Global Transformation: The Eurasian Open Economic Space

30 june 2013

Why the TTIP Could be the Tipping Point of De-Globalization

Jean-Pierre Lehmann is Emeritus Professor, IMD, and Founder of the Evian Group, Lausanne, Switzerland.

Resume: The profound transformations occurring in the global economy are inevitably causing disruption, confusion and tensions. The proposal for the establishment of a Transatlantic Trade and Investment Partnership between the U.S. and the EU might seriously exacerbate the situation and lead to the establishment of rival economic blocs.

The profound transformations occurring in the global economy are inevitably causing disruption, confusion and tensions. The proposal for the establishment of a Transatlantic Trade and Investment Partnership (TTIP) between the U.S. and the EU might seriously exacerbate the situation and lead to the establishment of rival economic blocs. Notwithstanding the growing clout of the major new trading powers, there have been no visions or plans for building a new world order. In fact “disorder” would be a more appropriate word to describe the current global economic and institutional environment. Today globalization is in a state of chaotic transition to uncertainty. In this confused turbulence, Russia may have a constructive, innovative and visionary role to play.

GLOBAL TRANSFORMATIONS

The problem with the TTIP is not so much that it is a bad idea (in fact, in some respects it is a good idea), but that it is untimely and potentially catastrophic. Globalization is a fragile process, frequently stalled and occasionally reversed; and as things currently stand it is especially vulnerable. The current phase of globalization started in the early 1990s as an impact of the reforms in China launched by Deng Xiaoping in the late 1970s and the market oriented policies subsequently undertaken by many, albeit to varying degrees of intensity, in the early 1990s.

The scale of the global market can be gauged from the number of WTO member-states. In 1990 (when it was still the GATT), their number stood at 90; today it has 159 members – and another 26 countries are negotiating accession. The scale of the ongoing global transformation is much larger, though. There is a profound shift occurring in the global balance of economic power. The global economy is no longer dominated by the West as new economic associations emerge. This is especially noticeable with the BRICS, as Brazil, Russia, India, China and South Africa have been expanding their global reach.

Economic power ultimately implies geopolitical power. What is happening is fascinating, but also potentially explosive.

The emerging global economic powers are challenging the established global economic powers on many fronts. Although in principle and indeed in reality a considerable majority of the world’s citizens benefit from a more open global market economy, this is not always the perception, especially considering the speed and scope with which the new economic powers – China in particular – have arisen. So the global economy is becoming not only multi-polar, but also multi-speed.

In principle, there is no inherent conflict between an increasingly multi-polar world and a multilateral world order. Indeed that should be the preferred goal. In reality, however, the world is being challenged by conflicting forces – greater and deeper globalization, on the one hand, and greater fragmentation along national and regional lines, on the other hand. The TTIP is in the latter category: it is an attempt by the “old” powers to impede the rise of the “new” powers by creating what is perceived as amounting to a bloc that will aim to retain the levers of global power and set the rules. While this may not be the intention – though I, for one, suspect it is – it certainly is the impression. And impressions at the time of heightened tensions, suspicions and concerns over the present state and perspectives of the global economy count a lot.

Furthermore, there is a risk that the new powers may seek to generate and promote their own blocs through various groups and institutions, or quasi-institutions (such as the BRICS). This, no doubt, will result in a de-globalized fragmented and hence conflict-prone world. Russia’s interests and indeed those of the world would be best served by renovating and strengthening the multilateral regime and by providing visions for a new order in lieu of the current disorder.

To better understand what we may confront with, it is useful to look back on the history of globalization.

GLOBALIZATION’S DYNAMICS

Globalization is a recurring historical phenomenon. As brilliantly described by Nayan Chanda, it is a process driven by four main actors: traders, preachers, warriors and adventurers, with some more prominent at times than others. Traders seek markets and profits, preachers wish to save souls and increase the number of their followers to extend their global influence, warriors fight for glory and the conquest of territory, and adventurers are motivated by curiosity for new discoveries. Arguably, the most remarkable illustration of the concerted action of the four actors resulting in a truly huge informal empire was that of the Arabs. Following the death of the Prophet Mohammed and the compilation of the Koran in the 7th century, by the beginning of the 15th century it encompassed most of the Eurasian continent, extending as far as Indonesia, as well as northern and coastal Africa. Warriors, traders and preachers conquered territories, profits and souls, while scholars (the explorers) discovered new cultural and intellectual territories. Trade was especially prized. Tunisian historiographer and philosopher Ibn Khaldun noted in the 14th century: “Through foreign trade, people’s satisfaction, merchants’ profits and countries’ wealth are all increased.” The Silk Road and the Spice Route, both extending across the extremes of the Eurasian continent, richly illustrate this observation.

Globalization, therefore, is a major force of history and, basically (with some caveats), of progress. It contributed to the enrichment of civilizations and the spread of knowledge. In the 14th century, Samarkand was a veritable economic and cultural hub. A recent study of the Silk Road by Valerie Hansen stresses its importance in terms of the transmission of knowledge, languages, literature, art, science and technology.

Most of world history has seen not one dominant hegemon but rather a multi-polarity of occasionally competing and often co-existing empires. The exceptions were few: the Mongol Empire, which at its pinnacle in the 13th and 14th centuries represented the biggest contiguous land empire, and China, which by the early 15th century was looming as a formidable maritime empire. In a series of voyages the fleet of Admiral Zheng traversed the East and South China Seas, went up the Bay of Bengal, down the Indian Ocean to Ceylon, then across north to the Arabian Sea, up the Red Sea, then down across the Horn of Africa, to Mogadishu and Mombasa. These exploits were truly remarkable. Equally remarkable, however, was Emperor Xuande’s decision to terminate the voyages and prohibit any further maritime expansion. Had there been trend-watching think tanks in the early 15th century, they would surely forecast that China was on its way to becoming the dominant global power. Xuande’s decision constitutes as profound a break in history as the world is experiencing today.

In the course of the late 15th and early 16th centuries, the balance of global economic, military, political and cultural power began its ineluctable shift to the West. While huge China in the East looked inward, tiny Portugal in the West embarked on the path towards a remarkable seaborne empire, followed over time by Spain, the Netherlands, Britain and France. The five maritime powers extended their empires to the East and across Asia, and to Africa, yet most critical in terms of global dominance was their colonization of the New World, the Americas. Whereas throughout the first half of the second millennium the European nations had been minor and somewhat peripheral actors in globalization, in the second half of the millennium they became the dominant actors. Indeed by the 19th century Europe came to rule the world from the Americas, across Africa, Asia and down to Australia. Also, by the end of the 19th century, the United States joined the European nations as an imperial power.

This half-millennial phase of globalization brought great power and riches to Europe, but it also gradually despoiled the rest of the world. The slave trade had a particularly brutal deadly effect. Whereas in 1750 the population of Africa was estimated at 13.5% of the world’s population, by 1900 it had decreased to 8%. At the beginning of the 19th century China’s and India’s economies accounted, respectively, for 33% and 24% of global output, respectively; by 1950 they declined to 4% and 3%. Nayan Chanda’s four actors – traders, preachers, warriors and explorers – cooperated closely in the expansion of Europe-driven globalization. The idyll of the benefits of trade described by Ibn Khaldun in the 14th century would certainly not correspond to the perception of the alleged benefits of trade by non-Europeans in the 19th century. Whether because of the slave trade in Africa or the opium trade in China, globalization and exploitation became synonymous. Globalization led to wars, colonization and myriad forms of brutality. Regulating these abuses proved daunting. Those seeking an end to the slave trade, for example, faced huge resistance, including from the Church of England whose coffers were well replenished by the slave-labor plantations they owned in the Caribbean.

By 1900 it seemed indeed “obvious” that Europeans, or at least rich European, should feel that the Western dominance was the “natural” order of things and that they should rule the world. This was brilliantly illustrated by John Maynard Keynes’ famous description of what globalization meant on the eve of World War I: “The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality... But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement.”

At the beginning of the 20th century, though the warriors, preachers and explorers were still there, the most prominent actors of globalization were the traders, above all money traders, bankers and financiers. Thus power was extended mainly through finance and investments. One example was the “re-colonization” of Latin America in the second half of the 19th century (most of Latin America had obtained political sovereignty in a series of wars of independence fought against Spain and Portugal in the early 19th century). This was done not through outright political control, but through financial manipulation. The trend was described by Sir Norman Angell in his famous book The Great Illusion published in 1910: “International finance is now so interdependent and tied to trade and industry that political and military power can in reality do nothing.”

Four years later Europe erupted into war and globalization was brutally reversed, only to be resuscitated some eight decades later. The process of de-globalization, especially during the period between 1914 and 1950, brought about unprecedented misery and deprivation to the entire planet. Europe was clearly engaged in a spiral of violent decline, while in the interwar period the United States basically sought to stay aloof from the fray. Its refusal to join the League of Nations set the irrevocable stamp of failure on this institution.

It is important to remember this point when we assess the evolution of global trade in the context of the WTO and the TTIP. Following the disastrous WTO ministerial meeting in Seattle in 1999 the then Director General Mike Moore expressed the fear that the WTO might become a “League of Nations of the 21st century world economy.” The fact that the U.S. seems to be abandoning the WTO in pursuit of its own agenda ominously seems to confirm Moore’s dire prediction.

In the wake of WWII, however, it was the United States that established what turned out to be a quite robust and highly successful global institutional framework that ultimately provided the basis for the post-war world’s remarkable economic growth and transformation.

THE ATLANTIC CHARTER AND ITS SEQUEL

On August 9, 1941, British Prime Minister Winston Churchill and American President Franklin Delano Roosevelt met for the first time in Placentia Bay, Newfoundland, Canada, aboard the USS Atlanta. The meeting resulted in a most remarkable document that was entitled The Atlantic Charter. It is brilliant in its vision and succinctness. It contains eight key points that were meant to encapsulate the goals for the world once the war ended. Most relevant to the topic discussed herein is the fourth point by which they committed their respective countries to “endeavor, with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity.”

In addition to the principle on trade elaborated in the Atlantic Charter, Roosevelt’s Secretary of State and Nobel Peace Prize winner, Cordell Hull, wrote back in the 1930s: “Enduring peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in international trade.” Regarding post-war trade cooperation, Hull argued that “a revival of world trade [is] an essential element in the maintenance of world peace. By this I do not mean, of course, that flourishing international commerce is of itself a guaranty of peaceful international relations. But I do mean that without prosperous trade among nations any foundation for enduring peace becomes precarious and is ultimately destroyed.”

It was in this spirit that the architects of the post-war international economic order set about establishing the rules and institutions for international trade. The objective was to put the multilateral rules-based trade regime in an institutional framework, which came to be known as the ITO (International Trade Organization). A problem arose that fairly quickly metamorphosed into a paradigm for the trade regime. While the U.S. executive favored the establishment of the ITO, it was eventually opposed by Congress. (It should be noted that in the preceding decades, the U.S. had been highly protectionist.)

While the common American myth is that the U.S. has been the champion of free trade, this is both true and untrue. It is true in the sense that it was part of the U.S. policy agenda and pursued quite vigorously at times, but also resisted at others; a schizophrenic visceral protectionist instinct remains part of the American political DNA. This is seen in the fact that while American presidents of either party, Democrat or Republican, have generally sought to push forward the open trade agenda, more often than not it has been resisted by Congress. This is why it was so vital for the U.S. presidents to secure what was initially, when first enacted in 1974, known as “fast-track trade authority” and since 2002, as “Trade-Promotion Authority” (TPA). The rule bound Congress to either approve or disapprove proposed trade legislation and denied it the right to propose amendments. TPA expired in the summer of 2007 during the second term of George W Bush and has not been revived since. In light of the current highly polarized positions between the Obama administration and Congress, prospects of restoring TPA are nil.

In the face of defeat over the ITO, however, the policymakers snatched a compromise by establishing the General Agreement for Tariffs and Trade (GATT). The GATT set principles and enacted rules, but the latter were not enforceable. In other words, the main difference between what would have been the ITO and the GATT was that the latter had no binding legal authority, only moral suasion. The GATT’s main function was to act as a negotiating body for liberalizing trade between its members. To that end a series of “rounds” were launched. The last GATT Round, which lasted seven years, was the Uruguay Round (1986-1993), following which, in 1995, the concept of the ITO was resuscitated to be reincarnated as the WTO. The core principles of the GATT/WTO include the imperative of transparency and predictability in individual members’ trade regimes and that of non-discrimination among its members: there must be no preferential or discriminatory trade policy by one member in respect to others.

The spirit and letter of the GATT rules and principles were more often than not violated by its members. In the 1980s, for example, the U.S. and the EU used all sorts of measures to discriminate against Japanese exports, especially of automobiles and electronics. France, for one, set a 3-percent market share imposition on Japanese imported automobiles. This measure went against the two core principles, but it also contravened the rules that the very name of this institution implied: countries could set tariffs, but not quotas. Another flagrant illustration of the violation of the GATT principles was the Multi-Fiber Trade Agreement (MFA), which sought to protect – also through quotas – Western textile and garment industries against the rising competitiveness of the newly industrializing economies of Hong Kong, Singapore, South Korea and Taiwan. (The MFA was finally lifted in 2005.)

Still, imperfections notwithstanding, the principles of the Atlantic Charter prevailed in the end, generating considerable peace and prosperity. The “victory” of the GATT culminated with the conclusion of the Cold War. Since the barriers to trade of many states of the former “Second” and “Third” Worlds have been dramatically reduced and many of them have become member-states of the WTO, the story could have a happy ending, but…

IN A STATE OF CONFUSION

Yet, as we all know, we are far from a happy ending. Trade tensions have been acute. The fears that the global financial crisis of 2008 would unleash a massive protectionist backlash have not materialized, but there is no room for complacency, as The Global Trade Alert regularly reminds us. The fact that the Doha Round, launched in 2001, has been stalled and many argue is in fact dead, and that there has been a veritable plethoric proliferation of PTAs (preferential trade agreements) – in lieu of advancing on the multilateral agenda – demonstrates that the global multilateral rules-based trade regime is now facing the risk of destruction.

The multiplicity of new actors causes confusion. But most critical is the abandonment of the system by the United States. To quote Mike Moore, “what the pre-WWII League of Nations and the WTO have in common is the absence of the U.S.” Importantly, it is not the absence of American leadership, but its absence as a participant that matters: the U.S. demonstrates by its aloof attitude a lack of commitment to and lack of faith in the WTO.

The Bush and Obama administrations have also flagrantly violated the credo of Cordell Hull as they kept politicizing trade policy and making it an additional weapon of the U.S. foreign policy arsenal. For example, in addition to the TTIP, aimed, as argued, to build a “Western/Atlantic bloc” in the face of the growing Eastern and Pacific economic powers, Washington has been pushing hard for the establishment of the Trans-Pacific Partnership (TPP). The current members of the TPP are: Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The recently elected Prime Minister of Japan, Shinzo Abe, has indicated Tokyo would join the negotiations, although this does not imply that it will necessarily accede to membership. To date South Korea, the third biggest economic power in the region, has refused to join the TPP. And, of course, China is missing. The push for the TPP is also occurring at a time when the U.S. has announced its geostrategic “pivot” to Asia, thus bringing a security/military dimension to the economic policy goals. Naturally, U.S. efforts are perceived by Beijing as a Cold-War ploy to “contain” China.

To paraphrase the English saying, if the TTIP and the TPP are the answer, how stupid was the question? That the institutional and legal structure of the global multilateral trade regime is in bad need of repair has been obvious – the world has changed immeasurably in the last two decades. While the blame for the failure of the Doha Round can be pinned on various bodies (notably the U.S.), the fact that it has failed is neither surprising nor tragic – after all, failures can have positive effects. The worst thing about it is to go on pretending that the structure is still there. To add to the farcical condition of the WTO, it is currently undergoing considerable physical construction – in the absence of any intellectual reconstruction and separate and parallel structures being built on the basis of preferential agreements. The outcome is easy to predict: it will make for a more divided world.

While among the established powers, the U.S. has been actively undermining the multilateral regime, the other two main actors, the EU and Japan, have played very minor roles. Japan’s economic doldrums have resulted in a vacuity in policy thinking, while the EU, though instinctively ideologically committed to multilateralism, has opted instead to play the PTA game: if you can’t beat them, join them.

While the “old” powers have forsaken the multilateral regime, the emerging economic powers have so far provided no meaningful alternatives and have brought very little to the table. While expanding the G8 to the G20 is basically a good idea, “the emerging member-states” – Argentina, Brazil, Mexico, South Africa, Saudi Arabia, Indonesia, Korea, China, Russia and Turkey – have neither collectively nor individually taken any policy initiatives nor generated new ideas. Four countries – Brazil, Mexico, Indonesia and Korea – have nominated candidates to succeed Pascal Lamy as WTO Director General, and it is likely that one of them will win. That would be a positive result, yet two questions remain: 1) Will the new DG be able to motivate collective thought and action on behalf of the emerging member states in formulating innovative policies? and 2) Will the new DG will be able to exercise any authority – or indeed even be listened to – in Washington and Brussels?

WHAT ROLE FOR RUSSIA?

It has become increasingly clear that the global trade train is off the tracks and that at some stage it will crash. And it may no longer be possible – or indeed desirable – to put it back on the existing tracks. The no-change scenario is not sustainable; there is an imperative for new tracks.

Russia could be in a pivotal global position to lay the new tracks. It is a prominent member of all the major global institutions, as well as a major industrial, geopolitical and cultural power. It is also an “Arctic power” – at a time when the significance of the Arctic region for resolving the planets’ vital issues is incessantly growing. In addition, Russia is a member of a number of regional and inter-regional organizations, including APEC, the BRICS and the Shanghai Cooperation Organization (SCO). Russia has also established a Customs Union with Belarus and Kazakhstan, which together account for 1/6 of the earth’s surface. Russia is a major geographic power stretching across Europe and Asia, hence ideally placed to be a “bridge” across the Eurasian continent.

Globalization is somewhat of a misnomer for the idea that all nations are integrated into the global market economy and global community. In fact, there are three broad categories of nations: those which are at the core of globalization, including the established and the emerging powers; those integrated, but somewhat marginal; and those excluded. Countries in East and Central Asia, West and Central Europe, North, Central and South America, and increasingly Sub-Saharan Africa, which are globally integrated and inter-dependent, are stable, by and large. The third category nations tend to be marked not only by economic exclusion, but also by political and geopolitical instability. This category includes countries of Central and West Asia with which Russia shares common borders and/or has had traditionally close relations. These are also countries with which another major Eurasian power, Turkey, has common frontiers and traditional close relations.

It seems that a really major initiative that Russia could take would be to lay out a vision – and eventually a plan – to create an open Eurasian Economic Space that would stretch from South Korea in East Asia to Ireland in Western Europe, encompassing the southern, central and western parts of Asia. The space should also extend to include the Arctic. The plan should be clearly to create an open space, not a preferential discriminatory area as envisaged in the TTIP and the TTP. In the face of the de-globalization trends such an initiative could have a very strong effect in rebooting globalization and bringing it onto a new level. The drivers of this major initiative would be the Asian and Eurasian members of the G20: China, Japan, Korea, Indonesia, Russia, and Turkey. The idea should be to revive the APEC concept of “open regionalism” that would provide new and potentially immense opportunities to other members, rather than suspects and fears of their exclusion from global integration. Such initiatives may also have the effect of bringing the U.S. back to Geneva and recognizing by the world powers of the imperative of a solid and genuine multilateral rules-based framework to manage global transformations and coordinate developments. 

The forthcoming G20 summit to be held in St. Petersburg on September 5-6 this year could be a good occasion for promoting the idea and drafting a Pacific-Atlantic Charter that would set out principles and visions of global integration amid the new realities – the way the Atlantic Charter did in 1941 to serve the planet’s peace and prosperity in the subsequent decades.

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