Prominent officials such as Treasury Secretary Janet Yellen and European Bank President Christien Lagarde tell us that the global trading system is collapsing. The International Monetary Fund has even given a new name for the policy-driven reversal of global economic integration: “geoeconomic fragmentation.”
It is important to put “geoeconomic fragmentation” in historical perspective.
There have been two eras when globalization led to rapid growth in world trade and investment. In the early 19th century, the global system of trade and investment was created, with Great Britain as the dominant player. The classical economists challenged mercantilist policies, and Great Britain provided leadership in pursuing policies of free trade and investment. By the second half of the century, the benefits of a global system of free trade and investment were clear, and other countries followed the lead of Great Britain in pursuing these policies. Rapid growth in international trade and investment launched the industrial revolution and modern economic growth.
This era of rapid globalization was interrupted in the early 20th century by two world wars and the Great Depression. Populist leaders of all stripes convinced their citizens to pursue “beggar-thy-neighbor” policies, restricting international trade and investment. Unfortunately, the United States took the lead in this deglobalization, an era that proved to be fertile grounds for xenophobia and military conflict.
In the post-World War II era, the United States took the lead in restoring a global economy. Multilateral negotiations through the General Agreement on Trade and Tariffs and later the World Trade Organization provided the framework for reducing restrictions on international trade and investment. The International Monetary Fund and the World Bank facilitated the creation of a global reserve and payments system based on the gold standard and reliance on the dollar as a reserve currency. This new era of rapid globalization was also accompanied by rapid economic growth.
Over the last two decades, however, we have again experienced an era of deglobalization. Major turning points were the economic shocks of the financial crisis in 2008 and the COVID-19 pandemic in 2020. Countries responded to these economic shocks by imposing new restrictions on international trade and finance. Now, countries are fragmenting into regional trading blocs pursuing trade wars and currency competition. Financial regionalization is undermining the international reserve and payments system. Not surprisingly, these policies have resulted in stagnating international trade and investment, accompanied by retardation in economic growth.
Unfortunately, the United States has again taken the lead in this retreat from global economic integration. U.S. trade policy is now focused on “friend-shoring.” Tariffs and other trade restrictions are designed to shift supply chains from China and Russia to benefit the United States and its allies. Subsidies are used to promote high-technology industries such as semiconductors and microprocessors, and the United States has launched a subsidy war in its efforts to promote clean energy.
The United States has also contributed to “geoeconomic fragmentation” in regional agreements with its allies such as the Indo-Pacific Economic Framework for Prosperity.
This era of deglobalization has proved to be fertile grounds for xenophobia and military conflict, pitting the United States against a united China, Russia and Iran. A new cold war has emerged with military conflicts in Ukraine and the Middle East. This new era of deglobalization has much in common with that in the early 20th century. As Elon Musk argues, “I think that we are sleepwalking our way into World War III.”
The United States and China are trapped in prisoner’s dilemma. While conflicts between the two countries have not led to the Armageddon that Musk predicts, the risk is there and growing. Continuing along the present path fragmenting into regional blocs with trade wars and currency competition increases that risk.
With multilateral negotiations in the World Trade Organization at a standstill, the best hope for reversing deglobalization is through plurilateral negotiation. The meeting between President Biden and China’s President Xi Jinping at the Asia-Pacific economic summit in San Francisco provides an opportunity for the United States and China to take the lead in launching plurilateral negotiations to reverse “geoeconomic fragmentation” and the collapse of the global trading system.
Secretary of State Antony Blinken has asked for China’s help in preventing a wider war in the Middle East. Plurilateral negotiations could not only facilitate a peaceful settlement in Ukraine and the Middle East but also could lay the groundwork for a restart in negotiating a nuclear disarmament agreement.