Multilateralism may, in theory, put countries on an equal economic footing. But in practice the concept has often relied on an anchor government to create and preserve global norms. Under the presidency of Donald Trump, the United States has accelerated its move away from leadership in global economic governance. This shift threatens the monetary and trading systems that have long underpinned globalization. Does the global economy need – and can it find – another leader to take America’s place?
In the monetary sphere, the US role in providing an internationalized currency has endured relatively well, even though the US’s formal anchoring of the global exchange rate system collapsed nearly half a century ago. Governance of the US dollar and of the dollar-based financial system has largely been left to competent technocrats. However, recent US political uncertainty has encouraged other governments, particularly in the Eurozone and China, in their long-standing quest to supplant the dollar. But these economies’ internal weaknesses have prevented their respective currencies from playing a wider role. Arguments for a multipolar system exist, yet network effects plus the dollar’s superior institutions mean it has retained its dominance.
In trade, the US role as anchor of the global legal order was already looking unreliable before Trump’s election. Washington has faced growing resistance at home to its global responsibilities. This, together with the idiosyncratic rise of countries such as China, has made the US an increasingly unreliable and narrowly transactional leader. And, more recently, hard-to-regulate issues such as foreign direct investment, technology transfer and data flows, often with national security implications, are increasingly undermining the ideal of multilateral global governance. Institutions such as the World Trade Organization, focused on cross-border trade in goods and services, are becoming less relevant.
Recent US actions against the Chinese technology firm Huawei show the Trump administration’s willingness to decouple the US market from China and try to drag other economies with it. As far as possible, other governments should resist taking sides. A complete separation of the global economy into rival spheres is probably unfeasible, and certainly highly undesirable. And although future US administrations may be less wantonly destructive, it is not realistic to expect them to resume America’s former role. Nor can the US simply be replaced with another power. Instead, coalitions of governments with interests in international rules-based orders will need to form. These coalitions will need to show due deference to issues like investment and national security, especially where attempts to bind governments by multilateral rules are likely to provoke a severe backlash from domestic constituencies.
There is no doubt that the US’s retreat from international economic governance has given the global trading system its biggest shock for decades, perhaps since the liberal order was constructed in the aftermath of the Second World War. There is also a danger, probably less immediate, that wayward policymaking in Washington means the US dollar will cease to underpin the international banking and trading systems. Hence, is it obvious that the world needs a new leader in both areas? If so, how could one emerge and operate?
In monetary affairs, the need is not pressing and the path forward for potential rivals reasonably clear, if of uncertain length. Trade is much trickier. The old game of a dominant player enforcing consensus values in the trading system, which in any case never really delivered a truly global multilateral arrangement, is very likely gone. No future government is likely to take up that role again. The big powers need to be more flexible and imaginative. They need to replace a single anchor with a set of stays to hold the global system upright, make that system more flexible, and aim to cover new areas as well as possible rather than bring them under the same set of institutions.
In the meantime, leading economies such as Japan, China and the EU need to find any way they can, however ad hoc and partial, to prevent the US from destroying institutions such as the WTO dispute settlement system. The important thing is not to preserve all organizations as they currently are. Indeed, the US assault on institutions such as the WTO has underlined their vulnerability and their need for renewal, which should include wider coverage for their rules and nimbler governance. The task of leading economies – including of future, more cooperative US administrations – is to use creativity and coalition-building. The challenge is to carry forward the principles of rules-based trading without again relying on a single country to bear an outsized part of the burden of translating them into practical governance.
‚Can the World Economy Find a New Leader?‘ – Research Paper by Alan Beattie – Chatham House / The Royal Institute of International Affairs.
The Research Paper can be downloaded here