soviet Bloc. They were battles for the commanding heights – choices between freedom and serfdom, between the free market and the command economy.
This Manichaean view still reverberates in certain political cabals, particularly in the US, and even more so among Republicans. For most other purposes, though, it feels rather passé. The key choices today aren’t between government and free enterprise; they’re between political and economic systems that work and those that fail.
In fact, the consensus is that a new global economic and political environment is taking shape, though the emerging nature of the new global governance is still bedevilled by too many uncertainties to fully describe its characteristics.
Eight years ago, Donald Trump rode to victory on a populist ticket that blamed the decline of US industry on China. Since then, the world has become more protectionist. Supply chain disruption caused by the Covid-19 pandemic and Russia’s invasion of Ukraine have made even more countries wonder about their reliance on a small handful of suppliers of key goods and commodities. Meanwhile, the sanctions imposed on Russia have exposed a new fault line in the world order, where countries which previously might have sided with the US on certain issues took a more neutral stance.
The long-standing model of increasing economic interdependence between the West and the emerging world, especially China, was built on assumptions that no longer hold. The accepted wisdom was that keeping high-value production at home would create growth-stimulating wealth, and that this wealth would be shared to keep the middle class thriving.
However, while multinationals have generally benefitted from globalisation, the middle class in the developed world, especially in the United States, lost purchasing power as manufacturing jobs were exported overseas, first to China, then to Vietnam and other low-cost countries. Furthermore, developed world tax bases have shrunk as multinationals have relocated to low-tax jurisdictions (such as Ireland, Luxembourg, the Netherlands, and Malta in Europe), encouraged by a shift towards supply chains that create loopholes in the allocation of profits.
The 2008 global financial crisis, which started as a sub-prime mortgage crisis in the US, exposed the West’s economic model as a faulty one that needed to be repaired. An unintended consequence of the crisis was a collapse in global trade, which soon became a structural trend. Since 2008, global value chains have contracted, trade in intermediate goods has decelerated, and foreign direct investment (FDI) has declined globally.
The first result of these trends was that the West started losing its leverage over the “plumbing” of global economic interdependence, including finance, trade and investment. A second outcome was that the widening economic fragmentation called into question the ability of the international community to provide global public goods (such as climate security and health) or preserve the global digital infrastructure.
A new framework in the making
On what can we now depend to ensure that economic interdependence delivers stability, shared prosperity, and global public goods? The global economic governance framework of old is being tested as never before. But, while the geopolitical chasm opened by the war has injected further mistrust among the main global players and turned many policy areas into arenas of open contestation, we do not yet have a new framework.
Of course, the idea that we ever really had a golden age of global governance is suspect. The framework was never comprehensive enough to adequately cover the multiple and increasingly complex channels of economic interdependence; the “rules-based” regime was never entirely rules-based. On the contrary, institutional arrangements have long been playing catch-up with reality.
The narrative of the “end of globalisation” has increasingly dominated the debate about the inadequacies of the current global economic governance – social discontent, political opposition, and geopolitical rivalry. But the data does not necessarily support that picture. Cracks in the fabric of global economic interdependence have been widening for many years but talk about deglobalisation is somewhat premature.
Centrifugal forces are stronger than the forces pushing for increasing co-dependence. The reasons are various.
China has increasingly pushed for self-reliance. China’s import growth has been tepid for several years, especially since the Covid-19 pandemic. China is now producing many of the manufactured goods it used to import, in the process hurting exporters of high-end intermediate/manufactured goods from Japan, South Korea, and Germany. China is also pushing ahead with its own standards, to hedge against technological decoupling. Finally, China is hell-bent on making the renminbi an international currency, especially among like-minded countries, like Russia, that seek alternatives to the dollar.
On the other hand, disillusionment about what can be expected from China as a responsible stakeholder in the global order is growing in the West. After a period of openness, China is doubling down on its state-driven economic model, with many sectors still closed to foreign competition and a lack of reciprocity. The West’s trust in China has weakened, battered by the lack of cooperation during the pandemic, major disruption to a China-centric supply chain, and increased inflationary pressures.
So, what could be the scenarios for the future? The discussion has generated terabytes of computer memory, but I have been struck by a contribution by George Papaconstantinou in Forging Europe’s Leadership – Global Trends, Russian aggression and the risk of a regressive world. Papaconstantinou is a professor of international political economy at the School of Transnational Governance of the European University Institute (EUI) and the EUI Dean for Executive Education.
The Greek academic posits four scenarios:
Scenario 1: a reinforced status quo ante
This would entail finishing the job of creating a multilateral economic governance framework. It would involve, for example, funding the IMF to act as a lender of last resort in new crises, resolving the problems engulfing the World Trade Organisation, giving the World Health Organisation political clout and enforcement capabilities, creating a global competition authority, returning to the abandoned Multilateral Agreement on Investment, giving more power to the Financial Stability Board, funding a global environment agency, and making the G20 more representative and effective. This scenario can only serve as some kind of reference since none of these developments are about to happen.
Scenario 2: multipolarity prevails
Acknowledge multipolarity, with three large economic blocs – the US, China, and the EU – competing across all policy dimensions: trade, investment, and technology. This framework combines imperfectly functioning organisations that are anchored in hard law and multilateral principles with emergent governance regimes characterised by soft law and cooperation among variable coalitions in different policy areas. This scenario suggests a continuation of global economic governance as it has evolved over the last decades. In fields such as climate, taxation, global competition, and even digital and international banking supervision, it might indeed be possible to shelter governance frameworks from systemic competition and geopolitical rivalry. It is, however, difficult to imagine this happening in the traditional fields of interdependence: namely, trade and capital flows. Similarly, the near-universal consensus on the principles of international credit has been shattered by the rise of China’s overseas lending, and transparency is blatantly lacking.
Scenario 3: fragmentation squared
This scenario suggests that the multipolarity that has emerged over the last decades can settle into a “new normal”, where fragmentation in different domains progresses, “spilling over” to other policy areas. Digital is an obvious one, where the multistakeholder model is already under strain from systemic rivalry over technological leadership as well as from different preferences in areas such as data privacy. International tax governance is another – the advances made in this area through the Organisation for Economic Co-operation and Development (OECD) relied on a clear political push by the G20, which this format may not be able to deliver in future. Banking supervision and competition policy are also policy areas where the governance framework in place may not prove sustainable if systemic rivalry pollutes the soft coordinate-and-review method that applies in the banking sector and the set of principles shared by national competition authorities breaks down. But perhaps the biggest dangers lie in the area of climate governance, simply because the stakes there are so high. This scenario assumes that it becomes the default once governance rules break down with no viable alternatives in sight.
Scenario 4: fracture – a new Iron Curtain
This scenario assumes that the geopolitical rivalry will escalate well beyond its current confines. In any such event, the fragmentation scenario would quickly degenerate into a full-blown fracture – a new Iron Curtain pitting the West against the rest. Globalisation would be fully disrupted, and with it any semblance of global economic governance rules. Global supply chains would need to be completely rethought in an environment of trade rules fully subject to national security considerations, foreign investment flows drastically curtailed and redirected, and a fully partitioned internet. Geopolitical competition would undermine efforts to deliver global public goods, future pandemics would spread through the cracks of a crumbling international health governance system, and climate targets would become much harder to achieve. A truly dystopian future.
What will it be? Interesting, but highly uncertain, times lie ahead.