## SUPERPOWERS ARE FORSAKING FREE TRADE

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### Shift in priorities and systemic consequences
- The United States and China are "changing the system" and pressuring other countries to "choose sides" in a growing geostrategic rivalry.
- The result is a retreat from the free trade system that the great powers built and sustained, with major implications for emerging market and developing economies.
- The WTO notes that open trade mitigates the costs of shocks (for example, Russia’s invasion of Ukraine) and that global trade continued to increase in 2022, with trade in global supply chains growing "4 percent year over year in the second quarter of 2022."
- The WTO models a potential split of the world economy into two rival blocs and projects welfare losses (cumulative reductions in real income) "as high as 12 percent in some regions, with the largest in the lower-income regions."

### Drivers reshaping trade policy
- Jobs, domestic politics, and social cohesion:
  - Post-2008 backlash against globalization has polarized politics in industrialized countries.
  - US tariffs under President Donald Trump (targeting allies including Canada, Mexico, and the European Union) were justified in the name of national security and protecting US jobs and manufacturing.
- Technological competition and techno‑nationalism:
  - China’s "Made in China 2025" (2015) used subsidies and state-owned enterprises to accelerate tech development.
  - The US has deployed "sanctions, blacklists, export and import controls, investment restrictions, visa bans, and technology transaction rules"—described as "American techno-nationalism."
  - October 2022 restrictions limit China’s ability to acquire advanced semiconductors and the technology to make them.
- Security of supply and friend-shoring:
  - COVID-19 supply disruptions elevated concerns about supply security and led to "friend-shoring."
  - In December 2022, Canada and allies (Australia, France, Germany, Japan, UK, US) announced formation of the Sustainable Critical Minerals Alliance; the Group of Seven is developing an initiative to invest in a secure supply of critical minerals.
- Industrial policy and climate action:
  - The US Inflation Reduction Act includes "$400 billion in subsidies for renewable energy and electric vehicles that contain a minimum amount of North American parts."
  - The EU introduced the European Green Deal and a carbon border adjustment mechanism scheduled to go into effect in October 2023, imposing an "emissions tariff" on imports.
- Responses to war and sanctions:
  - Western powers imposed economic and trade sanctions after Russia invaded Ukraine; many developing countries did not join due to reliance on Russia for security, grain, energy, or fertilizer, and fears about precedent and consultation.

### Observed and measured shifts in flows and investment
- Chinese direct investment in the United States fell from "$46.5 billion in 2016" to "$4.8 billion in 2019" (reflecting US Committee on Foreign Investment restrictions and Chinese outbound capital controls).
- In 2022 US-China trade flows reached "an all-time record of $690.6 billion," yet the percentage share of Chinese goods in total US imports fell, and the value of US goods exported to China as a percentage of total US exports also fell.
- A DHL and Stern School of Business report finds far less decline in cross-border flows between China and US allies, suggesting decoupling may be "a slower and more limited phenomenon elsewhere in the world."

### Impacts and risks for developing and emerging market economies
- Greater uncertainty and risk of being shut out of markets that previously promised access.
- Pressure to choose between blocs could force countries to:
  - Reconfigure trade and investment patterns.
  - Rely on multiple sources for trade, investment, aid, weapon purchases, and security.
- Specific dependencies complicate alignment decisions:
  - Some countries rely on Russian arms, energy, food, and fertilizer.
  - Many countries depend strongly on Chinese aid, trade, and investment, and are resorting to bailout loans from China.
  - They also need access to markets in Europe and North America.
- Potential negative governance consequences echo Cold War-era patronage of regimes in resource-rich developing countries.

### Policy options and recommendations for smaller and developing countries
- Nonalignment:
  - Nonalignment can allow countries to protect their own interests and restrain superpowers by avoiding forced allegiance.
  - Nonaligned strategies could bolster regional trade, investment, and production exclusive of the great powers.
  - Historical examples: Singapore’s nonalignment decisions (refused to support Indonesia’s 1975 invasion of East Timor; opposed the US invasion of Grenada in 1983; opposes Russia’s ongoing invasion of Ukraine).
- Pursue self-reliance and diversified external relations:
  - Prepare with a measure of self-reliance while negotiating with multiple partners for trade, investment, aid, and security.
- Use collective nonaligned voice to reform multilateral processes:
  - Press great powers to adopt multilateral processes and institutions that include developing countries, thereby conditioning great-power support on inclusive processes and restraining unilateral actions that harm smaller states.

### Key statistics and quantified references from the chapter
- Trade in global supply chains grew "4 percent year over year in the second quarter of 2022."
- US Inflation Reduction Act: "$400 billion in subsidies" for renewable energy and electric vehicles meeting North American part requirements.
- Chinese direct investment in the United States: "$46.5 billion in 2016" and "$4.8 billion in 2019."
- US-China trade flows in 2022: "$690.6 billion."
- WTO-modeled welfare losses: "as high as 12 percent in some regions."

*Source: Ngaire Woods, Finance & Development, June 2023.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2023/june/woods.pdf_