The world’s economic order is breaking down
Critics will miss globalisation when it is gone
IN LATE APRIL, for the 75th time in a row, America blocked a mundane motion at the World Trade Organisation to fill vacancies on the panel that is the final arbiter of disputes among the group’s members. The relentless vetoes, obscure as they might sound, have in effect completely defanged the WTO for almost five years. Members that are found to have violated its rules can simply appeal against the decision, to a panel that is not functioning for lack of personnel. While the appeals moulder, the transgressions go unpunished. Two years ago, at one of the WTO’s biennial summits, members resolved to get the dispute-resolution mechanism up and running again by this year. At the latest summit, earlier this year, having failed to do so, they instead decided, without even a hint of irony, to “accelerate discussions”.
The dysfunction at the WTO is emblematic of a world where the institutions and rules intended to foster international trade and investment are falling into abeyance. Every day brings alarming new headlines. The European Union, although supposedly both more supportive of free trade and more determined to reduce its greenhouse-gas emissions than other economic powers, is on the verge of imposing duties on Chinese electric vehicles. Last month EU officials raided a big Chinese security-equipment maker as part of a probe into subsidies. America recently imposed sanctions on more than 300 entities, including some in China and Turkey, for providing support to Russia’s armed forces.
The proliferation of subsidies and sanctions is one of the most obvious signs of the unravelling of the “international rules-based order”, as policy wonks like to call it. Institutions like the WTO were created to remove barriers to the movement of goods and capital and so foster trade and investment. This process has gone into reverse, with the obstacles multiplying as the rules fray. This unhappy regression—call it deglobalisation, for want of a better term—is beginning to become visible in the economic data, as investors reprice assets and redirect capital in a less integrated world. Although these shifts have not yet had much impact on global living standards, they constitute a giant and alarming gamble: that the enormous reductions in poverty brought about by globalisation can continue without it.
In the aftermath of the second world war, the global economy was a Wild West. Many countries imposed big tariffs on goods to build up domestic industry. Capital controls were strict. Governments regularly expropriated assets from foreign owners: it happened at least 260 times to American investors abroad between 1961 and 1975, according to an official report.
General agreement on tariffs
Even when foreign investors were tolerated, they were not given the red-carpet treatment. Consider George Cohon, the McDonald’s executive who led the effort to set up a branch of the fast-food chain in the Soviet Union in the 1970s and 1980s. Foreigners were forbidden from taking money out of the country, making it impossible for the firm to earn a return on its investment. Its only option was to reinvest any profits within the Soviet Union and hope that the rules would change in the future. Getting permission to open was also a slog. “This is a hamburger; this is an order of French fries,” the late Mr Cohon recalled having to explain to surly bureaucrats in his memoir. At one point he was made to wait in a hotel room for 17 days for a contract to be translated and typed up.
International momentary freedom
The end of the cold war, however, helped stitch the global economy together more tightly. A consensus emerged, however fragile and reviled: that it was easier for economies to grow through integration than self-isolation. Tariffs fell sharply. Governments abolished many capital controls (including the ones that prevented McDonald’s from taking profits out of what had become Russia). Many countries even surrendered some sovereignty to allow the emerging system to work better. One of the reforms that accompanied the evolution of the General Agreement on Tariffs and Trade (GATT) into the WTO in 1995 was the creation of a binding mechanism to resolve trade disputes—the one that America is now sabotaging. Politicians tried to court foreign investors like Cohon, rather than the other way round. This was always an incomplete process, in China in particular. But flows of trade and investment soared.
In recent years cross-border trade and investment have stopped growing (see charts 1 and 2). Three big scourges are undermining globalisation: the proliferation of punitive economic measures of various sorts, the sudden vogue for industrial policy and the decay of global institutions. The punitive measures do not typically take the form of higher tariffs. Although a few big countries, such as America and India, have been raising them, tariffs remain low by historical standards—and many governments continue to cut them. In Canada and Japan average tariffs are still falling. Australia recently abolished close to 500 tariffs unilaterally. There is little sign yet of the sort of tit-for-tat escalation that hobbled the world economy in the 1930s.
But the world’s governments are imposing trade sanctions more than four times as often as they did in the 1990s, according to the Global Sanctions Database, a research outfit. Western governments have put hundreds of sanctions on Russia in retaliation for its invasion of Ukraine. America is placing ever more restrictions on China to thwart its technological ambitions, especially in semiconductors.
Governments are also screening foreign investments more carefully and often barring investments in “strategic” companies. “The number of FDI regimes and regulatory enhancements is growing around the world, particularly in Europe,” according to White & Case, a law firm. In America in 2022 (the latest official data) the Committee on Foreign Investment in the United States closely scrutinised 286 proposed deals, up from just 97 in 2013. The British government recently approved the sale of the country’s largest chipmaking facility to an American firm, after blocking a bid from a Chinese-owned entity. A senior Canadian minister has boasted that his government has blocked a number of Chinese bids for mining companies, saying that the move had gone down “very well” with the American authorities.
Other countries are going to greater extremes and actually expropriating assets. Earlier this year Mexico’s government ordered the seizure of a hydrogen plant belonging to a French firm. In March lawmakers in South Africa voted to confiscate land without compensation when it is in the national interest. A year ago Chile announced plans to expand the government’s role in the lithium industry markedly. Russia’s defenders complain that Western governments are discussing plans to expropriate Russian assets held abroad and divert the proceeds to help Ukraine.
The second big change is the rise of industrial policy. Politicians are frantically competing to build up domestic supply chains and local industries—not in coal and steel, as in the post-war period, but in clean energy, electric vehicles and computer chips. By one count governments around the world adopted over 1,500 policies to promote specific industries in both 2021 and 2022, compared with almost none in the early 2010s.
On the fiscal side, America is funnelling billions of dollars to favoured firms to boost production of clean energy and computer chips. Last month TSMC, a chipmaker that has been promised vast state funding, announced that construction of a big new plant in Arizona was on track. Well-funded schemes to boost domestic manufacturing include “Made in Europe”, “Make in India” and “A Future Made in Australia”. Canada’s government dubbed last year’s budget its “Made-in-Canada plan”. It is in subsidies, rather than tariffs, that a tit-for-tat escalation is occurring. A new paper published by the IMF finds a 74% probability that a subsidy for a given product in a big economy is met with a subsidy for the same product from another big economy within a year.
The third change relates to global institutions, which are a shadow of their former selves. The IMF used to have almost exclusive power to resolve poor countries’ debt problems. But with the rise of alternative creditors such as China and India, it is finding that job more difficult. Each part of a debt restructuring, including steps that were once formalities, are often now subject to protracted negotiations. A growing number of countries, especially in sub-Saharan Africa, are nearly or already unable to service their debts. Yet resolving such crises is proving almost impossible.
The IMF has also changed from within. The organisation, chastened by widespread complaints that its policy prescriptions were too harsh in the 1980s and 1990s, now devotes growing attention to questions of climate change and inequality at the expense of its overarching mission of instilling sound macroeconomic management. In the latest edition of its flagship annual publication, the “World Economic Outlook”, the word “reform” appears 63 times, compared with 171 times in the edition of 30 years ago.
The most moribund multilateral institution, however, is the WTO. Since the collapse of a 14-year-long negotiation in 2015, all talk of expanding free trade or deepening protections for it has fallen by the wayside. This year’s summit only just managed to extend a moratorium that, had it lapsed, could have seen countries imposing tariffs on cross-border transfers of data, including software and music. With the appeals process frozen, governments can adopt capricious policies with little fear of censure. In the past year an index of “trade-policy uncertainty”, produced by economists at the Federal Reserve, has been nearly twice as high as the long-run average.
World trade ostracisation
The effects of these three scourges are predictably grim. An index that tracks references to economic uncertainty in prominent publications is at twice its average level from 1997 to 2015. Not only has global trade in goods stagnated; the same problem now afflicts services, too. Cross-border investment is in retreat, as well, as a share of global gdp. Both long-term (direct) and short-term (portfolio) flows are well below their peaks. Companies are retrenching, to avoid geopolitical rifts in particular. The share of American corporate profits coming from abroad is falling fast. Western law firms and banks are pulling out of China. After Russia’s invasion of Ukraine in 2022, McDonald’s quit the Russian market. A new Russian-owned restaurant, “Delicious, full stop”, has taken over many of the American chain’s outlets. (As if to bear out Cohon’s proselytising about the benefits of globalisation, the new restaurant has received poor reviews.)
Those investors still willing to venture abroad expect a higher rate of return. The Economist analysed data published by the Federal Reserve on stocks and flows of cross-border investment. For years the gap between American investors’ returns abroad and that on risk-free Treasury bonds was shrinking, suggesting that the world was becoming a safer place. But in recent years the gap has widened again, pointing to growing global instability (see chart 3) .
Another sign of deglobalisation comes from relative prices—how similar prices are for the same goods and services in different places. In a seamless market, variation should be small as firms and consumers seek out the best deals and incomes in poorer areas catch up with richer ones. Before the pandemic average prices in Britain’s costliest region were only about 10% higher than in its cheapest, for instance.
For years the variation in relative prices around the world was declining, signalling a convergence. But in recent years progress has stopped or even gone into reverse (see chart 4). Admittedly, economists’ dream of a single global market was always a distant prospect. Some services are hard to trade—a lawyer or barber in Rome will struggle to attract customers from Auckland—meaning that prices are unlikely ever to converge fully. But growing global variation suggests that the world economy is atomising rather than integrating.
The reduced efficiency that this entails does not seem to bother the many politicians who are embracing deglobalisation. So far the economic damage has been limited. Last year global GDP grew by a respectable 3%. Some of the countries that have embraced isolationism most enthusiastically, including America and India, are growing especially quickly. That has prompted some to argue that deglobalisation will actually boost growth.
That seems improbable. The golden age of globalisation caused an unprecedented decline in global poverty. The number of Chinese living in extreme deprivation, for instance, has fallen from 800m to almost zero. “Starting around 1990, developing economies began to grow more rapidly and catch up to the higher income levels enjoyed by advanced economies,” says Douglas Irwin of Dartmouth College. Research published in March suggests that inequality within countries has declined, too. Moving away from global integration thus presents a massive risk to the world’s poor, in particular.
Nonetheless, politicians appear wedded to deglobalisation, which they see as a means to secure a slice of “the industries of the future”. Narendra Modi, who is about to be re-elected as India’s prime minister, is spending vast sums on a “production-linked incentives” scheme to boost its share of global manufacturing. China’s leaders, meanwhile, are spending a fortune to strengthen their country’s position as the global leader in clean energy and electric vehicles. Donald Trump, who may win a second term as America’s president in November, is mulling a 60% tariff on all Chinese goods. He may well revive an old threat to quit the WTO altogether. Joe Biden, the incumbent, is only slightly better. He is convinced that subsidies can turn a services-dominated economy back into a manufacturing powerhouse. The EU, for its part, wants the WTO to allow space for industrial policy in future trade deals. At the same time tensions between the West and China make economic warfare ever more likely, even as they reduce the chance of meaningful reform to global institutions. As deglobalisation gathers pace, its true costs are likely to become clear. ■
This article appeared in the Briefing section of the print edition under the headline “The great regression”