By Akshobh Giridharadas
The idea of the ‘global economic order’ may sound too grandiose but its profound impact cannot be overstated. The order is essential for better trade, investment, and other forms of commercial activity to take place according to agreed-upon rules, and those rules should reflect the principles of the liberal economies in Europe, Latin America, and Asia. It is important to note that ‘liberal’ in this case does not signify a position of partisan political leaning but a set of ideas that encompasses the rule of law, openness to change, and the primacy of the individual as opposed to a state authority.
This current economic order is akin to the foundation stone of the United States’ economy. An economic order that espoused free trade, less government control, allowed the free hand of market forces, an economic system that allowed the innovator to thrive and the entrepreneur to flourish.
However, that economic order has seen multiple erosions. Britain’s decision to withdraw from the European Union and the growing sense of economic nationalism in the U.S is signaling a retreat from the rules-based economic order in its current form. The overarching political overtones have eviscerated globalization as a phenomenon that has benefitted a few but left many others, especially those at home in a worsened state.
The current international economic system is not perfect, but that does not mean that the U.S. Germany, EU and others so important to the foundation of this framework would advance their interests by withdrawing from it. Jettisoning this order would not be counterproductive.
The Bretton Woods system of international economic institutions such as the World Bank, and the International Monetary Fund (IMF) have outlined sacrosanct economic principles that have fostered monetary cooperation, secured financial stability, promoted employment & sustained economic growth and ameliorated poverty. Along with the World Trade Organization, they have governed the rules behind global trade and investments. Some would brazenly state that these are “Made in America” ideas and that’s what truly “Made America Great”.
The U.S. would benefit more from revisiting these guidelines and updating and strengthening these global economic rules that benefit both America and the global economy at large. For the U.S to turn its back on cross-border economic engagement would be akin to throwing the baby out with the bathwater.
There is little need to recreate a seminal Bretton Woods like system but however a new narrative for the role and importance of a rules-based international economy is required. A system that speaks about optimistic prospects but also conversely warns us of consequences if we were to deviate from it. The positives of this economic system can outline new ideas, products, services, and technologies produced by the U.S. and its economic partners and how this will help enhance economic prosperity. Conversely, the message is clear that abandoning this order without a viable alternative would lead to economic uncertainty, market volatility and exacerbate economic woes.
Harvard academic Graham Allison echoes that instead of an order where the United States sits at the top of the totem pole, the U.S should embrace an economically diverse order and accommodate “the reality that other countries have contrary views about governance and will seek to establish their own international orders governed by their own rules.”
Instead of the utopian ambitions of remaking the world in America’s image, the U.S must accept the world as it is.
That is leading economic engines with burgeoning growth, such as China and Russia will have their own sphere of influence. Politically this may be a concern (think Ukraine, think Taiwan) but the reality of the Belt and Road initiative or BRICS is here to stay.
The pattern repeats itself – where a new power threatens to dislodge an existing one. For years, the U.S hoped that China’s economic aspirations would lead to espousing the western ideals of democracy, free speech, a vibrant press and an increased attention towards human rights. It didn’t work out that way and instead China created its own economic model that works for it.
It is important to note that China is not the Soviet Union and is not an ideological rival. China must be allowed to rise peacefully. It has already carved out and financed multilateral development institutions –such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB). The U.S was one of the notable absentees from the existing 56 shareholder countries in the AIIB.
This is par for the course given that the present economic order has long been viewed by many emerging economies as a ruse for American hegemony. The flaws in the system were exacerbated with the Asian Financial Crisis in 1997 and the Global Financial Crisis of 2008. The G8 excluded China, while the G20 came about to expand representation to the global economy. Despite this, the U.S and the European powers possess the maximum clout with regards to the workings of the IMF. China and other Asian powers now see the tectonic shift of economic growth moving eastwards. And with that China sees its turn to add to the global economic discourse.
Even if the U.S is afraid to acknowledge China’s ascendancy, other institutions will. The IMF has already added the renminbi (RMB) to its Special Drawing Right (SDR) basket of currencies along with the dollar, the euro, the yen, and the pound; signalling a sign of Chinese economic potential. However, the U.S dollar still remains the global reserve currency and is used in over 40% of international trade, while the RMB makes up just 2% of the global trade. So, there is little reason for the U.S to worry about the yuan (RMB) dislodging the dollar.
Speaking of trade, the most vital and understated piece of information is that trade isn’t a zero-sum game and trade is essential to continue to boost the productivity and wealth of the world economy.
A tit-for-tat trade war with China is harmful to the American economy since China owns a significant portion of the U.S national debt. Hurting the Chinese economy would hurt the American economy and when these two behemoths sneeze, the rest of the world will catch a cold.
The Transpacific Partnership (TPP) was seen as an Obama era initiative towards a pivot to Asia. Amidst a growing concern, it was the United States rebalancing a Chinese hegemon in Southeast Asia. Withdrawing from the TPP has seen the United States score an own goal without having China step on the field.
The TPP will progress without the United States at the table. The seven original members will likely grow to 11 by the time that the TPP takes effect. The benefits of the TPP will see a slash in tariffs on agricultural and industrial products, it will make it easier for foreign investments while protecting intellectual property. The downside – the U.S loses out by backing out of the agreement.
The chagrin by various right-wing policymakers against such trade deals has led to increased protectionism and fervent economic nationalism. While multiple trade deals such as NAFTA, and proposed deals such as the TTIP need to be looked at, moving away from multilateral deals could be counterproductive. The IMF has warned in the absence of multilateral deals, there would be an increase in trade barriers which would disrupt global supply chains and slow the proliferation of new technologies. This would hinder global productivity and welfare.
President Trump claims he is the best dealmaker. The trouble is, we are yet to see the best art of the trade deal.