Rising trade tensions expose an increasingly fractured world
With the War in Ukraine dominating the news for the last nine months one might imagine little else is happening. Nothing could be further from the truth. Some very big stuff is going on, and even though many international CEOs don’t seem to realise or like it, much of this stems from the primacy of geopolitics over economic rationality.
This does not solely concern Russia’s barbarous behaviour, which has triggered both major energy and food crises, or the threat represented by the ascendant hegemon China, which some frivolously compare with the pre-1914 challenge of Imperial Germany to the British Empire. Take the tensions that have arisen between the US and EU over the $369 billion Inflation Reduction Act, and especially the $7,500 tax credit for those who buy an e-vehicle (including its battery) wholly sourced in the US, Canada or Mexico. European manufacturers rightly sense an existential threat if this home-shoring is extended to everything from microchips to wind turbines. As one European industrialist remarked, death by drowning happens very quickly, even if the pond’s surface is benignly green.
We’re only slowly waking up to the fact that the new economy is just as susceptible to geopolitical tensions as was the old one of iron and steel. Appeals to the WTO are hopeless: thanks to Donald Trump’s sabotaging of its arbitration panel, this amounts to an appeal into a legal void. After the everyman-for-himself response to the gas crisis, with EU states resorting to fuel-bill subsidies and despatching supplicant missions to the major LNG producers, the EU is thinking in terms of a European Sovereignty Fund. This is part of a more nebulous rhetoric of “strategic autonomy” – which could become real enough if the vengeful “Tariff Man” Trump returns in 2024.
This EU-US dispute is part of a larger picture that shows we are rapidly leaving an unprecedented era of global trade integration, the high points of which were the admission of China to the WTO in 2001 and Russia in 2012. This had real benefits, with those living in absolute poverty falling from 42 per cent in 1988 to under nine per cent by 2020, while the advanced West enjoyed a low inflationary world thanks to the flow of cheap Chinese goods.
We seem to be reverting to something resembling the era that saw World War I and the Great Depression, which was followed by the “re-match” of World War II
Of course there were downsides. Wandel durch Handel (political liberalisation through closer economic exchange) turned out to be fool’s gold as both China and Russia went further down the path of autocracy. Globalisation’s inequalities and the casualties in left-behind regions led to a populist backlash in many countries, especially after the masters of the universe and their political surrogates proved so greedy and incompetent during the post-2008 financial crisis. This was not some crisis on the periphery, in East Asia, Latin America or Russia, but at the heart of the western-dominated financial system.
We now seem to be reverting at pace to something resembling the era of 1913-1932 – a period that saw World War I and the Great Depression, and which was followed by the “re-match” of World War II. Trump really set the ball rolling when he abdicated US global leadership in favour of imposing tit-for-tat tariffs on bogus national security grounds and pursuing the Australian-inspired witch hunt against Huawei. The Biden administration talks a good game on expanding the G7 into a league of like-minded democracies – for the G20 has such dubious actors as Saudi Arabia – but the reality has been the increasing subordination of trade relations to the mentality of the intelligence community and military-industrial complex. This calls for enhanced national resilience – only partly occasioned by the Covid pandemic, re-shoring and “friend-shoring” of supply chains, and – last but not least – the deliberate attempt to retard a major competitor (China) by denying them access to advanced technologies, notably advanced 3-14 nanometre micro-processors and the complex equipment needed to produce them.
The obvious rationale for this final measure is that these are dual-use technologies which are also handy in modelling, for example, the effects of nuclear warheads, and powering the AI behind China’s modernised armed forces and police surveillance systems. The idea is that the Chinese will be lumbered with an indigenous chip industry which will soon be obsolescent. This has been accompanied by loose talk of toppling the Chinese Communist Party and/or going to war to defend Taiwan. The irony of course is that globalisation has created serial new vulnerable dependencies for western democracies and their technologies, notably rare earth minerals over whose production China has a virtual monopoly. As the old warning goes to anyone bent on revenge, “dig two graves before you set out” including your own. Think further what your iPhone, games console or trainers might cost if they were produced here. These realities are why trade and foreign investment statistics remain far rosier than the above would suggest, and why US-China trade is back to pre-pandemic levels. And why, having sounded as hardline as Liz Truss in his first foreign policy speech, Rishi Sunak did not go as full tonto as the Tory “China Research Group” in desiring an end to any relationship whatsoever.
Even limited cooperation between the EU, US and China on e-commerce and climate change won’t stop the plunge into conflict
With the US apparently no longer interested in performing the free trade leadership role it played at Bretton Woods and GATT in the 1940s, multilateral organisations are no longer capable of managing the global system. The G7 is far too small a forum to perform this role, even if it tacks on other non-western players which then – like India with Russia – refuse to sing from the same hymn sheet. The G20 is of limited utility too since many of its members, including India, Saudi Arabia and Turkey, hedge their bets between the emerging hostile camps.
In theory the EU could hope to play a leading role. All talk of Fourth Reichs and the EUSSR apart, as a rich trading bloc it sets off fewer alarm bells, except in Britain, which cuts a very lonely figure nowadays – the ghost ship of the international community. Certainly the EU could play a role in reforming the WTO, although this is not helped by US non-involvement or the interminable processes that took three decades to get 190 countries to agree on fishing subsidies. Clubs of the willing seem to be the way it will go.
And the EU has its own problems. Neither France nor Germany is prepared to abandon all hope of Beijing, as we saw with Chancellor Scholz’s flying visit to meet with Xi and Macron’s forthcoming visit, which will happen after he becomes Biden’s first senior state guest in December. While the Germans are very Atlanticist, especially with a former mayor of America-facing Hamburg as chancellor, the French are still tantalised by the essentially Gaullist vision of “strategic autonomy”, which if Trump returns will mean autonomy from the US rather than anyone else. The French are also more susceptible to the military-industrial approach than many of their European counterparts, which is why they continue to flirt with the British, who have a similar mindset.
But even if the WTO was reformed in ways acceptable to the US (and that seems unlikely), and even if regional and sectoral agreements are implemented that see limited cooperation between the EU, US and China regarding areas such as e-commerce and climate change, these will not be enough to stop the plunge into economic fragmentation and conflict. Suspicion of China is bipartisan in the US to the point of mania, a sentiment that lesser lackeys are obliged to emulate even when their leaders (such as Sunak) don’t agree. By the same token, Xi Jinping is not a compromise kind of guy, and the CCP apparatus is convinced that the US and its allies are engaged in a conspiracy to bring their reign to an end with the sort of colours revolutions that led to the implosion of the Soviet Union. Maybe both Biden and Xi can reduce these tensions, as they seemed to do in Bali. But the world’s CEOs are betting the house if they aren’t planning on the next couple of decades being very precarious.
Michael Burleigh’s “Day of the Assassins: A History of Political Murder” is published by Picador