No country is an island

With the World Trade Organization’s rule-enforcing capabilities on ice and the US pursuing the path of unilateralism and isolationism, Ernesto Zedillo, former president of Mexico and director of the Yale Center for the Study of Globalisation, asks how the multilateral rules-based system can survive
IFF China 2020 1-06
World leaders at the April 2009 G20 summit in London established an ambitious agenda to strengthen global economic governance, but these goals failed to be met
IFF China 2020
This article is part of The IFF China Report 2020

New globalisation and new economic governance sound provocative, but do we really have new globalisation? Unfortunately, the answer is no. In reality, the world is facing the huge risk of deglobalisation, which requires serious consideration.

Before the onset of the global financial crisis in 2007– 08, there were already symptoms of weakening globalisation. But, at that time, it seemed clear these were happening for structural reasons. In the late 1990s and the early part of this century, China had completed its first phase of intense participation in the global economy, and the economies of Central Asia, the Middle East and Eastern Europe had already engaged in the global economy. These were important engines for the growth of globalisation or economic interdependence.

1-06 IFF China 2020 Ernesto Zedillo
Ernesto Zedillo

The financial crisis forced a slowdown in globalisation. It also slowed down trade, which made a slight recovery before faltering again in 2017; at this time, we saw the financial crisis mirrored in trade’s weakened growth compared with global GDP

The question now is, are we facing a strengthening in global economic governance? Again, the answer is definitely no. 

 

Dereliction of duty?

Beginning in 2007–08 and into 2009, a painful financial crisis affected economies worldwide. The leaders of the Group of 20 acknowledged, at the first G20 summit in Washington, DC, in November 2008, that the root of the crisis lay in the lack of co‑ordination and coherence among the macroeconomic policies of the key economies. In response, the G20 committed to strengthening and enhancing international co-ordination to mitigate the risk of a new crisis. The G20 – particularly at the London summit of April 2009 – established an ambitious agenda to strengthen global economic governance. Unfortunately, this momentum was not maintained. 

The G20 agenda adopted 10 years ago failed to accomplish much. Important adjustments to international financial regulation were made but, in all other aspects of that agenda, the G20 failed to deliver.

Instead, financial institutions such as the International Monetary Fund and the World Bank enhanced their capacity to perform their duties. But these institutions also failed to implement significant reforms. 

At the Pittsburgh G20 summit in September 2009, world leaders claimed that the Doha Development Agenda – a trade negotiation of World Trade Organization (WTO) nations that commenced in 2001 – would be concluded before the end of 2011. However, as we know today, those talks are dead. My concern now is that we are not really strengthening global economic governance.

 The global economy still faces significant risks. Almost all financial leaders and experts at the International Finance Forum concur that the global economy is in a slowdown that could eventually cause a synchronised recession. The financial system will be the weakest link. Should this occur, we will see – as we saw in 2008 – that the crisis was caused by avoidable problems. We need a globalised economy, we need economic interdependence and we need strengthened global economic governance. 

Sadly, today we are further from global economic governance than we were 10 or 12 years ago. Despite the latest crisis, key players in the global economy have neither the ambition nor the political will to strengthen global governance. 

In fact, the current rules-based multilateral system is under unprecedented stress that not only weakens its efficiency but threatens its very existence. This critical situation is most unfortunate, considering international governance and institutions agreed and constructed over many decades, although far from perfect, have supported the pursuit of peace, security and the protection of human rights as well as economic and global social progress.

The multilateral system has been useful for all countries: weaker countries preferred to interact with all the nations, according to rules and institutions, for their interest to be considered – even if inefficiently in the end. For stronger countries, the case is no less compelling; obliging others to co-operate on issues of their own national interest by means of international agreed mechanisms is less costly and more reliable than the use of unilateral imposition of force, which invariably leads to the acrimony and resentment that could undermine their economic and geopolitical position.

Notwithstanding the proven value of the rules-based international system – on fronts from nuclear disarmament and non-proliferation to climate change mitigation and the regulation of international trade – is being severely challenged.

Ironically, the most significant aggression against this system is being led by the US – which designed, constructed and benefited enormously from it. Termination of the Intermediate-Range Nuclear Forces Treaty between the US and Russia; withdrawal from the nuclear deal with Iran – known as the Joint Comprehensive Plan of Action – and the 2015 Paris Agreement on climate change; departure from the Human Rights Council and Unesco; reduction or cancellation of funding for numerous multilateral instruments; and unilateral and arbitrary erection of trade barriers are examples of actions undertaken by the US government that are eroding and seriously compromising the strength of international law and institutions.

Unfortunately, the reaction of other influential powers to mitigate that harm to the multilateral system by the US offensive has been muted, and in some cases erratic, unco-ordinated and unilateral – frankly, counterproductive. Whether that has been through omission or commission, countries still have gravitas and resources and their own national interest to protect the international rules-based system, instead of watching its demise. 

 

A brake on progress

Only in exceptional circumstances have countries with the economic and geopolitical capacity to make a difference in response to US escalation proposed reforming and strengthening international institutions. Most have opted to negotiate bilaterally with the US. In this regard, it is at the price not only of legitimacy of the existing multilateral frameworks, but also of the capacity to fulfil their goals. 

The consequence of subordinating rather than modernising the international order could have enormous and negative consequences for the pace of human progress – a regression from the rules-based system into power-based mechanisms to address international disputes. All the matters will not be resolved in a safe, predictable and propitious environment for any country. Rather, this would lead to higher costs and greater impediments for every stakeholder within the global order, irrespective of their might. Power-based mechanisms of interaction among countries would prove – as has historically been the case – expensive, likely to cause conflict and even tragic for all those involved.

All countries – the US certainly included – should rectify the present trajectory of the multilateral system rather than replicating the US’s unilateralism and isolationism. Governments must engage in negotiations and agreements to sustain the co-operative framework that has already been established to confront common challenges.

Although the stresses and threats to the multilateral system are numerous, urgent and exceptional, co-operative action must be stepped up in two multilateral areas: climate change mitigation and the trading system. 

In view of the US formal notification of the withdrawal from the Paris Agreement, the remaining signatories must be urged to both enhance their commitments to reduce their carbon dioxide emissions and adopt rigorous monitoring of compliance. This escalation is urgently needed, considering that current commitments are not just insufficient but – for many countries – unlikely to be achieved at the current level of compliance.

In addition to starting unjustified and illegal trade wars, the US government has been blocking the appointment of new members of the Appellate Body of the WTO dispute settlement mechanism. Without new appointments, the number of judges is below the necessary amount to rule on an appeal. The result is a collapse of the dispute settlement capabilities the WTO has wielded since its creation. Consequently, it is urgent that the WTO membership must reach the decision to resolve the majority voting to appoint the necessary new judges to the Appellate Body.  

 

This article is part of The IFF China Report 2020, which draws mainly on content provided by China-headquartered think tank, the International Finance Forum, and is published in association with Central Banking.

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