By Frances Coppola
Perhaps they are falling victim to what the economist Dani Rodrik calls the “trilemma” of globalization.
“I have an ‘impossibility theorem’ for the global economy,” he has said. “It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full.”1
Over the last three decades, there has been a strong push for global economic integration. The World Trade Organisation’s (WTO) rules created a solid foundation for the lowering of barriers to international trade,2 while the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) produced landmark agreements on everything from intellectual property (IP) and agriculture to environmental and health regulation.3 International trade in services, which is dependent on common standards, IP protection and harmonization of regulation, particularly benefited from the Uruguay Round.
Developments in payment systems supported the intensification of international trade. Technological improvements such as the introduction of central bank real-time gross settlement systems removed much of the risk from international payments, while deeper and more liquid foreign exchange markets made it easier to handle multiple currencies.
In Europe, the drive to make international trade easier led to the creation of the Euro. The Association of Southeast Asian Nations (ASEAN) trading bloc has also discussed a common currency. There has been talk of creating a modern version of the 19th century gold standard, in which all international trade is settled in a single global currency, perhaps based on the International Monetary Fund’s Special Drawing Right (IMF’s SDR) or a digital currency such as Bitcoin.4
For a while, it seemed that democratic structures might adapt to the dominance of international trade, aligning wider-ranging authority within trading blocs such as the European Union (EU) or ASEAN. Trade agreements enabled supranational arbitration to override national law,5 while moves toward further integration in the Eurozone appeared to presage the creation of a federal Europe.6
Together, these developments ushered in a “golden age” of international trade. Some people began to dream of a world with no nation states – an international trade Utopia in which people, money and goods could move freely around the world without obstacle.7
In the aftermath of the 2008 financial crisis, cracks started to appear in the international trade edifice. The Doha Round of international trade negotiations at the WTO, started in 2001, foundered on lack of agreement among the United States and the BRICS nations (Brazil, Russia, India, China and South Africa). National interests prevented the creation of even a single international trade agreement. Utopia receded into the dim distance.8
Initially, the inability of the Doha Round to achieve global agreement gave impetus to a series of regional trade negotiations. TPP between the US and a number of Asian nations;9 the Regional Comprehensive Economic Partnership (RCEP) between ASEAN, Australia, China, India, Japan, and New Zealand;10 the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US;11 the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU12 – all of these took flight as Doha stagnated.
But these, too, appear to have faltered eventually. One after another, they’ve all been effected by the resurgence of national sovereignty.
The first casualty was TTIP. The TTIP negotiations were always going to be protracted and difficult, because of the need to get 28 EU countries to agree. But TTIP proved unexpectedly controversial. There was widespread opposition to allowing US firms to offer services that might compete with existing public services, notably in healthcare: there was concern that EU standards might be watered down to meet looser US standards: and there was anger that local laws would be superseded by an international arbitration agreement, which could in theory allow a multinational to sue an entire country. In May 2016, France threatened to veto the deal unless there were comprehensive changes, which were unlikely to be acceptable to the US.13 Germany’s vice chancellor, Sigmar Gabriel, declared that the talks “had failed.”14
There was similar opposition to CETA, both in Canada and the EU. But after seven years of negotiations, it appeared to have been agreed – until the European Commission, stung by accusations that it was “undemocratic,” decided that the parliaments of all EU member states must ratify the deal. This is likely to take years, if it succeeds at all.15
Now, the current US president’s flagship TTP is in danger. It has been widely criticized on similar grounds to TTIP and CETA, and both candidates to succeed him in office have now indicated that they would not go ahead with the deal in its present form.16
Failure of TTP could, in the eyes of some, leave the way clear for China to take over from the US as the driver of international trade.17 If RCEP succeeds, there could indeed be a powerful Australasian trading block centered on China. But RCEP also faces headwinds: in June 2016, attempts by China, India and Korea to maintain their existing three-tier “preferred trading nations” structure almost brought the negotiations to an untimely end.18
The economist Branko Milanovic shows that, in the last 30 years, globalization has helped lift millions of people out of poverty – a fall in global income inequality not seen since the early 19th century.19 But those whose jobs have been offshored and whose wages have stagnated don’t see the global benefit. Now, trade agreements like TPP hang in the balance of this debate.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.