If Joe Biden wins the US presidential election in November, the temptation will be to see Donald Trump's years in the White House as a temporary aberration from American engagement with the world and its willingness to uphold a rules-based liberal economic order.
Not only does Biden embody an older, more collaborative US outlook, he has even put climate change – a top concern for liberal multilateralists – at the centre of his campaign.
A victory for Trump’s Democratic rival may well restore rules-based globalisation as the default mode of international economic interaction. But it will look very different from the globalisation of the 1990s.
Even if the US recommits to a rules-based order, the conflict over what the rules should be will become much fiercer.
Both Trump’s trade war and the immediate impulse from the pandemic have been about repatriating production. Post-Trump, the fight will shift from where production is located to how it is carried out. Welcome to the new trade policy: trade promotion, but in the service of extending the regulatory reach of the three blocs who set the rules – the US, EU and China.
Signs of this shift already abound. The update of the North American Free Trade Agreement made Mexico’s preferential access to the automaker supply chain conditional on paying workers in its car industry higher wages.
The EU's trade deal with the Mercosur bloc will impose requirements ranging from animal welfare standards to respecting the Paris agreement on climate change. Cambodia has been stripped of tariff-free access to EU markets for human rights violations.
Beijing’s Belt and Road Initiative aims to tie countries into Chinese trade and financial networks.
As the examples above show, it is smaller economies that are squeezed when the big trading blocs insist on their standards. Emerging countries have little choice but to acquiesce to the demands of the world’s biggest markets.
Even sizeable national economies can be caught in the squeeze, as demonstrated by the UK’s illusory hope to have close trade relations with both the EU and the US, while being completely free to set whatever standards it likes.
What is new is that countries are increasingly forced to align entire sectors with one of the big blocs. In the past, when trade was mostly in basic commodities and finished industrial goods, exporters could adjust production to each foreign market. But, for many reasons, rules increasingly cover the whole process of production.
Take the growing trade in services, which even physical goods, such as software-rich cars, now embody. That raises the stakes for the three big blocs to make sure it is their rules that are chosen. Demands for countries to make a choice will not go away with Trump.
Tensions will rise even in the area where America’s return to the fold is most welcome. A Biden White House would recommit the US to the Paris agreement and may pursue an ambitious climate change policy at home. Biden promises carbon border taxes on imports from countries that are deemed to be “cheating on their climate commitments”, a policy the EU also intends to introduce.
But making peace with Europe raises the risk of confrontation with China. It clears the field for a reunited west to form a “carbon club” demanding Beijing cracks down on its own emissions or lose market access.
It is a mistake to think of this as protectionism. It is, rather, a deeper form of globalisation, where cross-border economic activity is accompanied by cross-border rules to govern it. This re-regulation of cross-border economic flows is a natural, and potentially healthy, consequence of the earlier mistake of conflating globalisation with deregulation.
There are many possible outcomes of the looming regulatory battles. One is harmonisation: countries agree on similar (or similar enough) rules. This is the model of European economic integration, but is extremely unlikely on a global scale. Climate, however, could be an exception. A western carbon club covering half of the global economy could be a strong enough economic force field to force others into alignment.
Three main trading blocs
A second outcome is that countries outside the three blocs are more deeply absorbed into the sphere they are economically closest to. This creates dilemmas for those economies close to more than one – think Latin America choosing between China and the US, or Africa between China and Europe. The latest example is Brazil being told by the US to avoid Chinese telecoms group Huawei.
A third is splintering. In some areas, the rule books of the three main trading blocs are irreconcilable and will probably remain so. This seems true of personal data processing, where Europeans prioritise consumers over digital producers, the US favours Big Tech, and China facilitates state surveillance.
But a final, more optimistic, possibility is that countries converge on the most demanding standards. In the tendency known as “the Brussels effect”, countries sometimes adopt European-style rules because, once their companies satisfy them, they can typically also export to other markets.
As Nate Persily, a Stanford law professor, told the New Yorker: “Europe is the only functioning regulator of Silicon Valley.”
The previous phase of globalisation was often criticised for triggering a race to the bottom. In the next phase, a titanic struggle for regulatory dominance could paradoxically produce a race to the top. – Copyright The Financial Times Limited 2020
