How global trade killed the liberal world order | Business Beyond

Key Concepts

• Liberal World Order: A system based on democracy, free trade, and international cooperation, primarily shaped by the United States after World War II.
• Multilateral Institutions: Organizations like the World Bank, IMF, WTO, and UN, designed to foster global cooperation and stability.
• Hegemony: Dominance or leadership, particularly of one country over others.
• Hyper-globalization: An accelerated increase in international trade and interconnectedness, especially in the late 20th and early 21st centuries.
• Purchasing Power Parity (PPP): A method of measuring GDP that accounts for the relative cost of goods and services in different countries, removing the effect of exchange rates.
• BRICS: An association of five major emerging economies: Brazil, Russia, India, China, and South Africa.
• AIIB: Asian Infrastructure Investment Bank, a multilateral development bank headquartered in Beijing.
• Atlantic Charter: A declaration issued in 1941 by Franklin D. Roosevelt and Winston Churchill, outlining a vision for the post-World War II world based on democracy, free trade, and disarmament.

The Rise and Fall of the Liberal World Order

• Origins in the Atlantic Charter (1941): The Atlantic Charter, signed by Roosevelt and Churchill, laid the foundation for the liberal world order, emphasizing democracy, free trade, and disarmament after World War II.
• Post-War Institutions: The end of World War II saw the creation of key multilateral institutions:
  • World Bank: Initially focused on rebuilding Europe.
  • IMF: Stabilized the financial system by pegging currencies to the US dollar, which was tied to gold.
  • GATT/WTO: Reduced trade barriers and established common trade rules.
  • European Coal and Steel Community: Precursor to the European Union.
• Cold War Bipolarity: The world was divided between the American-led democratic West and the Soviet-led autocracies, each with its own set of institutions (e.g., COMECON, Warsaw Pact). However, the West's free market economy was significantly larger and more influential.
• Unipolar Moment (1991): The collapse of the Soviet Union led to a unipolar world dominated by the United States and its institutions.

The Role of Economics in Shaping Global Power

• Dollar Dominance: The US-led institutions and the strength of the American economy established the dollar as the world's dominant currency.
  • Advantages for the US: Cheaper borrowing costs and the ability to impose financial sanctions.
• Growth of International Trade: International trade increased rapidly after World War II, with the US initially holding a dominant share of global GDP (around 40% in 1960).
• The Assumption of Freer Trade and Freer Societies: The prevailing belief was that increased trade would lead to greater prosperity and the spread of democracy.

China's Rise and the Shifting Global Landscape

• China's WTO Entry (2001): The US believed that admitting China into the WTO would promote economic freedom and, eventually, democracy in China. President Clinton stated the agreement was a "one-way street" requiring China to open its markets.
• Economic Transformation: After joining the WTO, China's economy grew rapidly, becoming the world's largest by some measures (Purchasing Power Parity).
• Currency Inconsistency: Despite its economic size, China continued to trade primarily in US dollars, highlighting the outdated nature of the existing system. Paola Subachi noted the "inconsistency of this strange situation where the largest exporter in the world used the dollar in his own trade."
• Failure of Democratization: Contrary to expectations, China's economic growth did not lead to democratization. Under Xi Jinping, authoritarianism has increased, with greater state surveillance and repression of dissent.
• Shifting GDP Shares: China's share of global GDP has grown significantly, while the US share has declined. The EU's share has also increased.
• Job Losses in the US: Trade with China led to the loss of over 1.5 million American manufacturing jobs between 1990 and 2007, according to a paper published in the American Economic Review.
• Challenges to the Status Quo: Economic shocks like the 2008 financial crisis and the COVID-19 pandemic have fueled debates about the perils of hyper-globalization.

The Crisis of Multilateralism

• Erosion of Trust: Populations in liberal democracies have begun to question the status quo, leading to events like Brexit and the rise of populist movements.
• Divisions Within Institutions: Multilateral institutions are weakened by internal divisions.
• WTO Impasse: The WTO is unable to resolve disputes due to disagreements over issues like China's status as a developing country and the US blocking the appointment of judges to its top court.
• Rise of Alternative Institutions: New multilateral financial institutions, such as the New Development Bank (BRICS Bank) and the Asian Infrastructure Investment Bank (AIIB), have emerged as alternatives to Western-led institutions.
• US Abdication of Leadership: The Trump administration marked a shift in US foreign policy, with America actively withdrawing from its traditional leadership role.
• Undermining of Dollar Hegemony: The recent upheaval in bond markets in response to Trump's tariffs has undermined the dollar's dominance, as investors have become less likely to view US government debt as a safe haven.

The Decline of Liberalism

• Democracy in Retreat: The share of the world's population living in autocracies has risen sharply, with liberal democracies becoming less common.
• Threats to Territorial Integrity: The war in Ukraine and threats by the US to annex Greenland and Canada highlight the erosion of respect for territorial integrity.
• Rearmament: Europe is rearming due to a lack of trust in the United States.
• Erosion of Free Trade Principles: The principles of free trade are unraveling.

Conclusion

The liberal world order, established after World War II, is facing a serious crisis. The rise of China, the weakening of multilateral institutions, and the decline of democracy have challenged the core assumptions upon which the order was founded. The relationship between liberalism and prosperity is no longer as clear as it once was. If multilateral institutions are to remain relevant, they must adapt to the changing global landscape and address the concerns of emerging economies. The ideals they represent are under serious threat, and their survival depends on their ability to reform and regain the trust of their members.