Global Governance: Structures and Collaborations

Weaponised Economics and Restoring Economics in the

Global Order

Shiro Armstrong, ANU

2024 GDLN Distance Learning Seminar Series:

Governance for Transparent and Resilient Societies, 21 March 2024
Change and uncertainty
● A more inward-looking United States: from enforcer to spoiler in multilateral trade

● A rising and more assertive China with system differences

● US-China strategic competition

○ Increasingly overt policies to force others to pick sides, narrowing policy options

● Multilateral rules out of date

● Wars in Ukraine and Gaza

● Climate change, new technologies, recovery from pandemic…

○ The return of industrial policy: precautionsist and protectionist policies

○ Resurgence of national security concerns

Great Power strategic competition
● The competition for primacy: relative instead of absolute gains

● Zero-sum: one side’s gain is seen as a loss to the other

● Economic competition vs strategic competition

● Forcing countries to choose sides:

○ extra-territorial unilateral sanctions
○ economic coercion

● De-risking without a functioning rules-based system that

mitigates risks may leave decoupling as the most rational
outcome
Prisoner’s dilemma generalizes to an epic-fail

Cooperate Contain

Cooperate (5 , 5) (–10 , 10)

Contain (10 , –10) (–5 , –5)

How did we get here?
● The world was in an epic-fail equilibrium in the 1920s and 30s with beggar thy
neighbour protectionism and economic rivalry

● Post-war economic order forged during the war to avoid the causes of insecurity
and conflict in the postwar period

● Bretton Woods: embedded liberalism and multilateral principles

Bretton Woods
The conference at Bretton Woods in 1944 that forged the post-war order (shared norms and
practices) to avoid trade protectionism, currency wars and economic deprivation of the
1920s and 30s.
The General Agreement on Tariffs and Trade (GATT)
International Monetary Fund (IMF)
International Bank for Reconstruction and Development (or the World Bank)
Three ideas defined these institutions and their role
the idea of development
the idea of ‘embedded liberalism’
the idea of ‘multilateralism’.

These rules for economic exchange and institutions for economic cooperation were as much
about political security as they were economic security.
The General Agreement on Tariffs and Trade
• False start as the International Trade Organization at Bretton Woods in 1944

• Negotiated during the war and brought to conclusion in 1947 as the GATT

• The United States insisted on most-favoured nation (MFN) treatment to unwind

British imperial preferences

• The United Kingdom wanted to wrap the rising power in rules

• Economic and security challenges were tightly enmeshed in the thinking that led to
its creation

• Became the WTO in 1995

US-backed multilateral trading system
• Allowed an insulation of trade and economic policy from ‘high politics’

• Opening economies in East Asia with confidence, growing trade shares with
neighbours despite political relations
• Golden era of gloablisation

• Now?

The security imperative vs the economic imperative

Retreat to a dark corner
● Need to deal with tail-risks but cannot dominate policymaking

● National security risks are existential: infinite price

● Towards corner solutions: no amount of prosperity is worth catastrophic security outcomes

Security DPRK’s corner solution

Prosperity
Weaponised economics
● Geoeconomics: the use of economic tools for strategic purposes
(Blackwill and Harris, 2016: War by Other Means: Geoeconomics and Statecraft)

● Trade sanctions, export controls, SWIFT payments system, freezing assets and reserves,
blocking investment all in the name of national security

● Weaponised interdependence causes economic interdependence to be seen as a source of

vulnerability
○ East Asia (and Europe) show economic interdependence is a source of prosperity and
security

● Article XXI GATT Security Exception let loose

Does trade cause conflict or peace?
Peace is the natural effect of trade
— Montesquieu, 1748

The commercial peace; Kantian peace; the peace dividend

Increases the cost of conflict

Not is, but should be, a source of peace:

Commerce, which ought naturally to be, among nations, as among

individuals, a bond of union and friendship, has become the most
fertile source of discord and animosity.
— Adam Smith, 1776
Thinking about security differently
● How about collective security?

● Zero-sum can be limited to territorial disputes and war; not competition for technology
supremacy

● National security includes economic security

○ Can’t buy guns otherwise
○ Also includes social cohesion

● Comprehensive regional security

elevating economic, health, human, environmental, energy and non-traditional security as
complements of narrow military security
What can we learn from China’s trade sanctions against Australia?
Market concentration and interdependence
● 40% of Australia’s exports are to China, vulnerable to trade sanctions?

Selected monthly Australian exports to China and rest of the world

(billion US$)
Open global markets as a source of security
● The global economy is large: alternative suppliers and buyers

● First line of defence: the macroeconomic framework and flexible domestic economy
○ Protects against shocks, including abuse of market power

● Importance of a level playing field, most favoured nation and equal treatment

● Open contestable markets blunt the use of economic weapon

● And protect the targeted nation

● Key motivation of the postwar economic order: GATT (Hirschman, 1945)

Reactive policy responses
“Don’t onshore,
● Retaliate friendshore”

● Onshoring, friendshoring and nearshoring

○ Onshoring concentrates risk

● Trade and supply chain diversification

○ Firms or governments to insure against risk?

● Just-in-case instead of just-in-time delivery (focus on quality, not just cost)

○ Since when did quality not matter?
○ Costs matter

● Sovereign manufacturing

● Stockpiling
Friendshoring for a smaller world

“Our planet is not a very big one compared with the other celestial
bodies, and I see no particular reason why we should endeavour to
make inside our planet a smaller planet called the British Empire,”
— Churchill, 1902

Consistent with MFN and a rules-based system?

“A smaller planet”: Friendshoring’s poorer and less secure world

How to respond?

● Diversify trade? Isn’t that the opposite of specialization and gains from trade
(comparative advantage and economies of scale)

● Anti-coercion instrument:
Mob justice or vigilante rule consistent with the rules-based order?

● How to manage concentrated markets?

● What can supply chains tell us about efforts to diversify?

The power of economic interdependence
● China’s complex and deep interdependence in global value chains: not falling
○ China–US trade now via third markets
○ The example of Apple shifting production from China to India

● A Chinese economy and society that’s less integrated into the global economy is one with more
risks

● Europe’s dependence on Russian gas

○ But Germany didn’t go into recession. The market worked: reallocating scarce resources
Restoring economics in the global order
System preservation

● Appeal to the WTO rules backed by MPIA contributed to resolution of Chinese sanctions
○ Expand MPIA

● Plug security exception in WTO

● Avoiding chasing subsidies (IRA) and managed trade deals (VERs)

those “small”, economically and politically rational choices enable and validate direction of US
and contribute to weakening the existing international economic order
Restoring economics in the global order
System reform

● Bottom-up rulemaking will need multilateral principles

● Plurilaterals, minilaterals and ‘like-minded’ or ‘trusted partners’ can exclude countries and
make the world smaller

● Groupings and frameworks led by Third Nations can incentivize and accommodate Great Power
cooperation and the supply of global public goods
○ G2 is rational for China and the US but not the rest of us
○ Incentivise collective action and concerted unilateralism

● Focus on the bridgeheads for multilateralism in Asian and European interdependence —

especially which locks China in