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According to the World Trade Organization, Covid-19 will depress world trade by up to one third in 2020. This makes it far more devastating than the financial panic of 2008. For many, it is vital to restore globalization; otherwise, the lure of self-sufficiency will sweep the world economy into a new Dark Age.
The problem with this reflex is: there is no going back to normal. The old normal was in deep trouble well before Covid-19. If the world has responded to the pandemic in fractured ways, it is because the world was fractured before the disease hit. Moreover, the real threat is not self-sufficiency and the re-localization of the world. The menace before us is a world in which powerful economic actors subject the powerless even more to their rules and needs, thereby replacing a creaking one-world system with competing syndicates.
This is the playbook from the 1930s. The Great Depression saw feuding trade blocs with dominating countries forcing weaker ones to play by their rules. When George Orwell wrote his dystopian novel, 1984, he feared a return to the militarized imperial rivals of the 1930s. What he could not foretell was how, at the end of the Second World War, the architects of the economic peace distributed power and created guardrails against unfair deals and unruly rivalry.
The institutions that buoyed the long peace are now exhausted. The pre-Covid-19 multilateral order was riddled with problems. It did less to help the have-nots than the haves. The problems it had to resolve – like decarbonizing the economy – became more gnarled. As threats and competition mounted, strong countries began to retreat from their own rules. They won’t return unless they have a compelling incentive.
Rather than try to restore the old world, this is a good time to reinvent it.
The choice now is not between globalization or isolation. It is between tribal interdependence and a new global model. Rather than try to restore the old world, this is a good time to reinvent it. Reinventing interdependence begins by focusing on the distressed links of the world economy, which the pandemic makes worse. It is there that the temptations for the powerful to behave in predatory and extractive ways lurk.
Firstly, the pandemic attacked an anemic world trading system in need of new rules and new enforcers. Prior to 2008, trade was the engine of reconstruction and prosperity. From 39% of world GDP in 1990, it accounted for 61% in 2008. Yet, for the last decade, global trade has been limping. Why?
The trade surge since the 1980s relied on firms and industries stretching production across longer distances. Buoyed by sophisticated containerized logistics and multi-modal transportation systems, the fastest growing share of world trade was just-in-time exchange within sectors. With the dramatic decline in transportation costs, there were tremendous gains in productivity by extending supply chains. Toyota sold parts to Ford; General Motors moved components between its divisions across North American borders; Mitsubishi and Fiat made their parts interchangeable. By 2000, 68.7% of total manufacturing trade was going on within integrated industries like automobiles and electronics.
Well before Covid-19, the halo over this system had slipped off. Trade slumped from its 2008 peak to 58% of global GDP. Cross-border investment, which was so crucial to the extension of global value chains, also declined. In the decade after 2007, it dropped by half, to a mere 2.4% of global GDP. Big, multinationals were no longer the behemoths of the world economy. Their profits lagged behind homebody firms.
There were many reasons for this slowbalization. One is because the cost of trade has ceased to fall. After the logistics and transportation revolutions, there have been few breakthroughs. One index is the crisis ravaging lost-distance shipping container companies, culminating in the collapse of the South Korean giant, Hanjin Shipping in late 2017, followed by a wave of mergers and restructuring. The sector that had made the sprawl of manufacturing supply chains possible found itself burdened with huge debts, excess capacity, and megaships without enough cargo.
Secondly, since World War II, countries around the world brought down trade barriers. Then they stalled. Advanced economies tilted to services governed by invisible forms of protectionism, like licensing and credentialing in advanced trades. American and European governments would not turn their backs on agricultural lobbies. Disputes over intellectual property became intractable. After fourteen years of futile talks, the so-called Doha Round of trade negotiations ended in late 2015 in what the Financial Times called "a merciful death."
While the spats between Washington and Beijing dominate the headlines, there has been a more insidious, if less dramatic, undermining of the world trading rules. The White House has been systematically blocking the appointment of judges to the World Trade Organization’s Court of Appeals, clogging up the elaborate system of handling trade disputes.
The result has been proliferating trade barriers and not-so-subtle preferences for friends over foes.
Unable to see commercial justice done in WTO tribunals, trade partners have had to settle scores in more bare-knuckled, less mediated, ways. The result has been proliferating trade barriers and not-so-subtle preferences for friends over foes – undermining a principle of multilateral trade, extending tariff levels of "most-favored nations" to everyone who agrees to play by the same rules.
Faced with riskier, weaker, long-distant, links, firms have been "nearshoring" – turning to shorter, faster, and smarter, supply chains linked to more pliant partners. This reinforces the turn to trade blocs and the lure of powerful trading partners drafting rules for the rest.
Second, China presents a structural challenge to the world order – but not for the reasons that are often cited. After 1990, China powered itself out of poverty by pursuing an effective export strategy. Then it shifted. For the past decade, China has pivoted away from foreign markets as the engine of growth in favor of home demand. The process began before the financial crisis a decade ago. In 2006, 36% of China’s GDP was destined for foreign markets. A decade later, the share had been slashed to 19.9%. What replaced foreign demand was a combination of domestic corporate and public sector debt and investment.
But the turn to the domestic market in China is showing signs of exhaustion. Not even the scale of the Chinese home market or the depth of the borrowing pockets of state-owned enterprises (which consume about 80% of the country’s bank credit) could buoy the country for long. Many of Beijing’s newest massive infrastructure projects were wasteful, ill-conceived, and showed all the signs of hurried flops. Returns on capital investment fell by half, to 8.4%, by 2017.
China faces a familiar dilemma when low-income countries surge out of the gates with supercharged growth, only to level off as the country eases into the comforts of being middle-income. This happened in Japan in the 1980s, and Taiwan and South Korea in the 1990s. There are more roadblocks getting from middle to upper-income ranks. Japan and Korea tackled the challenge by cooperating: Toyota invested in the United States; Samsung created an investment fund to support European start-ups. More interdependence helped keep South Korean and Japanese growth going. But the bitterness and suspicion that surround China’s relations with its partners now close off that option. The spat over Huawei and the threat of cyber-balkanization between a Chinese and a US-based digital system is one example of the effects of China’s shift from being a customer to becoming an adversary.
Covid-19 has aggravated the cyber-rivalry. The impression of western decline and Chinese ascent, and the frustration with a decade of efforts by Beijing to "engage" with the rest of the world, have stoked Chinese aggression. It is true, China still hopes that its carrots – like the recent pledge of $2 billion to help fight Covid-19 – will sway global public opinion.
China still hopes that its carrots – like the recent pledge of $2 billion to help fight Covid-19 – will sway global public opinion.
Yet, there are growing signs of a backlash. "Wolf Warriors" diplomats, named after stud characters in popular Chinese action movies, accuse the French government of abandoning senior citizens to die in retirement homes. They threaten to boycott Australian exports if the country’s Prime Minister doesn’t back down from calls for a COVID inquiry.
They demand public thanks for mask shipments and circulate outlandish theories of US military conspiracies to plant the virus in Wuhan. In the words of Zhao Tong of the Carnegie-Tsinghua Center for Global Policy in Beijing, "the mindset now is more to coerce counterparts to respect China’s interests, as co-operative security is seen as less and less effective."
As China finds itself surrounded by competitors and rivals, the temptation has been to turn to its infrastructural reach to pull more dependent trade partners into a Sino-centric bloc.
Finally, one cannot understand globalization’s crossroads without taking account of the hobbled partners. Trade contraction will be especially hard on emerging markets, many of whom were reeling in debt already. They face a double whammy of slumping exports while creditors squeeze them for repayments. When this happened in 1929, it led to a wave of defaults, defections from the gold standard, and the formation of currency blocs.
Among what are known as "frontier markets" – countries wedged between the poorest and the solidly "emerging" markets – debt has tripled as a share of GDP since 2005. It now exceeds 115% of GDP in these countries. Among the most vulnerable is Argentina. Locked in an inflation spiral and a standoff with creditors, it is poised for its ninth sovereign default since 1816. Right behind are Zambia, Ecuador, Rwanda and struggling Lebanon, Iran and Venezuela. The weakest links will expose others, like South Africa and Brazil. Brazil is a mess. Its politics is gridlocked. And since 2008, its foreign debt has more than doubled. Emerging markets as a whole have racked up over $71 trillion in debt. In recent months, there has been a stampede of capital, far worse than the capital flight of 2008. The IMF’s managing director, Kristalina Georgieva, has noted that over $100 billion has left emerging markets in recent weeks alone – and the Fund has fielded dozens of pleas for emergency help.
A wave of defaults were looming even without Covid-19. Now, it’s almost inevitable. Faced with the threat, the G20 leaders called upon creditors to put a "standstill" on forced payments. But no one expects the announcement to make much difference without the force of the US Treasury. The weak will have to find relief from whichever creditor-consumer is willing to strike a deal – even at predatory costs.
The country most responsible for distributing power and defending guardrails at the end of World War II has turned its back: the United States. Since he took office in January, 2017, President Donald Trump was clear that he wanted to replace old multilateral treaties with new agreements with worried partners. Many took this as anti-globalism. That is wrong. He is committed to tribal interdependence, a model in which the strong subdue the weak to create blocs that hold rivals at bay. He and his economic advisers dislike multilateralism because it constrains the powerful and distributes power. The White House does not even mind if China creates its own pecking order, as long as it does not threaten America’s. Even if President Trump were to lose the elections in November, these past four years have permanently scarred American leadership.
There was once an effort to reboot and restore multilateralism. The strategy of the Obama administration was to corral eleven Pacific traders into the Trans-Pacific Partnership, including Canada, Japan, and Singapore, to create a vast free trade area that would compel China to play by new rules or be locked out. But during the election campaign of 2016, not a single leading candidate stood up to defend even the idea of TPP. No sooner did Trump come to power than he gleefully tore up the TPP and lashed out at friend and foe alike.
As a result, super powers are even less restrained from striking deals, even between themselves, at the expense of others. After the White House slapped tariffs on Chinese exports and President Xi Jinping retaliated, the two belligerents agreed to patch things up – temporarily – in a "Phase One" agreement that committed China to buying $77 billion worth of American goods. Much of it was farm produce to assuage the White House’s rural electorate. But the reaction in South America was panic: Chinese orders for soya and grains from Brazil and Argentina were canceled. For Argentina, it was crippling just as the country was entering delicate negotiations with the hedge fund titan, Fidelity Investments of Boston.
Interdependence is here to stay. The issue is: what kind of interdependence do we want and need? Panic about backsliding into self-sufficiency is exaggerated. The looming threat is a more rivalrous and unstable successor to the world built in the decades after the Great Depression. Covid-19 presents the world with an opportunity – and necessity – to reinvent a globalization that is neither nostalgic or tribal.
Copyright: STR / AFP
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