From the dispute over the Chinese Huawei group to the recently agreed military alliance between the USA, Australia and Great Britain – a new reality is shaking the global economy: the mostly hostile takeover of the international economy by geopolitics. This process is probably just beginning, the challenge is to learn to live with it.
Of course, the economy and geopolitics were never completely separate. Economists designed the liberal-capitalist economic order of the post-war period, but on the basis of a master plan designed by foreign policy strategists. Postwar US politicians knew what they wanted: a “global environment in which the American system can survive and thrive,” as a 1950 National Security Council report said.
In their view, the prosperity of the free world was the – ultimately successful – means of containing and defeating Soviet communism. The liberal order served as a means to achieve the appropriate level of prosperity. Although the end goal of the Cold War was geopolitical, for decades international economic relations were largely determined by their own rules.
Occasionally, political decisions such as boycotts or sanctions overshadowed the economic playing field. There were also geostrategic considerations. For example, the US urged the International Monetary Fund for strong financial support for Indonesia – aid for Mexico, on the other hand, did not seem to be that important to Washington. For the most part, however, trade and exchange rate policy was based on economic criteria.
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The triumph of the financial technocrats
After the end of the Cold War in 1989/91, financial technocrats began their triumphal march. For three decades, finance ministers and central bankers thought they would rule the world. As today’s National Security Advisor to US President Joe Biden, Jake Sullivan, and Jennifer Harris noted in 2020, the governance of globalization had been entrusted to “a small community of experts.”
This, too, was based on a geopolitical goal: just as the economic success of the West had contributed to the collapse of the Soviet Union, it was now expected that China would move closer to the Western model. All in all, however, political interference was limited.
The breathtaking rise of China and growing rivalry with the United States ended that era. With the failure of the “change through trade” concept, geopolitics came to the fore again. Biden’s focus on the Chinese challenge and his decision not to dismantle the trade restrictions introduced by predecessor Donald Trump show that the US has entered a new era in which foreign policy takes precedence over the economy.
China’s political leadership regularly pays lip service to multilateralism. But there is no doubt that the Communist Party controls domestic and foreign economic relations. This is also shown by Beijing’s megaproject of the “New Silk Road”.
As Anna Gelpern of Georgetown University and her co-authors recently documented, the Chinese loan agreements for financing infrastructure projects in developing countries are opaque and subject to political conditions. They also expressly rule out debt rescheduling through multilateral procedures.
A club of highly integrated market democracies
In Europe, too, where the belief in the primacy of the economy was most firmly anchored, the weights are shifting. “The heart of the globalist project beats in Brussels,” declared right-wing populist US agitator Steve Bannon in 2018. And he is even right about that. The European Union now seems to have woken up and recognized the new reality. As early as 2019, EU Commission President Ursula von der Leyen announced that she wanted to head a “geopolitical commission”.
The question, however, is what this new geopolitical alignment actually means. For most foreign policy experts, international relations are a power game. Their models often assume that one country’s gain is another’s loss. Economists, on the other hand, are more interested in promoting the benefits of cross-border trade or joint action for all parties involved. According to their concept for international economic relations, independent actors should voluntarily come to mutually beneficial agreements.
In 2019, Kurt Campbell, who today heads Asian policy in Biden’s National Security Council, and his co-author Jake Sullivan published their plan for a “competition without disaster” between the US and China. The geopolitical competition with Beijing is in the foreground. Economic and political cooperation with China is made dependent on its “good behavior”. As a counterweight to Beijing’s autocratic regime, the authors suggest setting up a “club of highly integrated market democracies”.
After all, that would be a clear strategy – but it is unclear whether Biden’s government will orient itself towards it. The economic problems of the US middle class and the resulting protectionist tendencies are in blatant contradiction to the project of an integrated market democracy club. Overall, the specific intentions of the Biden administration are still difficult to identify. Apparently the foreign politicians have prevailed over the economists. In case of doubt, however, the domestic politicians have the upper hand – a complicated, opaque mixture.
Beijing dupes Washington
China, on the other hand, strictly refuses to separate climate cooperation from the broader American-Chinese talks. In addition, Beijing recently duped Washington by bidding to join the Trans-Pacific Partnership Trade Agreement (TPP) – a regional containment project developed by Trump’s predecessor Barack Obama, which Trump then opted out of. Instead of being isolated, China is now trying to outmaneuver the US.
The European Union now appears to be making progress in defining its geopolitical position. The EU continues to rely on global rules and wants to convince its partners to enforce them. But she is now apparently ready to fill her new catchphrase of “strategic autonomy” with content: “Work with others wherever we can and act autonomously where we have to”, was how EU Trade Representative Sabine Weyand outlined the concept. In a world that is increasingly shaped by geopolitics, this could well become the credo of the European confederation.
The author: Jean Pisani-Ferry is a Senior Fellow at the Brussels think tank Bruegel. The economics professor holds the Tommaso Padoa Schioppa Chair at the European University Institute.
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