By Werner Raza
The era of unbridled free trade is over, the new buzzwords are de-coupling/de-risking. What we now see is an erosion of global cooperation. As we confront existential challenges like the climate crisis, a New World Economic Order 2.0 is needed, where the EU could lead the way.
Twilight of the gods of hyperglobalisation
The balance of more than three decades of global economic development based on the principles of the Washington Consensus is sober. Unbridled free trade, market liberalisation, privatisation of public companies, deregulation of labor markets coupled with a policy of fiscal austerity and social cuts have led to manifold structural distortions. We are currently moving into a new era, the contours of which are only just becoming visible. The understanding of the following three paradoxes of hyperglobalisation will be fundamental to the future direction of trade policy and international (economic) cooperation more generally.
Paradox I – More trade ≠ more democratic change
The well-known principle of liberal political philosophy of doux commerce has not proven to be true, neither in the “change through trade” variant nor in the variant of promoting international cooperation. The idea behind “change through trade” is that trade not only promotes prosperity, but also fosters democracy in the countries involved. The developments over the last three decades have neither confirmed this hypothesis for liberal democratic, nor fpr autocratic countries. The biggest beneficiaries of hyperglobalisation in liberal democracies has been the global class of the super-rich. This global elite not only uses its massively increasing wealth for ever more bizarre and completely unecological luxury consumption, but above all to expand its influence on politics at the expense of a more egalitarian policy catering for the needs of the majority of the population.
Contrariwise, in the OECD countries the income and wealth position of less qualified people has deteriorated significantly. This is mainly due to stagnating wages as a result of the relocation of mainly low-skilled work to the Global South due to hyperglobalisation, the eroding bargaining power of trade unions, the creation of low-wage sectors and the increase in atypical and precarious forms of employment. In combination with the dismantling of welfare state benefits, this forms the basis for the political rise of authoritarian nationalism in the USA and Europe. The rise of illiberal regimes like in Hungary and Poland has just represented the tip of the iceberg of a deteriorating quality of democracy in many countries. Despite the rise of relatively well-educated, young, and urban middle classes in emerging countries, democratisation processes have not materialised, with the political focus of political elites often centered on expanding material prosperity at the expense of suppressing popular dissent. Consequently, state capitalist models have consolidated their grip.
Paradox II – More trade ≠ more international cooperation
The hope expressed in the doux commerce thesis of the civilizing effect of international economic cooperation on interstate relations has also not been confirmed. Global governance mechanisms have failed to bring about significant changes toward more effective international politics and joint management of global challenges, as evident in the slow progress on climate issues. However, the crisis in international cooperation affects many other policy areas, not least international trade itself, where the failure of the Doha Round negotiations has plunged the World Trade Organization (WTO) into a crisis since the mid-2000s. With the partial withdrawal of the US under the Trump administration, the crisis has since deepened.
Last but not least, the hyperglobalisation desired by the US and the EU has contributed to a structural shift in the global economy that is now falling on everyone’s head. The economic and associated political rise of China, and in its wake that of other emerging economies such as India or Brazil, is challenging the leading role of the old capitalist centers. These are reacting to this by turning to a geopolitical trade policy and subordinate trade to the goals of national security. Economic sectors considered important for national security are being brought back into the domestic market and national production is being expanded, respectively, while exports of high-tech products deemed crucial for military superiority to countries classified as strategic rivals are prevented (aka de-coupling or de-risking). The new guiding principles of trade policy are thus no longer free trade, expansion of market access and the removal of regulatory trade barriers, but strategic autonomy, technological sovereignty and strengthening domestic industry through massive subsidy programs.
As a result, we now find ourselves in the paradoxical situation that, at a time when global cooperation is urgently needed, it is precisely this cooperation that is in crisis. Existing international institutions such as the WTO are being sidelined by the leading global power, the USA. The latter’s focus on its own security policy goals is making political and economic cooperation with other countries increasingly impossible, especially when official narratives are being created that differentiate between “friends/allies”, that is, between liberal, human rights-based democracies on the one side, and authoritarian regimes on the other. This distinction between the “good guys” and the “bad guys” makes international cooperation more difficult, and is arguably perceived as arrogant and neo-colonial in the global South.
Paradox III – Decarbonisation in the North needs more raw materials from the South
The geopoliticisation of trade policy has led to a renaissance of industrial policy, especially against the backdrop of the two major challenges of the 21st century – digitalisation and decarbonisation. Both challenges require large quantities of critical raw materials like lithium, cobalt and rare earths. In view of the escalating geopolitical rivalries, the securing supply of (renewable) energy and the raw materials required is also becoming increasingly important in terms of security policy. The third paradox we are therefore facing today is that the climate and environmental crisis is forcing us to reduce CO2 emissions to net zero by 2050 and to drastically reduce our (fossil) energy and material consumption, while to achieve this, our consumption of critical raw materials will have to be drastically increased in the coming decades. The deposits of these raw materials are mainly located in the Global South. This threatens to deepen the extractive economic model in these countries, which is based on the exploitation and export of largely un-processed raw materials. The associated economic value-added in the producer countries is low, but the social costs for the local population are severe as is the destruction of nature caused by extraction, often in ecologically valuable areas such as the Amazon rainforest. However, the EU needs access to these raw materials in the Global South in order to achieve the desired energy and mobility transitions, and finds itself in a race with the USA, China and other emerging countries. At the same time, however, for reasons of both security and competitiveness, the EU wants to process these critical raw materials into technologically advanced products primarily domestically. Decarbonisation in the global North will therefore foreseeably lead to a deepening of resource exploitation in the Global South and thus to the perpetuation of centuries-old dependency structures. Understandably, this green extractivism is increasingly encountering political resistance from the Global South.
A cooperative New World Economic Order 2.0 is needed
These three paradoxes highlight the complexity of current challenges amid escalating international tensions. The European Union faces dependencies on foreign energy, critical materials, and intermediate imports, particularly from China and other emerging countries. The traditional EU model of manufacturing high-quality products through low-cost imports is no longer sustainable due to ecological concerns and global tensions. Decoupling from China, if imposed by the USA, would entail significant economic costs for the EU and hinder decarbonisation efforts. The EU’s relatively close integration with the global economy, especially China, thus necessitates an independent and proactive role in shaping international economic relations. While the EU should gradually reduce external dependencies through diversification and more domestic production, cooperation is vital, especially with the countries in the Global South.
Against this backdrop, European trade policy is challenged to find new forms of international cooperation that consciously distance themselves from the geopoliticisation of trade policy. These must be based on solidarity and enable our trading partners to meet on an equal footing. In particular, this means accommodating their interests and needs to a significantly higher degree than in the past. The discussions surrounding the New World Economic Order of the 1960s and 1970s can provide starting points for this, even if today’s situation is different. The greater regionalisation of production networks, both in the EU and in other regions of the world, which is necessary both ecologically and for reasons of security of supply, must therefore be urgently supplemented by a solidarity-based agenda for dealing fairly with existential global challenges. Europe should face up to its international obligations and its historical responsibility and advocate much more strongly for a new global order based on solidarity. The emerging multipolar world certainly offers starting points for this, not least in view of the new self-confidence of a politically emancipated Global South. Much of this is still unclear and requires a broad political discussion process. Critical scholarship as well as civil society are called upon to make their contribution to shaping such a New World Economic Order 2.0.
Werner Raza is Director of the Austrian Foundation for Development Research (ÖFSE). Together with cooperation partners, ÖFSE organized the international conference “The Future of Trade in a Multipolar World Order” from 23-25 June. For more information see HERE.
Note: This article gives the views of the authors, not the position of the EADI Debating Development Blog or the European Association of Development Research and Training Institutes.