The year 2020: one we won’t forget, a span of 12 months in which the world completed the journey from the “end of history” to the firehose of history. The pandemic-induced economic crisis served to merge, amplify and accelerate changes driven by a slew of technological, political and natural shocks:
- the populist reaction to the distributional excesses of globalization 2.0;
- the global supply chain’s restructuring and decoupling, driven in the first instance by the trade and technology war that flared as the United States moved to counter China’s technological rise, and amplified by ad hoc economic nationalism measures to address supply chain risks in critical areas highlighted by the pandemic;
- the digital transformation, which was disrupting established business models, leaving many established enterprises vulnerable to shocks while generating a plethora of new economic, societal and security concerns and regulatory challenges; and
- the urgent need to transform economies and infrastructure to address the twin crises of climate change and species extinction, a need highlighted by apocalyptic images emerging from extreme weather events and growing concerns about imminent tipping points that would drive irreversible changes in global environmental systems.
With the global economy now in recovery mode, societies are leveraging the crisis to “build back better,” deploying massive debt-financed economic stimulus to green the economy, rebalance income distribution, carve out competitive niches in the modern data-driven economy, and respond to the national security pressures and geopolitical challenges of the day. The “solution space” to which the economy is being pushed will look different from the one disrupted by the pandemic. What we produce, and how we produce it, will change and, by extension, so will the ways in which we share this production internationally and exchange it through the trading system, as will, indeed, our approach to how the system is governed.
As the world moves into the post-pandemic period, there is widespread agreement that institutional reforms are required. There have been calls for a new Bretton Woods moment to reset the international institutional framework to make it fit for purpose for the digital era, not to mention to deal with the plethora of other issues, ranging from fiscal debt to income distribution. But numerous questions remain open: How extensive are the required changes? What will be the defining issues? Who will be the architects? And, ultimately, how and when is this all to come about?
New Tensions between Globalization and Economic Nationalism
The pandemic and the trade and technology war have made countries acutely aware of the risks inherent in a trade-oriented economic strategy, exemplified by the pandemic-induced widespread disruption of supply chains because of lockdown of firms, regions and even entire economies and the disruption of transportation logistics, including the normal movement of containers and the role of passenger airlines in shipping high-value, time-sensitive cargo. In parallel, the geopolitically motivated restrictions mounted by Donald Trump’s administration and continued under Joseph Biden’s administration on the export of US-involved technology to China served to tighten global supplies of semiconductors (due in part to reduction of Chinese supply and anticipatory stockpiling by Chinese firms), even as the demand for semiconductors was boosted by the scramble for equipment to facilitate remote work and soaring e-commerce activity, induced by the pandemic, and the accelerating secular trend to smart devices of all sorts, including in automobiles.
Certainly, trade creates exposure to specific risks, which can prompt thoughts of repatriating production and pulling up the drawbridges. At the same time, trade diversification is a way to mitigate risk. A quantitative assessment by Barthélémy Bonadio, Zhen Huo, Andrei A. Levchenko and Nitya Pandalai-Nayar found that the global average real GDP decline due to the pandemic shock of –31.5 percent (of which –10.7 percent, or about one-third, was due to transmission through global supply chains) would have been greater in a world with renationalized supply chains (–32.3 percent).
As for repatriation or relocation of supply chains, this is neither simple nor cost-free. It is one thing to take a factory out of China, as was much discussed in the early stages of the pandemic; it is another to replicate the supporting supply web. The sunk costs of finding and establishing relationships with new suppliers are non-trivial. Moreover, if a significant portion of the supply web remains in China, supply chain risk is not mitigated, as Manisha Mirchandani reported. Nintendo ran into this problem when production of its consoles, which it had moved from China to Vietnam in 2019, was interrupted because of a lack of key components from China. India, one of the countries first proposed when the topic of relocating production for geopolitical reasons comes up, has a very different trade specialization from China, which suggests that the in-country supporting supply chains are very different between the two countries. India’s own slide into pandemic crisis in its second wave, which shut down its global vaccine exports, highlights that there is no safe haven to which supply chains can run. More fundamentally, trade and the organization of global value chains are dominated by large firms — and Northeast Asia contains the world’s largest concentration of such firms, led by China. Not surprisingly, firms are looking to finesse the geopolitically motivated decoupling pressures by finding ways to be on both sides of the new cold war’s “silicon curtain”; for many firms, this does not mean abandoning China but heading to China — as underscored by China’s leading the world in inward foreign direct investment (FDI) in 2020, even as global FDI fell by 42 percent due to the pandemic-induced recession.
A second feature of the pandemic has been to underscore the reality that, in a pinch, a country may find it has no friends, as all countries scramble to “look after number one” first. This was the realization that confronted Ontario Premier Doug Ford when the United States blocked shipments of medical equipment to Ontario. Again, there is a counterpoint to the story: when President Trump banned the sale of medical masks to Canada, it was pointed out that Canada supplies the unique pulp that is used for the manufacture of these masks. Economic interdependence cuts both ways, a reality that serves to discipline behaviour.
A second feature of the pandemic has been to underscore the reality that, in a pinch, a country may find it has no friends, as all countries scramble to “look after number one” first.
A third warning shot over the bow of globalization — as we understood it, before the pandemic — was the rebuffed attempt by the United States to buy a German pharmaceutical company working on a vaccine in order to secure the treatments for the United States first. The world has since moved en masse to protect such “vulnerable assets.” But there are counterpoints here as well. A pandemic story that started with a focus on supply chain disruption evolved into a story of extensive transnational cooperation in vaccine development: as Scott Lincicome summarized in a tweet, BioNTech, a German company founded by Turkish immigrants, developed a vaccine and partnered with US pharmaceutical giant Pfizer, whose CEO is a native of Greece, to produce it in US and Belgian facilities, using Canadian, European Union and US inputs, and shipping it worldwide using US transportation networks. This is globalization as teamwork. Moreover, while inward FDI restrictions can make sense for knowledge assets with powerful local externalities that warrant public sector intervention, they make little sense for traditional industrial assets. This reality will likely reassert itself as we move into the post-pandemic period.
In short, the centripetal and centrifugal forces in play ensure that the trading system will not revert to peak globalization, nor move toward autarky. This raises questions about the rules framework that will emerge to manage and facilitate trade in the “new normal” to come — will it be a tweak on the current framework, or will it reflect more fundamental reforms to address the changed economic conditions and terms of trade in the digital era?
Defining Conditions for the Post-Pandemic Age
If the framers of a new international accord whose purpose was to provide the basis for mutually beneficial international commerce in a post-pandemic age of data were to approach the task on a tabula rasa basis, they would start undoubtedly by acknowledging the conditions that will define the new age. What would those conditions be?
- That the major internet firms have more clients than the citizens of the United States, the European Union and China combined?
- That economic value is increasingly intangible in nature?
- That the existential threats of the day (climate change/species extinction; pandemic; the digital transformation, and all the risks that it poses for governance and national security) are borderless, involve global public goods that require major public investments, and portend major social transitions that will place a premium on effective public sector administration?
- That the prominent role of externalities in these issues means they are not well handled by the private sector — or, by extension, a rules-based order in which the public sector establishes a framework and hands over agency to the private sector?
- That the migration of innovation into machine-learning space means that the current geo-strategic competition to be first in technology has been largely rendered moot, since the contenders will arrive at the technology frontier at more or less the same time?
We need to keep question marks behind these conditions because, to some extent, the determinative questions will be decided by the framers of the new system. But who would those framers be?
A new “Great Game” has been set in motion to settle this question, with the player board defined by the contest for control over data and data infrastructure, the major source of contestable rents in the data-driven economy.
The Game of Zones
The United States wrote the rules for the postwar world in a manner congenial to its own interests and it has sought to maintain that status quo. Thus, President Barack Obama framed his “pivot to Asia” as a move to ensure that it would be the United States that wrote the rules for the twenty-first-century Asia Pacific economy. In his own pithy phrasing, “The world has changed. The rules are changing with it. The United States, not countries like China, should write them. Let’s seize this opportunity, pass the Trans-Pacific Partnership and make sure America isn’t holding the bag, but holding the pen.”
The United States is still the hyperpower militarily, but natural growth dynamics have made the global economy much more multi-polar. As the United States moves into the post-pandemic, on trend, its share of global GDP, its share of global trade, and its relative importance to trading partners are at postwar lows; and the US dollar’s share of foreign exchange reserves is at a 25-year low. While there is little evidence to date of erosion of the role of the dollar in international financial transactions or trade invoicing globally, there have been significant shifts toward euro invoicing in Europe and in parts of Africa, while renminbi settlement for China’s trade has increased steeply since 2017. Moreover, digital financial technology is evolving rapidly — money is just another form of data, after all. The technological basis for disruption of the post-Bretton Woods dollar-based monetary order is already in place.
Structurally, the United States has large deficits on its external and fiscal accounts. During the economic good times of the mature business cycle in the second half of the past decade, the Trump administration, far from saving for a rainy day, ran the budget deficit up to US$984 billion, or 4.7 percent of GDP in fiscal year 2019, and saw this balloon to US$3.1 trillion, or 14.9 percent of GDP, for fiscal year 2020. The US current account deficit is large (projected by the IMF to hit –3.9 percent of GDP for 2021). Simply put, the United States has less capacity to underwrite global public goods going forward than it ever has had in the postwar era.
The United States is still the hyperpower militarily, but natural growth dynamics have made the global economy much more multi-polar.
Under the Trump administration, the United States withdrew support for the multilateral institutions that it midwifed into existence in the aftermath of the world wars of the twentieth century (including leaving the United Nations Educational, Scientific and Cultural Organization, the Paris Agreement on climate change, and the World Health Organization). It also sidelined the World Trade Organization (WTO) dispute resolution mechanism and marginalized the major “clubs” that had provided fora to organize concerted action (the Group of Seven, the Group of Twenty, the Asia-Pacific Economic Cooperation and the Organisation for Economic Co-operation and Development [OECD]), including, perhaps most notably, by withdrawing from the negotiations being conducted under the auspices of the OECD for taxation of multinational enterprises in the digital age. The highly elaborated multilateral framework was replaced by an emphasis on bilateral relations, complemented by ad hoc coalitions of convenience, an approach that has long been familiar in the foreign policy sphere, as is evident from James Chace’s description of President George W. Bush’s modus operandi: “When unilateral actions seem impossible or unwise, Mr. Bush will seek allies, but not to make decisions that would require their approval. His preferred approach is to seek ad hoc ‘coalitions of the willing,’ what Richard Haas, a former adviser to Secretary of State Colin Powell, has called ‘à la carte multilateralism.’”
The Biden administration in its first 100 days walked back some of the Trump administration’s Alleingänge, with the United States rejoining the Paris Agreement and the World Health Organization and agreeing to the appointment of a new WTO director-general. This has poured diplomatic balm on diplomatic wounds. At the same time, little of substance has changed: the Trump administration’s tariffs and technology restrictions toward China remain in place; the bilateral US-EU civil aircraft tariffs remain in place; the unilateral Section 232 “national security” measures remain in place; WTO Appellate Body appointments have not been made; the Trump administration’s America-first agenda has been maintained (including in its Buy American procurement policies and in a diplomatically damaging refusal to share COVID-19 vaccines with India — since walked back — as the latter lurched into the most severe crisis to date in the pandemic).
In the critical area of command of the digital economy, the Biden administration has not meaningfully changed course from the one charted by the Trump administration. The United States has mainly sought to slow China’s technological advance by denying access to US-involved technology and by excluding Chinese competitors from the contest for rents in the US digital domain, and indeed elsewhere outside of China as well — for example, a new “Scramble for Africa” is under way, redolent of the nineteenth-century European competition for colonial domination.
In the critical area of command of the digital economy, the Biden administration has not meaningfully changed course from the one charted by the Trump administration.
The China containment policy involves a search for coalitions. In the first instance, this has involved a shift from an Asia-Pacific to an Indo-Pacific framing of US regional policy, as actuated through the Quadrilateral Security Dialogue with Japan, Australia and India (the “Quad”). A parallel/overlapping idea being floated is the formation of a “T-12” — a group of a dozen techno-democracies — with the purpose of confronting “digital authoritarianism.” None of this is the least bit multilateral in scope — and directly at odds with the policy stance of groups such as the Association of Southeast Asian Nations (ASEAN), which play a balancing game vis-à-vis the major powers, which means economic engagement with both the United States and China, as well as the security relationship with the former.
A second front in the digital wars concerns taxation of the new technology rents presently being captured by US firms. The digital services tax issue pits the United States against the European Union, Canada and many developing countries that otherwise would have difficulty participating in the data-driven economy. The United States withdrew from OECD talks on this issue in 2020, but has returned to the table under the Biden administration, with new proposals; however, the essential dynamics remain adversarial.
In short, the convening power of the United States to “write the rules” of the post-pandemic is much eroded.
After the United States, the European Union has the strongest hand in terms of convening power. However, it, too, faces challenges. Europe has historically been a zone of dissonance. Its internal harmonics predispose it to fracture and, historically, fracture has been the rule, not the exception. It took the cataclysm of World War II to allow its political elites to staple together a workable framework for peace and economic cooperation and create a single market, a single currency, and the borderless Schengen Area. Now the European Union has had its first exit, with the United Kingdom crashing out rancorously at the end of 2020, and faces unprecedented internal governance challenges with member states flouting the bloc’s governance norms.
The European Union is also fiscally limited. Germany might be able to underwrite the recovery of a shrunken European Union post-Brexit, given its relatively good economic and pandemic management performance, but the European Union lacks the fiscal resources to underwrite an international order. The European Union does have long-term geo-economic assets (particularly in terms of being the other major economies’ largest trading partner), but these fall mainly into the category of soft-power assets. Moreover, in the digital/technological space, the European Union’s leverage on global standards is questionable, and its goal of digital/technological sovereignty aligns better with French and German interests than with those of other member states.
In the critical digital technologies, the European Union has some assets but has not succeeded in capturing market share in the data-driven economy. Its perceived vulnerability in this regard is driving it to develop the regulations to minimize the negative impacts of technologies that it does not own, while it strives to achieve its newly articulated goal of technological/digital sovereignty and to develop its own champions in its Digital Single Market. While the European Union is showing some encouraging results in this regard — it has recently had a strong run of producing unicorns — it finds itself in a major-league contest in this regard, as both the United States and China throw around exorbitant amounts of money to win the technological race.
Finally, with its missteps in management of the pandemic, the European Union’s energies and political capital will likely be absorbed in the effort to preserve its own internal union and secure its own foothold in the post-pandemic digitally transformed economy.
China is the main “near peer” potential competitor for the US role as hegemon, although it says it wants nothing of this game (at least for now). Its foreign minister, Wang Yi, has publicly stated that China “is not the former Soviet Union … and [has] no intention to become the next United States.”
China does claim sovereignty over its cyberspace, which it defends behind its Great Firewall, while it mobilizes to achieve technological independence from the United States — an existential issue for China, given the US technology embargo. This commitment to securing its technological supply chain is unlikely to change, regardless of how the US-China relationship unfolds.
China is the main “near peer” potential competitor for the US role as hegemon, although it says it wants nothing of this game (at least for now).
In geo-economic terms, China has some assets — in particular, its large internal market is important for international business, and China has used denial of access as a stick in the form of tit-for-tat trade remedy actions. China also has allocated massive funding to its Belt and Road Initiative (BRI), which serves as a strategy to both counter US containment and gain access to markets — for example, Africa largely runs on Chinese technology and the rail link between China and Europe has seen a boom in freight traffic. However, as the BRI is investment-led, it exposes China much more than its borrowers, notwithstanding all contentions to the contrary, and sustainability of the project remains an open question. The signing of the Regional Comprehensive Economic Partnership (RCEP) with the 10-member ASEAN group, plus Australia, New Zealand, Korea and Japan, improves China’s position (although, from the perspective of its RCEP partners, this is an inherent part of the balancing equation — economic cooperation as a balance to strategic hedges). The overture to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is an interesting signal, but this is not a sign of geo-economic strength since it involves China joining a club forged by others.
China remains geo-economically weak on other grounds. First, it has not managed to significantly internationalize its currency, although the introduction of the digital yuan, formally known as the DCEP (digital currency/electronic payment), is thought by some as potentially changing that. Second, it remains vulnerable on technology rather than being able to use technology denial to its advantage — although, arguably, the shift of innovation into machine space accelerates technological convergence, meaning the window of technological vulnerability will close more quickly than historical experience would suggest.
In geopolitical terms, China is flush with vulnerabilities, given that its periphery is a chain of geopolitical hot spots: East China Sea (Senkaku/Diaoyu Islands dispute with Japan); South China Sea (disputed territorial boundaries); Taiwan and Hong Kong (independence desires); the disputed border with India (where surreal fights with sticks and stones have broken out); and the ethnic autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet and Xinjiang), where unrest has been met with a level of repression that has put China in the dock on human rights violations. The military coup in Myanmar, which has resulted in attacks on Chinese factories, is just the latest flare-up on China’s border – and in a country that is a key part of the BRI.
China can be under no illusions about its roster of friends. Its “near abroad,” by the logic of realpolitik, balances against it. In the United States, public opinion on China has fallen to historical lows, swayed by unceasing inflammatory rhetoric. The European Union has been trying to find a balance on its China posture but, overall, its position has hardened against China. China’s diplomatic overtures in the course of the five-nation European tour by Wang Yi in August 2020 had mixed results at best and rather served to put a spotlight on the extent to which EU-China relations had deteriorated. While the surprise signing of the Comprehensive Agreement on Investment at the end of 2020 momentarily created the appearance of a breakthrough, relations almost immediately soured with an exchange of sanctions after the European Union, in its Official Journal, accused several Chinese officials of a “large-scale surveillance, detention and indoctrination programme targeting Uyghurs and people from other Muslim ethnic minorities,” “systematic violations of their freedom of religion or belief” and other offences.
Of the remaining countries, the BRICS, excepting China (so, Brazil, Russia, India and South Africa) have been unable to parlay their spectacular rise in the era preceding the Great Financial Crisis (GFC) into a sustained geo-economic presence in the post-GFC data-driven economy era. They are now among the most severely impacted by the pandemic, both health-wise and in terms of the depth of economic downturns. Geopolitically, the BRICS, as a group, are no longer a force.
India has moved firmly into the US camp, signing on to the US Indo-Pacific strategy. Following its border spat with China, India expelled the major Chinese technology firms, creating space for its own domestic champions while accommodating US interests. However, the signing of the RCEP without its participation weakens its value proposition for regional supply chains. The digital economy is a world of superstar firms. These are concentrated now in Northeast Asia — China, Japan, Korea and Taiwan, between them, have hundreds of Fortune 500 companies. These firms draw energy and scale from the integrated Northeast Asian economy. As noted, the RCEP will work to further deepen these networks.Brazil, which has long-standing relationships with Huawei, was offered financing by the United States to make a break and go elsewhere for its fifth-generation (5G) network technology; however, the access to vaccines provided by China reopened the door to the Chinese supplier. Russia has moved closer to China, in part under duress from US sanctions. South Africa is also doing business with China, including relying on Huawei for its 5G rollout, but without obvious alignment.
As the world moves into the post-pandemic period, changed and shaken by the shocks of 2020–2021, there is widespread agreement that institutional reforms are required — indeed, there have been calls for a new Bretton Woods moment to reset the international institutional framework to make it fit for purpose for the digital era, not to mention to deal with the plethora of other issues ranging from fiscal debt to income distribution. At the same time, it is not obvious that any of the major economies is in a position to underwrite a new framework. This is an important consideration, given that the issues that need to be addressed mostly do not promise the “win-win” gains that the postwar industrial-era trading system offered to induce cooperation; a new system may require an underwriter.
Quite apart from who might hold the pen on the new Bretton Woods is the question of whether the time is ripe. In this regard, James Boughton argues that the lessons from Bretton Woods success are threefold: there must be a clear vision of what needs to be done; there must be cooperative leadership from the major countries; and sufficient time must be provided to lay the groundwork. Today, the world strikes out on all three counts, particularly as regards preparedness to reform the institution that will be central to a new world economic order — the WTO.
The issues that need to be addressed mostly do not promise the “win-win” gains that the postwar industrial-era trading system offered to induce cooperation; a new system may require an underwriter.
First, there is no clear vision on what needs to be done. Restarting the WTO as is — for example, by the Biden administration agreeing to restore the Appellate Body — would have little if any impact on global commerce, not least because the irritants used as an excuse to shut down the Appellate Body have not been shown to be of any commercial consequence.. More importantly, the WTO was on the sidelines for the major fight between the United States and China over the latter’s economic governance, and this issue is unlikely to be resolved through appeal to the WTO (recall, in this regard, that the comparable US-Japan frictions in the 1980s were dealt with outside the framework of the General Agreement on Tariffs and Trade, through the Structural Impediments Initiative pressed on Japan by the United States using its Super 301 mechanism). And, perhaps most importantly, the substance of a rules framework suitable for the data-driven economy is in the very early stages of development, as shown by the thinness of the treatment of the many novel issues raised by this economy in the Digital Economy Partnership Agreement (DEPA), which was agreed by Chile, New Zealand and Singapore, which makes it a stalking horse for a larger agreement.
Second, the world’s three major economic powers have major conflicting interests in a contest for rents in the data-driven economy that is far from being decided. Indeed, where Bretton Woods was held in the anticipation of the end of a war, the escalating rhetoric (including characterization of the US-China conflict as preparing to use “all means short of war”) is raising concerns that actual kinetic war is a very real possibility in the near future. Moreover, each of the major powers faces its own sea of troubles going forward in the early years of the post-pandemic and, as argued above, will have limited political capital to underwrite a new system, unlike the United States at Bretton Woods, which had an economy untouched by the war and roaring at capacity to supply the machinery of war.
Third, the extraordinary pace of technological developments does not allow the time to carefully lay the groundwork. Countries are moving apace to develop regulatory interventions in a context of asymmetric information and power between would-be regulators and the sophisticated superstar firms dominating the modern economy, and with limited understanding of the behavioural responses to regulations.
In order to address the pressing global issues of the pandemic and climate change/species extinction, a working relationship has to be re-established between the United States, the European Union and China, even as competition continues more or less unbridled on the trade and technology front (which seems unavoidable, given the stakes).
Europe is seemingly there to some extent, as reflected in the line it has adopted on China — strategic competitor in some spheres and strategic partner in others — but there seems little partnership there for the moment. For the United States and China, moving ahead will require finding a formula under which both sides save face while narrowing bilateral conflict to an agreed scope. In theory, nations should be able to identify the scope of “agreed competition” or “agreed battle” and, through tacit bargaining, create “more stable expectations of acceptable and unacceptable behavior.” There are ways to de-escalate the economic frictions, including unilateral actions that China can take to address concerns of international business (many of which indeed it has been taking out of self-interest), and, as Mark Kruger suggests, finding reasonable compromises on the definition of “government” and the calculation of subsidies to accommodate systemic differences (which, as I argue, are less problematic than generally made out to be).
Perhaps to get to a second Bretton Woods moment, we first need a second Yalta moment (recalling the meeting of the triumphant Allied powers in Yalta in 1945 at which the shape of the postwar world and — importantly — the spheres of influence of the Soviet Union and the Western powers were agreed). In this case, what would be required would be the United States and China agreeing on the scope of competition while also committing to forbearance on using “anything short of war” measures, dialling down the rhetoric and refraining from pressing against redlines to buy time for the groundwork for a viable framework for the post-pandemic economy to be set out. The Biden administration’s first meeting with China in Anchorage in March does not appear to have served that purpose. The moment that does allow the move to a new détente may be quite some time and distance away.