Thursday, July 25, 2024

New trade policies have queeredthe pitch for developing nations

Developing countries are worried that the US will turn its back on the multilateral trade regime. Amid rising geopolitical tensions, they fear that this could make them hostages to great-power politics, undermining their economic prospects. Their concerns are not groundless: US trade policies have changed significantly. What seemed like haphazard measures under Trump (sanctions on Chinese firms, increased tariffs and subversion of the World Trade Organization’s dispute-settlement body) have become a broad strategy under President Joe Biden.

This strategy aims to reconstitute America’s role in the global economy and embodies two imperatives. First, the US regards China as its main geopolitical rival and views its tech ascendance as a security threat. As sweeping US curbs on the sale of advanced chips and chip-making equipment to Chinese firms show, the US is willing to sacrifice international trade and investment to thwart China’s ambitions.

Second, US policymakers aim to make up for its long neglect of domestic economic, social and green priorities with policies that promote resilience, supply chain reliability, good jobs and a clean-energy transition. The US seems happy to pursue these objectives on its own even if its actions could adversely affect other countries. The best example of this is the Inflation Reduction Act, a climate-transition law. Leaders in Europe and elsewhere have been outraged by its $370 billion clean-energy subsidies that favour of US-based producers. Former WTO head Pascal Lamy recently called for a ‘North-South’ coalition without the US to “create a disadvantage for [Americans] that would make them change their position.”

To be sure, Europe has its own brand of unilateralism, albeit a softer one than America’s. The EU’s Carbon Border Adjustment Mechanism (CBAM), which aims to maintain high carbon prices within the bloc by imposing duties on carbon-intensive imports such as steel and aluminium, is meant to placate European firms that would otherwise be at a competitive disadvantage. But it also makes it harder for India, Egypt and others to access European markets.

Developing countries have plenty to worry about. As the US and Europe attempt to isolate China and serve their own agendas, they are unlikely to have poorer economies’ interests in mind. For such countries, multilateralism remains the only safeguard against the solipsism of great powers.

But developing countries would do well to recognize that these unilateral policies are driven by legitimate concerns and are often aimed at meeting global needs. Climate change is clearly an existential threat to humanity. If US and European policies accelerate the green transition, poorer countries will benefit, too. Instead of condemning these policies, lower- and middle-income countries should seek transfers and financing that would enable them to follow suit. For example, they could demand that European nations channel CBAM revenues to developing-country exporters to support investment in greener technologies.

More broadly, developing countries must remember that their economic prospects are determined first and foremost by their own policies. Short of a 1930s-style global plunge into protectionism, they will likely not lose access to Western markets. Also, export-oriented countries such as South Korea and Taiwan engineered their growth miracles during the 1960s and 1970s, when developed countries were far more protectionist than they are now or likely to be in the foreseeable future.

It is also true that the export-oriented industrialization model has run out of steam for reasons that have little to do with the Global North’s protectionist turn. Manufacturing technologies are so skill- and capital-intensive now that it is difficult for latecomers to copy the success of East Asian tigers. Future development models would have to rely on service industries and small and medium-size enterprises, rather than on industrial exports, to build a thriving middle class.

Developed countries’ focus on resilient and equitable economies could also benefit the world economy. Cohesive societies are far more likely to support openness to international trade and investment than those that are roiled by the inegalitarian forces of hyper-globalization. As many studies have shown, disappearing jobs and regional economic decline can often engender ethno-nationalist politics.

In a 2019 ‘letter to the next generation’, Christine Lagarde, then managing director of the IMF and current president of the ECB, lamented the rise of unilateralism and emphasized the benefits of the post-1945 bargain: “Bretton Woods launched a new era of global economic cooperation, in which countries helped themselves by helping each other.” But the opposite is also true: Any successful global regime, including the Bretton Woods system, must rely on the idea that countries could help each other by helping themselves.

In sum, when it comes to achieving stable and sustainable growth, the world’s developing countries must ask not what the world’s richest countries can do for them, but importantly what they can do to improve their own prospects. ©2023/Project Syndicate

Dani Rodrik is a professor of international political economy at Harvard Kennedy School, and the author of Straight Talk on Trade: Ideas for a Sane World Economy.

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