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The Paris Peace Forum: a new rules-based multilateralism for a multipolar world (en)

11 noviembre 2018
ITC Noticias

One hundred years ago today, the guns fell silent in Europe, bringing an end to a conflagration of unprecedented scale and savagery. Yet what was described at the time as ‘the war to end all wars’ proved to be anything but. Scarcely a generation later, the world found itself engulfed in a war of even greater barbarity.

The causes of the First World War, and the extent to which its political and economic aftermath contributed to the Second, are matters best left to historians. Nevertheless, the years before 1914 and after 1918 have enough similarities to our own age that the parallels are too important to leave to professionals.

Failures of international cooperation scarred the first half of the 20th century. The Paris Peace Forum organised by the French government this week is part of a search for solutions to ensure that the middle of the 21st century escapes that fate. As it did a century ago, trade and trade policy have a significant place in this story.

The trenches of the Somme marked the sudden and quite unexpected end of the first wave of modern globalization. Technological and transport breakthroughs – the telegraph, electricity, the steamship – had revolutionized commerce and communication. International trade and investment flows had by 1913 reached levels, as a share of global output, that by some measures would not be equalled until the end of the 1980s. On the eve of war, the core of the world economy – Europe – was marked by deep trade and investment ties, but also geopolitical tension, between an ascendant Germany and a United Kingdom in relative decline.

Replace the telegraph and steamship with the internet, Europe with the Asia-Pacific, and China and the United States for Wilhelmine Germany and Britain. Our predecessors learned that decades of Victorian-era stability within Europe did not, in fact, guarantee it a stable future. They made bad choices. These choices had consequences. Human nature has not greatly changed in a century; we should not be overconfident about our own wisdom.

Insofar as we have cause for optimism, it springs from the legacy of the Second World War. The opening lines of the United Nations charter, adopted in 1945, expressed the world’s determination “to save succeeding generations from the scourge of war, which twice in our lifetime has brought untold sorrow to mankind.” The architects of the postwar order were obsessed the policy failures of the interwar period. The League of Nations’ failure to ensure collective security. Uncooperative, beggar-thy-neighbour trade and financial policies that deepened and prolonged the misery and unemployment of the Great Depression, in turn empowering political extremists.

The pre-1914 world had shared policies – open trade, free capital movement, the gold standard – but no shared institutions. The post-1945 world had the UN, the World Bank and the International Monetary Fund, together with the General Agreement on Tariffs and Trade (GATT), the forerunner of the World Trade Organization. The architects of these institutions, led by the United States, sought to foster peace through economic cooperation and interdependence. They recognised that embedding cooperative economic policies in rules-based institutions would make them more resilient.

Rules and norms in favour of open markets made it possible for countries to hitch their wagon to the international economy, starting with postwar reconstruction in Western Europe. The multilateral system was able to accommodate newly independent countries, who had been denied voice, representation and policy autonomy in the pre-1914 wave of globalization. Not all of them were initially enthusiastic about trade, but rapid export-led growth in Japan, Korea and other Asian tigers inspired market-oriented, outward-looking reforms in China, India, and other developing countries starting in the late 1970s. The ensuing growth was turbocharged by the rise of multi-country value chains, themselves a product of predictably open markets and improved communications technology. The effects have been dramatic. In 1980, over 40% of the global population lived in extreme poverty. Today, it is fewer than one in ten of us. After centuries of divergence between per capita living standards in the West and the Rest, the past twenty years have finally seen convergence.

Convergence, paradoxically, has made international economic cooperation more complicated. This is the circular irony of the open global economy: the rebalancing of global economic power it enabled has made the world economy more multipolar. This means that getting optimal results now requires more international cooperation. At the same time, however, shifting economic power has tilted the balance of global political power, which has made multilateral cooperation on economic openness more difficult.

Consider the new distribution of economic power. The US and the dollar remain the core of the global financial system. But when we move from the financial to the real economy, Chinese output, in purchasing power terms, has already surpassed that of the US. Even at market exchange rates, the economic output of developing countries is on pace to exceed that of advanced economies by the end of the next decade. Meanwhile, the EU is the world’s biggest trader, and as we saw with its General Data Protection Regulation, it is a regulatory superpower.

In this world, no economy, however big, is an island that can stand aloof from economic conditions elsewhere. Already in 2008, during the acute phase of the financial crisis, governments had to coordinate policy to arrest the free fall of their national economies. Monetary policy from the US Federal Reserve and fiscal stimulus from the government of China both played key roles in stabilising global demand.

Now think about the balance of political power. Today’s trade tensions between the US and China are a symptom, more than a cause, of their growing geopolitical rivalry. There are, to be sure, underlying trade issues that need to be addressed. China’s sheer size means that its policies on subsidies or state intervention in different sectors of the economy have important spillover effects in other countries. These spillovers present one set – but not the only set – of strains on our institutionalised interdependence.

The much bigger question, however, is whether the US-China rivalry will bring the multilateral order down, to everyone’s detriment, or whether the rules-based trading system can be used to mediate the rivalry for the mutual benefit of all.

Geopolitics has returned to geoeconomics, after a generation-long holiday during which investors and governments could, to an important extent, separate economic decisions from considerations of security and regional alliances. Now, when governments determine which companies can participate in the development of 5G telecommunications networks, effectiveness and cost are not the only parameters they are considering. In Asia, policymakers from Seoul to Canberra are anxious to avoid having to choose between Washington, their chief security ally, and Beijing, their biggest trading partner. While geopolitics and geoeconomics were closely intertwined during the Cold War, the western alliance and the Soviet bloc were never equals in economic terms. Nor did they have significant trade and investment ties.

The path we are on today could end in a breakdown of the open rules-based trading system that contributed to the unprecedented global prosperity of the past 40 years. The economic history of the 2020s might well end up resembling that of the 1920s: a disparate group of powers unable to act alone and unwilling to work together to stabilise the world economy. There would be a few winners within countries, but on the whole we would be poorer. In a deglobalising world, the prospect of achieving our sustainable development goals for the next decade would be remote. The image of economic blocs peering out at each other with suspicion but few economic ties recalls darker moments in living memory.

There is an alternative scenario, one that preserves the trade and investment ties that have underpinned our shared prosperity. Today’s tensions could culminate in a cooperative update of global rules to better align them with the realities of trade and technology in the 21st century. Renewed positive-sum thinking in the global economic arena would leave us better equipped to tackle collective action problems like climate change. Better domestic policy for trade adjustment would position societies for the far bigger displacement challenges to come thanks to the rise of intelligent machines.

The second scenario is vastly preferable, but it is not straightforward, either conceptually or in terms of the technicalities of global trade relations. The challenge is to manage the renewed intersection of geopolitics and geoeconomics in the knowledge that economic and political systems in the US and China may not soon converge, as many had assumed they would during the heady years after the fall of the Berlin Wall. What the world needs to do, to borrow a phrase, is define terms of engagement that are “peaceful but still competitive.”

Updating WTO rules would be a logical way of defining these new terms of engagement. The institution and its rules have served us well, and continue to serve us well. But much of the global trade rulebook dates back to April 1994 - six weeks before Jeff Bezos founded the company we know as Amazon. There is scope for new rules that would foster trade and reduce negative spillovers and the related temptation to use unilateral policy action.

Digital trade and technology are one area where governments could usefully identify new rules that would facilitate e-commerce, clarify protections for data flows, and safeguard privacy. In keeping with the notion of ‘peaceful but competitive’, new rules could enhance cybersecurity while ensuring that companies from around the world compete on the basis of ingenuity, not policy distortions or abusive market practices.

Subsidies linked to overcapacity in key metals have received a lot of attention. But there is a much broader subsidy agenda covering other industries, agriculture, and payments supporting marine fishing and fossil fuel production and consumption. Disciplining these payments would help level the playing field for trade while freeing up public money and delivering large environmental dividends.

Improving the WTO’s regular functions, so that governments regularly notify and discuss their policies, would improve transparency in trade relations and help address potential irritants before they have a chance to escalate.

Updates like these would help solidify the legitimacy of the WTO’s dispute settlement mechanism, which is currently being contested. Binding dispute settlement, together with a fully operational appellate function, is essential for rules-based trade. Non-binding dispute resolution could not work today as it did in the 1970s. This is a world with more systemically significant economies, which means that free-riding by ignoring dispute rulings would come at a substantial economic and political cost. Non-binding dispute settlement would open the door to an escalating spiral of unilateral non-compliance.

So where do we go from here? I want to offer three avenues.

One. Develop a positive-sum agenda for global trade reform.

Countries large and small need to know that we face two potential futures: a win-win scenario of increased cooperation, and a lose-lose scenario in which the best countries might hope for is to dent their own growth prospects less severely than others’. Win-lose outcomes are a delusion.

A reform of the WTO along the lines above would help shape it to face the challenges of today and tomorrow.

Two. Pursue economic inclusion at home.

As countries embrace trade and technology, they must act domestically to help individuals adjust to the downsides of import competition and automation.

Displacement due to trade and technology is set to intensify. For certain types of services that can be broken down into individual tasks – think writing, graphic design, video voiceovers, software coding – platforms like Upwork or Fiverr place white-collar workers in Oslo or London in direct, individualised competition with lower-cost counterparts in Manila or Lagos. The fast-increasing sophistication of artificial intelligence will destroy some jobs while creating others.

Leaving no one behind is fundamental to the United Nations Sustainable Development Goals. It means that countries need to boldly pursue social protection and economic empowerment. Gender equality is increasingly recognised for raising the growth potential of entire national economies. New tax and social policies will be necessary for society as a whole to gain from changes that might otherwise benefit a small number of individuals, companies and regions.

And three, pursue economic inclusion abroad.

For all the triumphs of the open global economy, many countries and communities still remain on the margins of international value chains. Even before the future of the rules-based order had been called into question, these countries were struggling to use trade to drive broad-based growth. Ending the marginalisation of these countries, many of them least developed economies and fragile states, would help us attain the U.N. Agenda 2030 goal of eradicating extreme poverty.

In tandem with efforts to preserve open rules-based trade, countries must work to ensure that support to build supply-side capacity in these countries does not fall off the global agenda. Businesses also have a role to play here: broadening their sourcing networks to include small and medium-sized firms and women-owned companies in developing countries would meaningfully contribute to making growth and trade more inclusive.

We have come to a fork in the road for the global economy. One path is new: rules-based multilateralism that is genuinely multipolar. It will require creative thinking and constructive engagement. The Paris Peace Forum could provide fresh impetus and new ideas. The other, non-cooperative path, is more familiar: we have gone down it before, and we know it does not work.