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The markets are spooked, but we need a new world order making room for local solutions, says Guardian economics editor Larry Elliott

The significance of the trade war between China and the US goes well beyond the impact of tit-for-tat tariffs, or which of two self-styled strongmen wins the bragging rights. As was the case in the 1930s, the seemingly inexorable drift towards protectionism is part of a deeper crisis of the international status quo. When Beijing this week accused the US of deliberately destroying the international order, it was really saying that US hegemony will no longer go unchallenged. Globalisation as we have known it is coming to an end and thats by no means unwelcome.

Hailed as the ultimate in human progress, a model based on loosening the controls on capital and the construction of global supply chains has spawned recurrent financial crises, fostered corrosive inequality and worsened the climate emergency. True, millions of people have been lifted out of poverty in the past 25 years, but most of them live in a country China that has kept the market at arms-length.

The worlds stock markets see things differently. They tremble every time Donald Trump tweets a paean to protectionism. Likewise, multinational corporations fret about the possible damage that trade barriers might cause to global supply chains. It is clear that those who have done best out of globalisation tend to be the rich and powerful, and they are not going to give up their privileges without a fight. Nothing in this is new.

Throughout history there have been successive waves of globalisation followed by a backlash when the model over-reached itself. This is one of those occasions and all the ingredients are in place for a struggle between the defenders of the status quo and those who say that recent trends in politics, technology and the climate point to the need for a new world order focused more on local solutions, stronger nation states and a reformed international system. Its quite a stretch to imagine that Trump has this in mind when he is bashing China, but the economic crisis of the 1930s of which protectionism was one part led eventually, albeit after the war, to reforms that made the world a sounder and safer place.

The challenge is to make sure crisis again leads to change, and that process starts with an honest appraisal of the mess we are in. For more than a decade, ever since the financial crash of 2008, there has been a frantic attempt to put globalisation back on its feet and return to the status quo ante. Trump is proof that those attempts have ended in failure.

A Hong Kong stock market display on 6 August: The worlds stock markets tremble every time Trump tweets a paean to protectionism. Photograph: Philip Fong/AFP/Getty Images

In retrospect, the early 1990s marked globalisations high point. The Soviet Union had collapsed, former communist countries were becoming market economies, independent central banks were all the rage and a multilateral trade deal was concluded after more than seven years of negotiations. Europes integrationist project was in full swing, with preparations under way for a single currency. Politics during the 1990s was dominated by parties of the centre right and centre left, pursuing broadly similar economic policies: budgetary discipline, liberalising capital flows, encouraging the incursion of the market into sectors hitherto off limits. Whether in the developed countries of Europe or the emerging markets of Latin America, orthodoxy reined supreme. Sure, it was accepted that there were teething problems with the new world order, but the cold war was over and Russia no longer a threat. America would use its unchallenged military might to police the world and keep factories booming internationally through its willingness to act as the consumer of last resort.

Little of this utopian vision has survived. There has not been a completed set of multilateral trade talks since the Uruguay round was wrapped up in late 1993, in large part because this was the last time the US and the EU were able to carve out a deal to their mutual interest and then impose it on the rest of the world.

The G7 the US, Canada, Japan and the four biggest economies of Europe no longer call all the shots at international summits. The independence of central banks is threatened. The US is unwilling to soak up all the worlds excess production and instead demands that countries such as Germany run down their trade surpluses. Europes drive for integration has stalled. Parties of the centre have been hollowed out, either because they failed to spot the weaknesses inherent in globalisation or were too timid to act if they did. The Washington consensus that there was a one-size-fits-all solution to the problems of developing countries that involved privatisation, abandoning capital controls and budgetary rectitude has fallen into disrepute. And Russia is not the busted flush it was supposed to be. The risk that the current iteration of globalisation could end in military conflict is much higher than generally acknowledged.

To prevent such an outcome, there needs to be change at all levels, starting with the local one. Even during its heyday, large chunks of economic activity remained untouched by globalisation and that segment is likely to grow as economies become more service-sector dominated. In addition, countries such as the US are already bringing production back within its borders in part because of the high cost of transporting goods around the world, and in part because technological change greater use of robots and artificial intelligence has reduced the financial incentive to offshore.

There is also going to be an enhanced role for the nation state, the death of which has been exaggerated. It will no longer be good enough for politicians to fob off voters with the idea that globalisation is an unstoppable force of nature against which they are powerless. Telling the public that inequality, industrial decay and stagnant living standards are something they have to suck up is asking for big populist trouble.

The US is unwilling to soak up all the worlds excess production. Photograph: UPI/Barcroft Media

Chinas Belt and Road initiative is an example of how countries are starting to operate at a sub-global level. Beijings network of infrastructure projects across Asia and Europe has a dual purpose: to provide a market for Chinese goods and to extend Beijings reach in parts of the world where Americas hard and soft power is weak. Similarly, trade deals are likely to be negotiated bilaterally or among coalitions of the willing.

Finally, theres a need for reform at a global level: to mobilise effective climate-change action, to meet the United Nations sustainable development goals, to rein in the power of global finance through curbs on capital flows, and to piece together a system of rules-based, but managed, trade.

None of this will be easy in fact, it will be hellishly difficult. But three developments provide cause for optimism. The first is that the failings of the current system have become too big to ignore. The second is that failure has, as ever, led to new thinking. The third is that the new ideas are starting to influence policy.

Larry Elliott is the Guardians economics editor

Read more: https://www.theguardian.com/commentisfree/2019/aug/08/globalisation-not-survive-trump-markets-new-world-order