The high price of global retrenchment

| February 5, 2012 | 0 Comments

Our globalized world is unraveling. This is not the end of globalization, but it is something we have seen before. It is called retrenchment.

It is a phenomenon characterized by declining levels of interdependence in global trade and investment, beggar-thy-neighbour policies as states (especially new entrants in the global economy) look out for their own interests and don’t play by the rules, a corresponding weakened capacity for collective action among the world’s leading nations, and the progressive weakening of international institutions that are the bedrock of a sound global order.

U.S. President Barack Obama and Prime Minister Stephen Harper converse at the G20 Summit in Cannes, France, in November.

U.S. President Barack Obama and Prime Minister Stephen Harper converse at the G20 Summit in Cannes, France, in November.

The first great era of globalization unfolded in the second half of the 19th Century. It was an era marked by a dramatic increase in worldwide trade, investment, labour mobility and prosperity. But it was followed in the 1920s and 1930s by declining interdependence as countries introduced a wide range of protectionist measures to shield jobs and local industry.

Great Britain introduced the Commonwealth Imperial system, which granted favourable access and free trade on reciprocal terms to its Dominions (Canada among them) and colonial territories.In 1926, Britain introduced the Empire Marketing Board to encourage Britons to buy goods from their current and former colonies.

The United States wanted it both ways. Although the U.S. pressured Canada to abandon the Imperial preference system, it still wanted to keep its own tariffs and restrictive policies in place. The Smoot-Hawley Tariff Act (1930) smacked America’s trading partners, including Canada, hard. By some estimates, worldwide trade in the 1930s shrank by almost a third as countries retaliated against each other.
The retrenchment phenomenon of the inter-war years also had an ugly political side as countries struggled with massive unemployment, inflation and the broader consequences of economic depression in their societies. In Weimar Germany and Italy, national socialism reared its ugly head as Hitler and Mussolini rode to power on a xenophobic wave of popular protest, replacing democracy with brutal dictatorship.

The leaders of the Anglo-Saxon world (Britain, the U.S., Canada, Australia) wrestled with a different kind of problem — isolationism — as their societies turned inward and refused to deal, at least initially, with the dark storm clouds that were gathering over Europe.

The League of Nations, an instrument for collective global security which had been crafted out of the Paris peace settlements following the end of the First Great
War, also proved incapable of dealing with a series of aggressive acts by the Axis Powers in the 1930s.
History does not repeat itself. But today, in the second decade of the 21st Century, we too are grappling with a renewed bout of retrenchment and the attendant political risks that come with a downturn in global economic fortunes and a weakening of international institutions. The causes of the current crisis are complex, but they are rooted in a variety of ills. The world continues to struggle with the fallout of the 2008-09 financial crisis, and now a second one with the impending collapse of the Eurozone monetary regime.

The deep bonds of European integration have been weakened by Italy, Greece, Portugal and Spain who are wrestling with unsustainable levels of public debt and are struggling to cut public expenditures at a time when their own economies are contracting and many people — especially the young — are out of work. If the Eurozone collapses, the ambitious enterprise that was launched by Jean Monnet and the other founders of the European Union will be seriously compromised.

Democracy, too, is paying a price as unelected technocrats are catapulted into positions of power in countries such as Greece and Italy to fix fiscal problems that the politicians can’t, or won’t. If Europe is not able to manage the crisis because of its own internal political constraints and contradictions, everyone will be a loser as  contagion spreads.

Last year's G20 Summit in Cannes, France was widely viewed as a failure. Pictured here is the site of the Summit's “round table meetings.”

Last year's G20 Summit in Cannes, France was widely viewed as a failure. Pictured here is the site of the Summit's “round table meetings.”

To make matters worse, Washington is mired in its own unrelenting fiscal and budgetary battles. Partisan politics has yielded to ugly class warfare as Democrats and Republicans take each other on. Whether markets and investors are prepared to live with the continuing political uncertainty until the November 2012 election remains to be seen.
The international architecture that was forged out of the 2008-09 economic crisis is proving woefully inadequate. G20 summits of world leaders have degenerated into exercises of indecision, fingerpointing and mutual recrimination. The G20 summit held in early November 2011 in Cannes, France, was by all accounts a
failure. The political and economic crisis in Greece hijacked an agenda that was supposed to come up with a long-term plan to rebalance the global economy, promote financial stability and address pressing new issues such as global food security.
The Bretton Woods system of international institutions, the bedrock of post-Second World War global economic recovery and prosperity, is fumbling and crumbling. This is especially true of the world trading system. The World Trade Organization has failed to conclude a new agreement on world trade, notwithstanding successive rounds of negotiations at Doha. Talks are stuck in neutral because of major disagreements about trade liberalization in agriculture and in a number of other sectors.
The deeper problem here is that global economic interdependence has increased dramatically since the 1980s, but the institutional framework that is required to
monitor, regulate and provide for crisis management has not kept pace. We are thus seeing political retrenchment as countries grapple with the instabilities caused
by private and government excesses (primarily excessive borrowing by consumers and governments alike). As economic conditions worsen, governments
are tempted to retrench further, leading to an uncoordinated spiral of noncooperative behavior.
The inadequate pace of global finance and economic sector governance is matched in the field of international security. At first, the late 1980s and 1990s seemed to mark a new era of the United Nations as the global mechanism through which conflicts could be monitored, managed and resolved. The institution had some notable successes in all corners of the world — Namibia, Mozambique, Cambodia, and El Salvador and, more recently, East Timor.

The success rate, however, was matched by a failure rate, as the UN fell short of effective action in Bosnia, Somalia, Rwanda and Haiti, and was marginalized
in the face of terrorist attacks on the United States and the subsequent U.S. decision to attack Iraq and Afghanistan.
Instead of building strengthened global security institutions, the general international pattern has been to cast doubt on the relevance of established ones. Instead
of innovation, we have witnessed expansion, dilution and confusion. Nowhere is this more apparent than in the Middle East and North Africa where, as the Arab Spring sputters and descends into chaos, there has not been much more than hand-wringing by Western countries as opportunistic neighbours exploit mounting bedlam for their own religious and political ends.
Another aspect of our retrenching world is that those countries that are rising powers in the international system — China, India, and Brazil, for example —
are not yet showing the kind of leadership that is expected of them. They have still to acquire the shared sense of responsibility for global governance and stewardship of the international system that come with great power status.
China’s reluctance to grant reciprocity to its trading and investment partners is symptomatic of this problem. So, too, are its depressed exchange rate policies,
which are a continuing bone of contention, especially with the U.S.

China, Russia and India were offside with other members of the UN Security Council over Libya. They have also done precious little to thwart Iran’s nuclear ambitions
or to use their influence to promote peaceful regime change in Syria.

The rising powers of our new world are still wedded to old patterns of behaviour. Power-sharing has to mean burden-sharing and reciprocity if global
institutions in economics and security are going to function effectively.

The central and most powerful actors in the international system are all — in one way or another — troubled by domestic political and economic pressures, yielding
to short-term political imperatives over issues of identity, employment, health, ageing, trade and jobs.

As new entrants into the world economy game the old system further, thereby weakening it and reducing its credibility, Western governments will be further tempted either to go it alone or simply to withdraw.
In such a world, there will be less growth and greater political instability. The inter-war years of the last century are a stark reminder of the trouble that comes
when there is diminished will, capacity and leadership for collective action.

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Category: Diplomatica

About the Author ()

Fen Osler Hampson is Distinguished Fellow and Director of Global Security at the Centre for International Governance Innovation (CIGI) and Chancellor’s Professor at Carleton University.

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