4 ways in which the re-emergence of geo-economics could cripple globalisation

13 min read

26 February 2015

The re-emergence of geo-economics comes at a time when many states in the developed world – including Europe and the US – faced with high levels of public debt and weak domestic support are choosing to project power through economics rather than military force. This, in turn, is weakening multilateral institutions designed to safeguard the free flow of trade and investment and is giving rise to four trends that could potentially reverse globalisation.

The world is witnessing a rise in geo-economics, and while wars rage from Damascus to Donbas, the main global battlefield is economic rather than military. Sanctions, competing trade regimes, currency and price manipulation of resources such as oil is possibly more consequential than the conventional arms race. And the implication of these forces could be an unravelling of the global economy.

“As tensions between great powers rage, the global businesses that once saw themselves as masters of the universe now feel like pawns in a game over which they have little control,” suggested Mark Leonard in a World Economic Forum report. “Ukraine is at the epicentre of a crisis of European order that has seen the Russian Federation and the West use financial markets, energy and the control of the internet to advance their respective causes. In Asia, the competition between a rising China and its neighbours has spawned naval disputes, the use of sanctions and restrictions on access to natural resources. 

“In the Middle East, the rise of ISIS is playing into a wider sectarian conflict led by Iran and Saudi Arabia. In every region of the world, new powers and restive populations are rising, and an increasingly introverted America is recalibrating its role in a scattershot manner that leaves allies guessing. And in the absence of global leadership, the erosion of global norms and standards and the ensuing shift towards a multipolar, regionalised power dynamic are apparent. This places acute pressure on leaders around the world, challenging their effectiveness and legitimacy.”

Has geo-economics backfired on us? Here are four disturbing trends:

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1. Economic warfare

Leonard explained that “the US, Europe and other developed economies, faced with challenging fiscal postures and weak domestic political support for engagement, are increasingly unwilling to pursue foreign policy objectives through the projection of military force. To compensate, these powers continue to seek to project power through their influence over the global economy and through their control over multinational corporations (MNCs) domiciled in their countries.”

Essentially, economic sanctions and restrictions have become prime tools that can span from sanitary controls to a full-blown economic blockade.

“Economic sanctions are usually a double-edged sword,” Leonard said. “The country applying sanctions hurts its own businesses that trade with or invest in the target country. US companies have had to stay away from Iran, German machine-builders have had to reduce their exports to Russia, and French shipyards have suffered through the freezing and potential cancellation of the sale of Mistral ships to Russia. Sanctions can also provoke counter-sanctions. In 2014, Russia retaliated against Western measures by banning food imports from the countries that had joined sanctions against Moscow.”

The problem lies in the fact that as companies start to believe that they are tied to their “home governments”, they won’t invest in certain markets abroad. We might also start seeing some changes in traditional foreign trade patterns.

“Faced in 2006 with the Russian wine embargo, Georgia had to look for new markets in the West, where it was headed politically. When in 2014 Russia faced Western sanctions, it accelerated its rapprochement with China, the one major power that refused to condemn its actions and shared Moscow’s opposition to US global dominance.” 

Ironically, when it comes to economic warfare, the true winner may actually be a third party that jumps into the opening. This was highlighted by Leonard: “European countries in the initial phases of US-Iran sanctions; China in the case of current Western sanctions against Russia; Russia in the case of the post-Tiananmen Western weapons ban on China; Turkey in the situation when EU pressure made Russia abandon its South Stream gas pipeline project.”

2. Competition driven by markets

In colonial times, competition revolved around who had the most control over the sea, as well as land. This later changed to who had power over oil after the Cold War. 

But a geo-economic era looks like it is likely to drive national competition based on markets rather than resources. This could be largely due to the fact that resources are becoming cheaper alongside the pace of technological advancement.

Leonard explained that another reason could be due to “the economic and demographic growth in emerging markets”.

“The interests of modern multinational corporations underpin the shift from the strategic competition for access to resources to the competition for inroads into new markets. Due to the breakthroughs in information and communication technologies, these corporations have become truly global, able to invest and allocate the production of goods, services and even individual production tasks across continents. This has shifted the strategic space of the natural resources competition to a competition for markets.”

The signs are already there, seen in the way the US has been reaching out to India, China’s infrastructure investments in Africa and even Russia’s attempts to penetrate Venezuela.

“The main law of the new race is access to large markets, which often have large, young populations as well as a burgeoning middle class that enjoys increasing purchasing power,” Leonard suggested. 

While countries with growing per capita incomes and large and growing populations, such as China and India will stand to benefit from these growing markets, the producers of natural resources are likely to see their power eclipsing.

“Oil rich countries such as Saudi Arabia, Russia and Iran stand to lose,” he explained. “And so are the medium-skilled workers in the Organisation for Economic Co-operation and Development (OECD) countries who now face competition from the cheaper-qualified labour in emerging markets. Countries that are unable to provide security and stability for economic enterprise and foreign investments will also be marginalised from this new wave of globalisation.”

Continue to find out more about state capitalism and potential trading patterns…

3. State capitalism

State capitalism is undoubtedly charging up competition between governments for power and influence.

With the US, arguably the most dominant country in the finance market, as an example, the state attempts to play a levelling role in markets. This ensures that “booms and busts are limited and that unbridled capitalism is tempered by the interests of the state and other stakeholder.”

This is nothing new. But governments have been increasingly using their ownership of companies and financial institutions in new ways. 

“But as fiscal authorities have become increasingly paralysed and politically constrained, post-crisis responses have fallen to central banks via monetary policy,” he suggested. “Central bankers have, by choice or otherwise, become owners of enormous swathes of securities, with enormous influence as a result. In addition, central banking supervisory authority has been enhanced by post-crisis legislative efforts to
manage financial system stability. Emerging market central banks are increasingly caught between domestic political pressures and alleged monetary policy and supervisory independence.

“Emerging market central banks are increasingly caught between domestic political
pressures and alleged monetary policy and supervisory independence. The risk of states using central banks to advance interests beyond those explicitly consistent with
their mandates is on the rise. The establishment of cross-border norms for financial market instruments, banking, technology, energy and trade has always been inherently political, while ostensibly technical. Now, we can add strategic as well, with market, legislative, regulatory and other policy tools increasingly being used to try to strengthen state-owned enterprises (SOE’s) and national champions.”

In a sense, standards are being set by the countries who are dominating specific fields – something that could become incredibly risky in the future.

“And they are blurring commercial and strategic lines for sectors like technology and finance, where implications of advancing national agendas have global implications. Technology is of increasingly strategic concern, with major powers assessing a landscape of economic and security concerns emanating from the opportunities and risks posed by the interlinkages and deep dependence on technology as the foundation of global economic, military and political security. 

“As the US and China, for example, discuss technological and intellectual property concerns, NATO grapples with its potential response function to intrusions under its mutual defence obligations. Recent ‘hacking’ into Sony Pictures and disclosure and theft of its private files and films has sparked speculation of government related catalysts and retaliation.”

This just leaves us with further questions: How will future security and technology concerns be addressed and agreed upon? Who will set the rules and who will seek to ensure that they are enforced?

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4. Changing trade patterns

There has been a surge of trade talk all across the world. But although this could bring in some much needed growth, Leonard is convinced that it is far more likely “to accelerate the multi-polarisation of the world or even competition among regional blocs far beyond trade.”

Take China and Russia for example, both of which are challenging the Western-led economic and political order by developing ‘trade zones’.

“China is strongly pushing for the Regional Comprehensive Economic Partnership, against the US-led Trans-Pacific Partnership,” Leonard explained. “Quite a few Asia-Pacific nations have been placed in the awkward position of working out how to reconcile the two competing frameworks. Each discusses different rules on flows of goods, money and intellectual property in line with the respective interests and principles favoured by the US and China. The turf battle mirrors the rivalry between the world’s two largest economies in far broader arenas, including military prowess.”

Meanwhile, you also have Brazil, which has exerted its influence over Mercosur and Argentina. 

“Now four emerging stars – Mexico, Colombia, Chile and Peru – are trying to provide an alternative to Mercosur through the development of the Pacific Alliance,” he said. “The new framework emphasises the inclusion of Asian economic powers into Latin American development, and could change the political and economic landscape of the region.”

This might promote freer trade, but if all the great powers of the world influenced the nature of deals to be competitive both politically and economically, “global consumers and businesses would become clear losers. Countries in the periphery of major regional powers would be under their strong influence and lose out too.”