The strains on the global economic system that became apparent during the Global Financial Crisis have worsened with the intensification of geopolitical tensions over the war in Ukraine and the high-tech rivalry between the US and China. This final column in a series of three discusses how the rules-based multilateral system needs to adapt to changes in the global economic landscape to preserve the benefits of global economic integration and avoid runaway fragmentation.
After decades of deepening global economic integration, the world has become more interconnected and interdependent, but also more diverse and multi-polar. Growing global wealth and declining extreme poverty have been accompanied by economic power shifting towards emerging and developing economies (EMDEs). In the early 1990s, Europe, the US, and Japan accounted for roughly three-quarters of global GDP; by 2019, their weight had dropped to about 50%. While advanced economies (AEs) have maintained their dominant position in the financial, high-tech, and military spheres, EMDEs account for a much larger share of global population and supply of primary commodities, as well as a growing share of global industry. China alone accounts for roughly one-third of global manufacturing value added. While trade and FDI patterns have mirrored these economic shifts, global governance has not.
A pragmatic multilateralism
The rules-based multilateral system needs to adapt to the changing global economy. While the current system is not well suited for managing multi-polarity, major reforms of multilateral mechanisms may not be feasible given acute geopolitical tensions and a ‘trust’ deficit. What is the best way forward?
Aiyar et al. (2023) outline a pragmatic approach based on the idea that countries should remain engaged, but that specific forms of engagement should be calibrated based on the extent of alignment of countries’ preferences and actions (see Figure 3):
- In areas of common interest – such as climate change mitigation, food security, pandemic preparedness and debt issues – multilateral effort is the best and only way to make progress.
- When multilateral negotiations stall, open and non-discriminatory plurilateral initiatives (fewer countries wanting to do more) could be a practical way forward. Agreements are ‘open’ when members keep an open-door policy for others who are willing and able to commit to the same rules and norms of conduct, and ‘non-discriminatory’ when members do not discriminate between different foreign producers or service providers. Such safeguards are needed to prevent a slide towards fragmentation.
- But when countries opt for unilateral actions, credible ‘guardrails’ are needed to mitigate global spillovers and protect the vulnerable. Examples of ‘guardrails’ could include multilateral platforms for consultations on policy measures that might entail economic costs for other countries, and developing commonly agreed norms of conduct such as agreements on ‘safe corridors’ to ensure a minimum level of cross-border flows in critical goods or services.
How could this approach be applied in practice?
Consider global trade. Key contentious issues include trade-distorting practices (such as industrial subsidies and market access barriers), the increasing use of trade policy for non-trade objectives (such as national security, labour protections and climate change mitigation), and the dispute settlement impasse at the WTO. Finding an agreement on all these issues, while desirable, is challenging given the diverse WTO membership, increasing complexity of trade policy, and heightened geopolitical tensions. What can be done?
- Multilateral efforts should focus on areas where countries are broadly aligned. A recent positive example is provided by the 12th Ministerial Conference of the WTO in July 2022, where a range of measures were agreed, including the exemption of World Food Program purchases from export restrictions and a partial five-year waiver from WTO intellectual property rules for COVID vaccines.
- Open and non-discriminatory plurilateral initiatives – such as WTO Plurilateral Agreements – could focus on areas where multilateral negotiations have stalled, such as industrial subsidies, market access barriers, FDI, services, anbd trade in environmentally friendly goods.
- ‘Guardrails’ are needed to mitigate the damage from unilateral actions that could lead to runaway fragmentation. One example is the US Inflation Reduction Act and similar measures adopted by other countries that could snowball into a subsidy race. To mitigate this risk, a recent joint paper by the IMF, OECD, World Bank and WTO proposed a consultation framework on the use of subsidies. This could include (1) improved data and information sharing; (2) a deeper analysis of subsidies to identify their economic impact, including cross-border spillovers, and to explore alternative approaches to better meet public policy objectives while reducing the negative effects on trading partners; and (3) an informed inter-governmental dialogue. Over time, such a dialogue could help develop international rules and norms on the appropriate use and design of subsidies. Similar processes could be considered for technology transfer requirements, data regulations, and other trade measures that are increasingly being put in place by countries to protect national security or economic security.
While the direction of globalisation remains uncertain, the world is likely to become more multi-polar (Ash et al. 2023). Hence, deeper reforms of multilateral rules and mechanisms may eventually be needed to ensure stability. Our hope is that pragmatic multilateralism can help mitigate the risk of runaway geo-economic fragmentation today.