A change of skies: the elections of 2024 and perspective for global trade and economic governance
Around half the world goes to the polls in 2024. That in and of itself is a matter for rejoicing: those of us with long enough memories can recall a past in which the ability of citizens to make their voices heard could not be taken for granted, not at this scale. But not everyone is so sanguine, at least in the arena of international trade and economic cooperation. In the aftermath of February’s WTO Ministerial Conference, many observers and diplomats tried to defend its minuscule outcome as being the best one could hope for in this electorally charged year.
While the politics of trade has always been messy, the idea that the exercise of large scale democracy would be an antagonist to deepening economic integration would have seemed wholly implausible three decades ago when the WTO was established. After all, the conclusion of the Uruguay Round coincided with a sudden step-up in political liberalism after the collapse of communism. Liberal economic governance and democracy had won the day, and were meant to be mutually reinforcing. Yet the current trend is that politicians and voters are rejecting economic liberalism and rules-based cooperation in favour of interventionism and unilateralism, if not outright nationalism. So what has changed, and why?
Nothing to lose but our value chains
Everyone now understands the role of global value chains in trade. In principle, the geographic unbundling of production should increase the incentives countries have to get along. Interdependency should increase cooperation. In practice, this is not necessarily the case. For a start, value added is not evenly distributed across value chains. It is more heavily concentrated in some activities, meaning that countries have incentives to enact policies (such as subsidies) to try and appropriate a bigger share of value added. Moreover, the nature of technological change creates tendencies that favour concentration and sharpen the incentives for countries to get “one-over” their rivals (see below).
But beyond that, the unbundling of production has made policymakers and politicians worry about exposure to exogenous shocks (such as with Covid-19). And they are nervous that geopolitical rivals could control key inputs and parts of the value chain, or have access to knowledge that would give them a strategic commercial or military advantage. The concerns are particularly sharp in areas that have dual-use functions (i.e. civilian and military). This is why we have seen selective decoupling between, say the US and China in sensitive sectors such as technological products.
All these effects together provide an economic narrative – albeit a flawed one – that supports a broader nationalist discourse. That has been sharpened by broader economic trends.
Capitalism without capital
Economic activity has changed with the rise of “capitalism without capital” i.e. activities based on intangible assets such IP, data, and skills. These are characterized by high fixed costs, near-zero marginal costs, economies of scope and spillovers. Collectively, these features create a strong tendency for concentration. And that, in turn, increases incentives to appropriate these activities and impose costs on rivals. Digital technologies and AI are a case in point. Moreover, intangibles have a big impact as embedded inputs, on the tangible aspects of production, a phenomenon known as servitisation. They also play critical dual-use functions. These sharpen the incentives for policy intervention and rivalry between countries. But what gives these incentives political traction domestically is the effect these new forms of economic activity have on income distribution.
It’s the economic distribution…stupid.
Activities that rely heavily on intangibles, from services to advanced manufacturing, will tend to cluster in specific regions. Moreover, the thrust of recent research into trade has underscored the role of the firm in trade and the key role that firm-level productivity plays in determining entry into global markets. Productivity is not evenly distributed, and clustering may make this worse. The micro-economic of trade and clustering effects can conspire to worsen inequality.
These are really a matter for internal policy relating to skills, labour market and productivity, and income distribution. But policy failures in these areas are responsible for a backlash against trade, and more specifically trade partners that are blamed for lost local jobs. This creates a political constituency that will buy into geopolitical discourses around national security and sovereignty. One might argue that it is unfair to blame trade for policy failures elsewhere. But as far back as 2007, Paul Krugman pointed to the distributional effects of trade and technological change, and impressed on economists the need to look for “better answers”. That economists have either not taken that injunction seriously or have not come up with such answers goes some way to explaining the current morass.
A lost narrative
The confluence of external insecurities regarding geopolitical rivalry and internal fears about distribution make nationalist, protectionist narratives an easier sell. Moreover, there are also economically legitimate grounds for policy interventions that can also have trade-distorting effects. Decarbonisation and sustainability are obvious examples: a transition to a low carbon growth path is likely to require subsidization and regulation to help bring new, cleaner technologies, to the market at scale. But what is also interesting to note is how even these policies have been co-opted into the discourse of security and reliance. The EU’s green new deal and sustainability were primarily about decarbonization to begin with. As of late, EU member states and the European Commission have started to cast these policies as central to the economic security of the EU.
The emotional resonance of the language of security means that policies couched in these terms are very difficult to challenge with objective evidence. It is useful to recall that the economic costs of protectionism are usually measured as deviations from baseline growth. Such reductions in growth rates are real costs: they are missed growth opportunities. But such missed opportunities are hard to spot politically: economists presenting estimates based on counterfactual simulations will be invisible against politicians speaking the discourse of national security. Recent evidence from the United States suggests that Donald Trump’s rhetoric in favour of tariffs on national security grounds was politically rewarding even as it imposed economic costs.
The needle and the damage done
The blunt assessment is that there are not many grounds for optimism. The large dose of nationalism and unilateralism that has been injected into thinking around trade and global economic governance will continue to course through the international system for a while. There is an even chance that Donald Trump will return to power, but, what is already clear is that Trumpism has already won over US trade policy. The only question is whether we have a lighter or a heavier version of it. And interventionism is contagious – research by the Global Trade Alert that tracks distorting measures shows that measures undertaken in one country are replicated by partners within a few months.
The economic costs of fragmenting economic governance are significant: a recent study by the IMF reported long-term economic costs ranging from around 1% to 12% of GDP depending on assumptions about the way in which fragmentation played out. Our own work, at Frontier Economics, looking purely at tech-sector fragmentation, puts the costs at between 1% and 5% of GDP. That brings us back to the long standing principle, that when everyone pursues their own narrow interests, everyone is worse off. That recognition underpinned the rules-based international system, arising from the hard lessons of history; and it is those lessons that have been lost.
But turning the tide will require more than lamenting the actions and words of unscrupulous politicians or the hardening of public opinion, or for that matter providing estimates of headline economic losses. It will require economists and policy-makers to rise to Krugman’s challenge of finding better answers to matters of distributional equity in a context of profound economic transformation. For businesses, particularly those at the smaller end of the spectrum, it will be a question of adapting to a less certain, higher cost environment, and for remaking the case as to why collective and collaborative approaches to policy are in everyone’s individual interest.
Authors
Amar Breckenridge
Amar’s work on trade spans trade policy analysis and modelling, support to dispute settlement and litigation, and trade negotiations. He has worked on these issues for clients in Europe, Asia, Africa and Australia. Clients value Amar’s combination of economic skills with his knowledge of trade rules, which he honed through five years as a staff economist at the World Trade Organisation prior to joining Frontier.