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Economic policy in many countries has entered a new era of supports and subsidies. But global financial markets have yet to catch up.
Consider some of the headlines over the past week or so. At the IMF/World Bank meetings in Washington, the so-called Bretton Woods institutions came under siege as leaders from the global south decried the hypocrisy of rich-country creditors demanding austerity from borrowers while running up huge debt loads of their own.
In Brussels, former European Central Bank president Mario Draghi gave a speech advocating EU-wide industrial policy. Across the Atlantic, the Biden administration has called for a tripling of tariffs on China and took up labour unions’ petition for shipbuilding trade relief to counter Chinese state support for its own industry.
Yet, at the same time, cross-border business continued as usual. German chancellor Olaf Scholz led a group of industrial leaders on a trip to Beijing with the aim of doing joint ventures in China. And US commerce secretary Gina Raimondo helped Microsoft, a would-be American “national champion,” ink a $1.5bn artificial intelligence investment in the United Arab Emirates.
The best way to bridge the gap between these headlines is to understand that even as the fiscal policy of rich countries is changing to support the long-term process of re-industrialisation and climate transition at home, global financial markets are still decidedly focused on maximising short-term private sector profit. The tussle between the two will continue until a new equilibrium emerges.
In Europe, the fiscal is pushing back against the financial. “We pursued a deliberate strategy of trying to lower wage costs relative to each other,” said Draghi, referring to Europe’s post-2008 strategy of belt-tightening in lieu of investment. “The net effect”, he went on, “was only to weaken our own domestic demand and undermine our social model.” Now, the EU is trying desperately to bridge the gap with a new capital markets union.
Meanwhile, the White House has doubled down on the idea that free trade simply doesn’t account for the cost of negative externalities like climate change. Last week, John Podesta, President Joe Biden’s senior adviser on clean energy, said in a speech: “When you seriously account for the emissions embodied inside tradable goods . . . the emissions from the production processes that create the commodities and manufactured products that we buy and sell on the global market . . . then traded goods account for about 25 per cent of all global emissions.”
By that accounting, free trade itself is the second largest carbon polluter after China. That’s because the current global trade and financial framework still incentivises what’s cheapest for companies and most profitable for shareholders, not what’s best for the planet.
As Podesta noted, the US used to be the world’s largest aluminium producer. Now, half the world’s aluminium comes from China, but with 60 per cent more emissions. Indeed, the emissions that the Inflation Reduction Act hopes to cut by 2030 are equal only to what the US imported in heavy-carbon-load manufactured goods in 2019.
In an attempt to square this circle, the White House has announced a new climate and trade task force that will build on US Trade Representative Katherine Tai’s idea for a “postcolonial” trade system that prices in carbon load and labour standards. Such a system might, for example, offer technology transfers to developing countries in exchange for key commodities.
But global financial institutions will have to change too if there is to be a real shift to a better system. At an Oxfam panel in Washington last week, Adriana Abdenur, special economic adviser to Brazilian president Luiz Inácio Lula da Silva, called out the “mismatch” between “rich countries and regions now openly espousing and defending industrial policy” while “still pushing the international financial institutions to impose an outdated prescription of Washington Consensus”.
The White House knows the global south has a point. Last week, US deputy national security adviser for international economics Daleep Singh called for more use of America’s sovereign loan guarantee authority to lower interest rates on developing countries.
But he also floated several ideas aimed at boosting investment into the US that seemed right out of the pages of a developing country industrial strategy playbook. These included a “strategic resilience fund” to secure clean energy supply chains, and even a US sovereign wealth fund to make long-term investments in strategic technologies.
All this tells us that we are at a major pivot point, and that no country has all the answers. Many stakeholders, though, want to cling to the past, even as the future is changing. I marvel, for example, at the wilful blindness of German automakers signing a joint declaration to work on connected vehicles with China, even though Europe is likely to place restrictions on Chinese EVs in Europe. Likewise, I worry that America’s push to counter Chinese AI will lead to a handful of US tech giants having even more market power than they do already.
The shift to a new economic paradigm has begun. Where it will end is very much up for grabs.
rana.foroohar@ft.com
