Getting economic statecraft right in the new era of competition and cooperation

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Alexis Crow, Partner; Global Head, Geopolitical Investing, PwC, Danny Quah, Dean and Li Ka Shing Professor in Economics, Lee Kuan Yew School of Public Policy, National University of Singapore

National security is quickly moving to the top of government agendas worldwide. Zero-sum thinking in geopolitics is on the rise.

In a time with such a focus on security, economic statecraft can be a powerful tool for achieving goals and keeping the peace — but it must be executed correctly and holistically.

Economic statecraft — harnessing a nation’s monetary, financial and trade policies in the service of national security — has the potential to either strengthen or undermine the power and effectiveness of economic instruments.

For example, weaponizing economic tools to intentionally disadvantage other nations in foreign policy is a practice that, in almost all cases, is self-defeating.

Instead, states should employ nuanced economic statecraft that can actually help both the international system overall and individual nations within it.

Cooperation amid challenges to globalization

The decades of hyper-globalization running up to 2015 might be viewed with nostalgia. Open trade reigned with few obstacles, and rapid drops in equality accompanied ever more rapid exchange of goods, services, people, ideas and finance. Today, the picture is different. But even if geopolitical rivalry had not disrupted this arc, other factors were already doing so.

Within advanced economies, the shift from manufacturing activity to services-oriented growth and employment — combined with import competition — made the maldistribution effects of trade ever more visible. Large segments of domestic populations grew increasingly disadvantaged, even as the sum aggregate of well-being rose on a global basis. The economic gains of populaces in China and India were seemingly set into contradistinction with the loss of economic security for many within advanced economies.

The worsening climate crisis, the COVID-19 pandemic and Russia’s invasion of Ukraine each exacerbated this effect — each of these issues have their own isolating effect on policies, seemingly pushing countries toward isolationism.

In light of these challenges, and in considering the outlook for future cooperation, the idea of universal global economic and trade cooperation must be appropriately modest. Even absent geopolitical rivalries, the same hyper-globalization might no longer appeal to some advanced or emerging economies. But that does not mean cooperation and good competition are impossible.

Driving cooperation in a complex world

The challenges of and potential for global economic and trade cooperation can be visualized as a series of concentric rings. In the innermost core are the common challenges that, when properly addressed, benefit all. In other words, cohesion and collaboration on such issues might mitigate negative externalities, which have spillover effects on other countries, regardless of the source. The effort to lessen the impacts of climate change — whether in the form of mitigation or adaptation — is certainly ripe for cohesion.

Working to Order: Concentric Rings

Opportunities for cooperation in the financial sphere

In considering macro-financial linkages between countries, central banks and financial institutions — and the potential for destabilizing capital flows or bouts of financial instability to ripple across borders — continued coordination on monetary policy would help everyone across the global economy in the short and medium-term. In addition, as the recent banking wobbles in the US laid bare, instability in one country’s financial institutions can have a domino effect in other countries. Thus, synchronized supervision on behalf of regulators with a view toward better managing the challenges of cross-border capital flows and banking will be important, as will be identifying potential liquidity mismatches in non-bank financial institutions.

Moreover, strengthening global supply chains has the potential for positive externality, with spill-over benefits distributed across the entire length of the value chain. In this scenario, everyone has the potential to have their own interests aligned, and in their working together, also harbor the potential to yield benefits that are multiplied over and above those which result from single, isolated actions. Efforts here which are rooted in pragmatism are laudable.

‘Common but arguable’ challenges

The next outer layer is challenges that are “common but arguable”. The global climate crisis could also fall here in the taxonomy. While mitigating the impacts of global warming is universally beneficial, there are those nations — poorer, underdeveloped — who consider the price too large to pay or who disagree on urgency and scale of action. Side payments, where the rich compensate the poor, will help, but these challenges will no longer be unambiguously universal, even if they are globally existential.

Growth-friendly and sustainable fiscal policies fit here, as different nations take different approaches to the challenges of going green – and might indeed learn from one another. Similarly, the race to establish a global minimum corporate tax will be calibrated within this second ring, as will be upskilling of the workforce in the face of a changing economy.

This second circle ring may be most effective if it is underpinned by aligned interests. In such a scenario, ‘like-minded’ countries engage with ‘unlike-minded’ countries in the pursuit of shared goals and interests. Excluding “unlike-minded nations” will likely end up putting together too ineffectual a group. An example of such issue-based cooperation could be the Digital Economic Partnership Agreement (DEPA) which unites Singapore, South Korea, Chile and New Zealand in an alliance on digital standards and advancing Digital New Deals.

Minimizing the risk of zero-sum territory

The third, outermost ring records a zero-sum territory in the domain of possible collaborations. That some large global players operate with confrontational mindsets renders interest-based cooperation in this space nearly impossible. The emerging technological decoupling between the United States and China — with its spillover effects across industries — is a case in point.

The hope, however, is that the 80% of humanity who live outside the Great Powers can work together, nonetheless, to reduce the size of this area, and — even in the midst of rivalries and tensions between the Great Powers — these Third Nations can drive the contents of rivalry ever further inwards towards those domains where collaboration is more likely.