Getting The Economics Back Into Economic Security – OpEd

The weaponisation of trade by the major powers, the return of geopolitics and a much more uncertain international environment has brought economic security policies into fashion, mostly in advanced economies.

High trade shares are now seen as a source of vulnerability and many countries are trying to diversify away from their fundamental comparative advantage and economies of scale in international markets in the name of economic security.

In the pursuit of economic security, countries and companies are self-insuring by diversifying, stockpiling, friendshoring, onshoring, hedging and introducing a raft of other costly measures. These are third-best policy responses in a second-best world that reduce our chances of reaching the first-best solution.

Economic security policies make countries poorer, but it’s not clear they make countries safer or more secure. Some governments are focused on economic resilience while they continue to implement export controls, restrict investment and retreat from global markets.

The global economy seems to be on a trajectory towards a 1930s-styleepic fail equilibrium— a generalised prisoner’s dilemma where everyone is made worse off by narrowly self-interested national decisions even if better outcomes are possible from cooperative international decisions — driven by US-China strategic competition and beggar-thy-neighbour policies brought on by uncertainty-induced policy short-sightedness in major economies.

It is a world on that trajectory because of decisions in Washington, Beijing and other capitals that of their nature are not all-embracing, and purposeful actors in the global community can alter that trajectory by deliberate policy choice.

Benign globalisation and a ‘benign international environment’ was not a lucky accident — it was created by the rules and a regime forged with a proactive diplomacy in the latter part of the Second World War and then for decades through patient diplomacy designed to deepen and entrench it.

The multilateral system created then, and subsequently extended, still diffuses economic and political power. The trade regime is still a reference point against protectionism, and the open global system with its substitute markets and alternative suppliers is what protects against market shocks, politically motivated or otherwise, including recently in Europe from the big political shock of severing of energy trade with Russia.

In this week’s lead articleShiro Armstrong argues that the ‘economic weapons that China deployed against Australia [in 2020] were deflected by [the] trade regime’, that ‘allowed Australian exporters to, first, find alternative markets and, second, ultimately seek redress through threat of international legal processes against China’. The United States has neutered the WTO’s dispute settlement system to avoid being held to account by world trade rules but Australia and China are party to a workaround of the Multi-Party Interim Appeal Arbitration Arrangement with 50 or so other WTO members that ‘provided the exit-ramp for both Australia and China from that unfortunate episode’.

The multilateral trading system, with the WTO at its core, remains fundamental to the prosperity and economic and political security of open economies.

A breakdown in confidence in the multilateral trading system would unravel economic and political ties globally — but especially in East Asia where political cooperation is still underdone and economic cooperation has been shaped significantly by the ambition for development and its corollary, international economic interdependence.

‘Trade and economic interdependence have been a cause of peace in East Asia … by design’, Armstrong argues.

The more countries like China trade with and invest in the world, the more they would lose from disruptions that war would cause. That constraint does not eliminate the prospect of war, but it makes it much more costly, particularly in the case of an economy like that of China.

The most enlightened states throughout history have understood this. Economics and security have always been entwined in the service of each other. The main elements of the global economic order today were forged in the middle of the Second World War at Bretton Woods. Economic and security challenges were tightly enmeshed in the thinking that led to its creation.

The perception that those who support a rules-based economic order are beholden to commercial interests and neglect security risks is naive.

Trade strategies in particular have historically been directed to securing peace — sometimes called the commercial peace — as in the European Project or the political rapprochement forged by economic interdependence in Northeast Asia. That equilibrium among Northeast Asian countries was generated by their all eventually signing onto the postwar rules-based trade regime that binds the major powers together despite their long-standing political disagreements and rivalry. By contrast there has been no similar economic engagement or political rapprochement between India and Pakistan in South Asia, and in some other parts of the world.

The great debates about trade and peace date back to at least the 18th century. In 1748 Montesquieu famously argued that peace is the natural effect of trade, an argument extended by John Stuart Mill a century later with evidence from throughout history. Adam Smith argued in the Wealth of Nations in 1776 that commerce between nations ought to be a source of peace but that it can in fact be ‘the most fertile source of discord and animosity’. Again, there is evidence of this throughout history and in contemporary US-China relations. What determines the relationship between trade and security is the nature of the regime within which countries engage economically.

The multilateral trade regime that separated trade policy considerations from national security and geopolitics is weakened but not dead. It has allowed the pursuit of development and prosperity through integration into the international economy, with countries signed onto the rules and norms of the regime, whether they were rivals or not.

The hopeis that countries that remain within the WTO’s compass and see a rules-based order as a central pillar of security comprise most of the rest of the world, and their share of the world economy is growing.

There’s not much collective leadership and cooperation to be found in the global community in the midst of its current polycrisis but the highly trade-exposed East Asian region, which has most to lose from a breakdown in the established international trading system, has a strong, perhaps existential, interest in getting things right in Asia. Correcting the dangerous trajectory, at least in East Asia, will go a long way to help correct the trajectory elsewhere.

• About the author: The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.
• Source: This article was published by East Asia Forum