Last week we brought you an article by Martin Wolf in which the chief economist of the "Financial Times", analyzing seven serious errors of assessment of anti-globalizers, promised to return to the subject to make a speech on possible remedies for free trade to continue to flourish in an era of disorder.
His reflections follow.
Enjoy the reading!
The three phases of the global economy
We have entered the third phase in the history of the postwar global economic order. The first covers the late 40s to the 70s and was characterized by liberalization that occurred primarily among high-income countries allied to the United States in the context of the Cold War.
Since the 80s, and especially after the fall of the Soviet Union, more radical forms of economic liberalism, known as "neoliberalism", have spread throughout the world. The creation of the World Trade Organization (WTO) in 1995 and the accession of China in 2001 were the milestones of this second phase.
We are now entering a new phase of world disorder, characterized by intra-state tensions and global frictions.
Domestically, especially in the United States, there has been a failure to formulate policies that would cushion the consequences of economic changes and provide security and opportunity for those affected by them.
The rhetorical gimmicks of nationalism and xenophobia have sought to direct discontent towards "unfair" competitors, especially China. In the United States, the idea of strategic competition with China has become increasingly bipartisan, while China itself has become more repressive and inward-looking. With the war in Ukraine, these divisions have deepened.
Free trade at risk: the role of small countries
How is it possible to support free trade in such a context? The answer is “with great difficulty”. Yet the stakes are so high and for so many that all those who can influence events should do so.
Fortunately, more and more of the less powerful countries understand what is at stake. It is they who must take the lead, as much as possible, regardless of what the competing superpowers decide to do. In this context, the limited successes of the WTO ministerial meetings in Geneva are also significant. They at least kept the mechanism going.
It is more important, however, to identify and then address the more fundamental challenges of the liberal trading system. Here are five.
The challenges of the liberal trading system: sustainability
Managing the global commons has become humanity's most important collective challenge. The rules of trade must be made fully compatible with this goal. The WTO is a natural forum for addressing the issue of destructive subsidies, particularly for fisheries. More generally, it must be compatible with enlightened policies, such as carbon pricing. Price adjustments at borders, necessary to prevent the movement of production to places without adequate taxation, are both an incentive and a penalty. These must be combined with large-scale assistance to developing countries for the climate transition.
The challenges of the liberal trading system: security
Here we need to distinguish the economic aspects from the more strategic ones and the actions that companies can carry out from those that are the responsibility of governments. Supply chains, for example, have shown a lack of robustness and resilience.
Businesses need more diversification. But this is also expensive. Governments can help by monitoring industry-wide supply chains. But they cannot deal with the management of such complex systems.
Governments have a legitimate interest in whether their economies are overly dependent on imports from potential enemies, such as Europe from Russian gas.
Likewise, they must be concerned with technological development, especially in areas relevant to national security.
One way to do this is to construct a negative list of products and activities deemed to be of interest for security, exempting them from the standard trade or investment rules, but retaining the latter for all other activities.
The other challenges: blocks.
Janet Yellen, US Treasury Secretary, has recommended "friendshoring" (relocation to friendly countries) as a partial response to security concerns. Others recommend regional blocks.
Neither solution makes sense. The first assumes that "friends" are forever and would exclude most developing countries, including strategically vital ones. Is Vietnam friend, foe, or neither?
Furthermore, it would create uncertainty and impose high costs. Similarly, regionalizing world trade would be costly. Above all, it would take North America and Europe out of Asia, the world's most populous and economically dynamic region, effectively leaving it to China.
This idea is economic and strategic nonsense.
The other challenges: standards
The debate on standards has become a central element of trade negotiations, too often imposing the interests of high-income countries on others.
A controversial example is that of intellectual property, where the interests of a limited number of Western companies are decisive. Another is that of labor standards.
But there are also areas where standards are essential. In particular, as the digital economy develops, shared data standards will be needed.
In their absence, global trade will be substantially hampered by incompatible requirements. This, by the way, is why the European Union's single market has required the substantial regulatory harmonization that Brexiters loathe.
And finally: internal politics
Sustaining an open trading system will be impossible without better national institutions and policies aimed at educating the public about the costs of protectionism and helping all those affected by major economic changes.
In their absence, an ill-informed nationalism is bound to sever the ties of trade, which have brought enormous benefits to the world.
This new phase of the world is creating enormous challenges.
It is possible – perhaps even probable – that the world system will shatter. In such a world, billions of people will lose hope for a better future and shared global challenges will remain unanswered.
World trade is only one element of this picture. But it is an important element.
The idea of free trade subject to multilateral rules was noble. It must not be allowed to perish. If the United States cannot help, it is up to others to.
Who wrote this article
Martin Wolf, In an era of disorder, open trade is at risk, “The Financial Times”, 29 June 2022
Martin Wolf is chief economic commentator for the London-based Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000 "for services rendered to financial journalism". In 2012 he also received the Ischia International Journalism Award. He is the author of many publications on globalization and finance.
