16th October 2018
Together with Jean Pisani-Ferry, I visited New York and Washington DC during the week starting 17th September to present and discuss the Transformation of Global Governance project of the European University Institute with policy-makers, think tanks and academics. This blog summarizes the main “takes” from the visit. I am grateful for discussions at among others the Council of Foreign Relations, SIPA at Columbia University, the Brookings Institution, the Peterson Institute, the World Bank and the IMF. Needless to say, the reflections below do not engage any specific institution or individual.
The general mood – between reflection and depression. Is it even possible to discuss retooling global governance during the Trump era? Should one not instead wait “for this to pass”? With a US administration openly hostile to multilateral rules and institutions and favouring instead a transactional approach to global issues, this was a legitimate concern. Many of our interlocutors have had a long and distinguished career addressing exactly such issues; they are understandably frustrated and dispirited, and often confused on the strategy of the administration.
Some scholars note that Trump’s stance in some way echoes Nixon’s trade policy: in the early 1970s also the US adopted a very unilateral stance, before moving towards rebuilding an international regime based on flexible exchange rates.
While however it is hard to see any new global governance initiatives in the current environment, the issues are too pressing to ignore or postpone. Preparing for a post-Trump world is critical; and even more as some aspects of Trumpism may outlive Trump; furthermore, critical parameters of the stance of the current US administration are also shared in other countries, and they need to be identified. They will linger on; so one needs to prepare for a new multilateralism for the post-multilateralism era.
The geopolitics – can one circumvent the US? This begs the question: can the US be circumvented? Can there be an “alternate global governance system” without the US? Should the EU push for it? Our US interlocutors were categorical: this cannot be. The US was instrumental in pushing for European integration after WW2; nothing has ever worked without US support. The US was the main driver of the post-war international system, acting as a (mostly benevolent) hegemon, with a quid-pro-quo attached.
Today the hegemon is smaller and less willing to engage; it internalizes less the benefits of cooperation. The trend is irreversible. But the EU does not seem to be capable of carrying this mantle; in fact to many US observers it has lost its chance after the crisis to repair itself. And crucially, the US with its global reach can always frustrate efforts to circumvent any EU-led coalition ewhich excludes the US, as it is currently doing by flexing its extra-territorial muscle to block those that want to stay in the Iran agreement.
The geopolitics – what does China want? With hostility to multilateralism from the US, and the EU dealing with its own problems, attention turns to China. But its aims and ambitions remain a riddle. Does it have a view on global governance? Is there a “dash for domination” as a response to US abdication? To some, China simply wants to be respected with no more engagement than that. In recent years it has confounded those that believed it would become more “like us”; it is currently preoccupied by domestic politics and consolidating its unique state capitalist system.
At the same time, it seems to be weary of making commitments to global governance rules, despite willingness to work on WTO reform. This could be because while until now the dominant western attitude was to ensure China works within the multilateral system (“keep them in the tent”), it is now facing a US administration that to some is simply intent on stopping China’ ascent and bringing supply chains back to US. This raises medium-term stability questions as China may also be suffering from “overreach”, with dwindling foreign reserves and discord on its hard/soft response to the US as well as internal opposition to “grand designs” such as the Belt and Road Initiative.
Trade as a non-zero-sum game. At the root of the current quasi-trade war between the US and the rest of the world is a view of trade as a zero sum game, or that trade imbalances are bad per se. While this view is not widely shared outside the White House, many Democrats and Republicans do share the criticism of China not playing by the rules or more broadly worry about China’s growing world stature, though stopping short of agreeing with tariffs. And many subscribe to the belief that in the short-run the size of the US may help it secure concessions from trade partners, even if they believe that the long-run impact of a trade war cannot be positive for any of those concerned.
In the US policy community, it is not clear that the president actually wants an agreement with China; in turn that makes thinking of the next moves in the tariff war difficult. Even more so the discussion on the bigger question of the future of the WTO and of trade agreements. The US subscribes to WTO reform, but without addressing the thorny issue of the appellate body. China in turn wants to redefine the way WTO classifies countries. The challenge remains on how to protect a cooperation of the willing and even to bring the unwilling into the trade system. A way forward could be plurilateral solutions involving club arrangements, which are however based on WTO rules and principles.
The new global finance playing field. Global finance is effectively a US system because of the role of the US dollar as the number one international currency. Unlike in trade however, our interlocutors did not see much disruption coming form the US in this field; the small adjustments made to Dodd-Franck were cited as evidence of that. There are nevertheless concerns that the Federal Reserve would no longer be able to provide global liquidity through swap lines as it did during the crisis (an issue so controversial that it never reached the G20 for discussion). Backlash from Congress is a risk, as seen recently in discussions to withdraw the US from the Basel III framework, go after the Swift system, or the US reticence to FSB. If the US did indeed pull back, this would undermine the dollar as global reserve currency.
China’s growing role in the global financial system is increasingly an issue of policy debate; this concern goes to the extent of believing it could actually create a parallel payments system. Perversely, US sanctions act as an accelerator – they incentivize countries to move away from the dollar.
As China’s reach becomes wider and its financing across the globe more important, so is its refusal to be part of the Paris Club; it prefers bilateral/transactional solutions. This stance undermines the multilateral system put in place over the years to deal with sovereign debt overhangs in low-income and middle-income countries. However, despite its large reserves, China cannot bail-out all of Africa by itself; where it is the biggest creditor and there are difficulties, it increasingly needs a cooperative solution, having to rely on the IMF and multilateral rules.
When it comes to the multilateral institutions governing banking and finance, the discussion centres around a combination of geopolitical power play and reform to help avoid new systemic risks going forward, in an environment of fragmented markets that will react differently in a crisis. The US administration seems to be supportive of the IMF crisis management role, though not of IMF programs for developed countries. The increasing importance of regional financing institutions was highlighted, and the IMF role in leveraging these resources may be a way to square the circle between Bretton Woods global institutions and the current multipolar reality.
A major concern in the new regulatory environment taking shape in the financial sector is the disruption from digital; in banking as elsewhere we seem to draw neat boxes but the world has moved beyond them – the very concept of what is a bank is in question today. Both banking CEOs and regulators are extremely concerned about technology, cyber and global financial stability issues; and many are concerned that the battle of regulating around fintech is being lost.
It’s all about digital. Of all the global governance issues, dealing with digital presents most challenges; the internet seems to be the policy area where governments are most behind. Cyber; privacy; liability and censorship; consumer protection; taxation and e-commerce; and IPRs are some of the issues being discussed in a multi-stakeholder policy environment that is being rapidly transformed. The UN is attempting to revive an “arms-control-type” multilateral approach in internet governance; and urgent issues around security such as norms on cyber conflict are being hammered out by “cyber diplomats” in international fora of government experts where the tension between international law and sovereignty is most apparent.
“Core infrastructure” (common critical infrastructure) is understood to require shared norms which parallels those in health and a WHO-type response. But a specific crisis response and governance more broadly are different issues; while for the former there is some agreement on the need for coordination, for the latter there are distinct views, often grounded on differing underlying values. Privacy is a case in point; regulating around privacy concerns is fragmented, with an increasing (and surprising to some) concern about privacy in countries such as China and India. At the same time, there is the possibility of a regulation such as the European GDPR becoming a de facto standard in a world dominated by global digital companies. In view of the prevalence of the Internet of Things, calls of an international convention on data privacy abound and complement attempts to tackle security issues and address standards.
Climate: to Paris and beyond. With the US pulling out of the Paris agreement, it seems to some of our interlocutors highly ironic that China is currently a better global citizen on climate than the US. Some believe the US pulling out is effectively a symbolic move, pandering to a domestic constituency; initiatives at the local and state level could effectively keep the US in. More generally, the Paris agreement shows that the international system is good on coordination; not on enforcing. Unlike Kyoto, Paris has no pretense on enforcement. And yet, a combination of public opinion and reputation for countries seems to push it forward, as well as dynamic effects built around the “tipping effect” of clean technologies. But the Paris agreement was infused with a significance it practically did not have; expert review and surveillance are needed to move it forward; and in the latter case, the IMF could have a role.
In climate issues, what is required is regulation that signals a change in direction; it was clear to many of our interlocutors that threats of regulation can and do move the private sector. Examples abound: investment in electric cars as a result of credible regulatory precommitment to cleaner cars; or in the case of oil pollution in the oceans, where changing technical regulations (split halls for oil and ballast in tankers) helped address the problem. Switching standards (as in double-hulled ships) helps more than trying to come to binding agreements.
Figuring out the new framework. As far as the Transformation of Global Governance project itself is concerned, our US interlocutors had a number of interesting comments on its shape and direction, as well as the substance of the questions addressed. They believed that despite the difficulty of articulating a global governance reform agenda in the current US policy environment, coming up with principles and a direction would be useful. But the focus should be more on the intellectual contribution, rather than on influencing politics; more on analysis, and less on prescription.
The starting point of the analysis needs to be the motivating questions in a new global environment characterised by skepticism that the current global order and international institutions do indeed work for the benefit of all. While we tend to see international institutions as taming the forces of globalization, most people see them as promoting and not moderating it. This general erosion of belief in institutions exists despite the fact that multilateralism has in fact delivered; but the distance from WWII grows and there is no longer a sense of an external threat. Not all is lost however; we need to remember that we have been here before (after the collapse of Bretton Woods), and also focus on what works and what not in multilateral action.
To motivate the project, the emphasis should be put on problems that do not have nationalist roadblocks and to pay attention to qualitative differences between different areas. In taxation for example, all countries have an incentive to fix governance. Climate is a pure public good, as are pandemics. But climate change moves slowly; that makes it hard as a governance issue (there is no expediency). Similarly, in technology, regulating at a national level is not possible; global rules are a necessity. Trade wars on the other had are more complicated, with more of a zero-sum game mentality surrounding them. And financial stability is also different; you can disagree on what makes a system stable or unstable; even more on what to do to avoid a new global systemic crisis.
In general, there is a better chance of coordination in areas where there is urgency; sometimes events push nations to work together only in extremis. In the absence of a crisis, it is crucial to define a problem so clearly that everyone wants to address it. In that sense, it is often more effective to talk about common objectives and problems rather than sectors: e.g. “digital means for criminal activity”; don’t start with the presumption that there will be an overarching framework for all sectors in the end. Taxation a good example: the G20 was effective because it focused on abusive tax planning, not structures as such.
If the objective is to retool multilateralism, it is important to first make the case for the reality of an interdependent world. Having done so, to focus on the global arrangements requiring immediate attention and to figure out the minimum level of international cooperation required to achieve a certain objective. The interconnectedness of issues needs to be brought out clearly; and compromises across agendas help (in Europe for example: attach money to migrants). Similarly, it is important to look at a number of variables which condition the final result: the dynamics of personalities/leaders driving the process, if it is agenda-driven or secretariat driven; whether it involves crisis mode vs. non-crisis mode; etc.
The approach should also recognise and build on the variety of regional agreements and governance arrangements in existence or under development; in doing so, it should ask the question what are the minimum conditions and principles at multilateral level for the regional to deliver. But a rules-based system of global action does not mean that it remains static; it means principles which need to adapt and adjust. In this context, it is important to not automatically dilute current regimes.
At the end of the day, the need to cooperate is today stronger than ever; but in a world when countries do not deliver domestically, it is going to be harder to push cooperation. Nevertheless, it is crucial to address the legitimate concerns and come up with governance arrangements that work; to respond to politics but not be consumed by it. And in doing so, to address the notion of relative contribution and burden-sharing, and of people’s control over their destiny.