Fragile international relations, trade, and policy

Anna Karhu
Research Manager
Pan-European Institute (PEI), Turku School of Economics, University of Turku

The past few years have witnessed that nothing is as permanent as change. It seems that our global economies have faced new crises increasingly frequently. Just as we have been able to take a breath and have gained a flicker of the new normal, yet another disruption shakes our renewed balance. The global financial crisis in 2008, followed by the US–China trade war, global Covid-19 pandemic and the Russia’s invasion to Ukraine, have all shaken the global structures that govern the increasingly interconnected trade. As the growth of global trade has brought us welfare and increased living standards, it has also brought us increasingly interconnected and diverse international relations.

To understand our current challenges, it is necessary to look back on how did we get here. International trade as we understand it today with its multinationals, global value chains, global governance structures and mantra for open trade has its roots in Bretton Woods agreement negotiated in 1944 in the turmoil of the two World Wars. This agreement stemmed from the widely shared will between the different counterparts of the war to gain world peace. The leading economic minds of the time had presented ideas that we could gain more through comparative advantage, meaning that nations could focus on producing things they produce relatively more efficiently than other nations, and rely on other nations regarding other goods. Thus, the simplified logic was that if we increase economic interdependencies between countries, they would be more hesitant to go to war. These new arrangements focused on global coordination of tariffs, quotas, etc. that would ease out the cross-border trade. The global trade and economic development then witnessed long period of growth between the end of 1940s and 1970s.

However, this growth slowed down towards 1980s: the tariffs and quotas were already low and did not boost the growth any more, and the challenges for international companies emerged in other areas. Therefore, a new set of experts sat down in a new meeting, Uruguay round, in 1986. This round took multiple years and concluded in 1994, and set the ground for establishing WTO in 1995. Here the focus was not anymore on crossing the border, but rather entering the market. When a product from country A entered country B, although the tariffs or quotas were minimal, the foreign company could face unfair competition as host country governments for example might subsidize unfairly the local producers. To overcome these challenges, the discussion turned to global trade productivity and included a new set of rules and standards. This changed the game, as now these agreements were not only influencing tariffs and quotas on borders, but the national regulation and laws needed to be aligned with the globally agreed standards. Therefore, negotiating became more difficult in addition to the increasing diversity as rapidly growing emerging markets (particularly BRIC countries) gained more economic power and wanted to be heard when discussing these global rules.

This simplified summary of the past development brings us to the disruptions mentioned at the beginning. The financial crisis in 2008 caused a massive drop down in global trade. It showed the fragility of the interconnected economic systems and global value chains as well as pointed out the need to renew our global governance systems. The US–China trade war also had some of its root causes in the inadequacy of the global governance systems built in WTO. Covid-19 pandemic, in addition to the enormous healthcare and economic challenges, boosted the increase of protectionist policies. Russia’s invasion to Ukraine even further challenged the global interconnectivity, and pressures further towards global decoupling, a shift to “two globalizations” – one organized around the US, and the other around China.

The global governance system was meant to create a neutral framework of rules that would bring productivity and efficiency gains. However, it seems that the system has increasingly been applied as a tool in power struggles in international relations. As the global governance began to serve additional values than only increasing interconnections in trade, meaning more socially desirable goals like human rights and environmental goals, it also became a battle field for the multiplicity of values inherited in the 193 countries in the world. Therefore, it now seems that the global governance system is open to change. This means that the choices made by a country or a set of countries can influence and reshape the rules, potentially moving the entire system in favor of some powers rather than others. Thus, it seems we are breaking out from the universalism of the previous order, where common rules govern trade.

Pursuing a global agenda, for example for environmental goals, digital trade, etc., is incompatible with a fragmented global economy that now seems to be emerging. If this decoupling is completed, the multilateral institutions that were created to manage globalization will become outdated. The public discussion seems to be developing towards a perspective that an ideological struggle between democracies and autocracies is taking hold. However, it is necessary to remember that many of the recent crises brought up the challenges in global governance system rather than a clear conflict between the different ruling systems. For example, the West did not impose sanctions against Putin’s regime merely because it does not meet a particular democratic standard, but rather that Putin’s decision violated the principle that the borders of an independent and sovereign state cannot be changed by force.

In closing, it is evident that we need to search for new ways of working together in spite of our different value bases and be able to find, recognize and create shared goals and opportunities. At the Pan-European Institute, we have supported the emergence of such activity in a three-year project focusing on trade policy and international business. Now the project is coming towards its end. As one of the project outputs, we edited a book “Global Trade and Trade Governance During De-Globalization” that discusses in more detail the themes brought up in this short essay. The book is published by Palgrave Macmillan and is coming out at the end of 2022. Welcome to check it out to learn more about the past, present and future of trade policy.

Expert article 3281

>Back to Baltic Rim Economies 4/2022

To receive the Baltic Rim Economies review free of charge, you may register to the mailing list.
The review is published 4-6 times a year.