Superpowers Are Forsaking Free Trade
Source details
- Canonical URL
- Superpowers Are Forsaking Free Trade
Other formats
Bibliographic details
- Authors: NGAIRE WOODS
- Published: June 1, 2023
Executive summary
- The great powers that built and sustained the free trade system are reprioritizing politics, security, and domestic economic objectives, undermining the open multilateral trade system that many emerging market and developing economies relied on.
- The United States and China are reshaping the global trading system and pressuring other countries to choose sides in a growing geostrategic rivalry.
- The recommended strategy for many developing and emerging market economies is nonalignment to protect their interests and to restrain the superpowers’ unilateral actions.
Major drivers reshaping trade
- Jobs at home and social cohesion
- Since the global financial crisis of 2008, criticism of globalization and open trade has grown, with anti-trade sentiment captured and accelerated by US tariff actions against Canada, Mexico, and the European Union on national security and jobs grounds.
- Winning the technological edge
- China’s 2015 “Made in China 2025” 10-year plan used subsidies and state-owned enterprises to develop its tech industry.
- The United States has deployed sanctions, blacklists, export and import controls, investment restrictions, visa bans, and technology transaction rules—described as “American techno-nationalism.”
- In October 2022, new restrictions limited China’s ability to acquire advanced semiconductors and the technology to make them.
- Security of supply
- COVID-19 exposed vulnerabilities in trade and supply chains; “friend-shoring” and secure supply initiatives emerged.
- In December 2022, Canada and allies (Australia, France, Germany, Japan, UK, US) announced the Sustainable Critical Minerals Alliance; the Group of Seven is developing an initiative to invest in a secure supply of critical minerals.
- Effective climate action as trade policy
- 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, influencing investment flows.
- The EU’s European Green Deal and a carbon border adjustment mechanism (scheduled to go into effect in October 2023) impose an “emissions tariff” on imports.
- Responding to a war of aggression
- Western powers coordinated economic and trade sanctions on Russia after its invasion of Ukraine, but many countries did not join due to reliance on Russia for security, grain, or fertilizer and concerns about precedent and consultation.
Impacts and risks for developing and emerging market economies
- Market access and growth
- Developing economies that oriented policies around market access now risk being shut out of markets and investment flows.
- Forced alignment and technological decoupling
- Pressure to choose between US and Chinese technology ecosystems may compel countries to cut ties (for example, companies pressured to cut ties with Huawei).
- Resource geopolitics and governance risks
- Secure-supply initiatives and strategic mineral alliances resemble Cold War-era courting of resource-rich countries, with potential governance costs.
- Climate policy trade-offs
- Industrial subsidies and trade restrictions by the US and EU—perceived as “Fortress US” and “Fortress EU”—can lock out firms from developing economies.
- Sanctions and geopolitical choice
- Joining sanctions against Russia could be economically costly for countries reliant on Russian arms, energy, food, or fertilizer.
- Modeled welfare losses from bloc formation
- Recent WTO work projects welfare losses (cumulative reductions in real income) as high as 12 percent in some regions, with the largest losses in the lower-income regions.
Evidence of decoupling and trade statistics
- Chinese direct investment in the United States:
- Peak of $46.5 billion in 2016 falling to $4.8 billion in 2019.
- US–China trade flows:
- In 2022 US–China trade flows hit an all-time record of $690.6 billion.
- Despite the record, the percentage of Chinese goods in total US imports fell, and the value of US goods exported to China as a percentage of total US exports declined.
- Global supply chain growth and food markets:
- Trade in global supply chains grew 4 percent year over year in the second quarter of 2022.
- Despite early predictions, global markets stabilized food prices (see the Food and Agriculture Organization food price index referenced).
Strategies and policy recommendations
- Nonalignment for smaller and developing countries
- Pursue nonalignment to preserve economic options, avoid coerced allegiance, and protect security and development interests.
- Use nonalignment to bolster regional trade, investment, and production exclusive of the great powers when advantageous.
- Multilateral engagement and collective voice
- Use collective diplomatic and multilateral processes to press great powers to consider the interests of smaller countries and to restrain unilateral actions that damage others.
- Self-reliance and diversification
- Prepare with a measure of self-reliance and secure diversified sources of trade, investment, aid, and military procurement to reduce vulnerability to bloc dynamics.
- Conditional support and inclusive processes
- Make support for great-power initiatives conditional on processes that include developing countries and reflect mutual, long-term interests.
Source: Superpowers Are Forsaking Free Trade, F&D Magazine, NGAIRE WOODS.
Content in this bundle
- Superpowers Are Forsaking Free Trade