Governments stand alone in a stormy global economy

Welcome to Trade Secrets. The IMF and World Bank annual meetings wrapped up over the weekend, and it’s safe to say there was a lot more gloom than there was long ago. IMF Managing Director Kristalina Georgieva was on hand to stamp out any trace of optimism: “Shock after shock after shock,” she said.

The rest of today’s newsletter delves into the global response to energy, currency and interest rate shocks, then separately kicks off a discussion of the idea that many people have suddenly woken up to, interdependence. militarized. Chartered Waters examines the causes of inflation.

Same global shock, different national reactions

It is during a widespread economic shock – the precedent, pre-Covid, being the Global Financial Crisis (GFC) – that hands are wringing over the general lack of effective global governance.

Hand wringers have a point, obviously. The Fed raises rates and drives up the exchange rate based on US economic conditions. It’s not so much that central banks elsewhere have to follow suit or see their currencies collapse, nor the setbacks of middle-income governments that have borrowed heavily in dollars.

Meanwhile, multilateral institutions do not have enough power to solve global problems. The IMF is giving bailout loans to individual countries, but can’t tell the United States exactly how to set monetary policy, let alone orchestrate a Plaza-style deal to weaken the dollar. The World Bank remains underpowered, with a constructive plan to increase its firepower still struggling to pass. The WTO has hosted a surprisingly productive ministerial meeting this year, but still plays a primarily advocacy role to keep trade open. As I have written before, there is also no predictable global system for sovereign debt restructurings.

This doom story of lack of coordination is neither untrue nor unusual. The world’s central banks showed unity by cutting rates together in October 2008, but only months later governments were jostling for the right level of fiscal stimulus.

But it doesn’t have to be advice out of desperation either. Governments have responded to the global financial crisis in varying ways: those with strict financial regulation, such as Canada, have been largely spared the contagion; those like the UK that were vulnerable but reacted quickly overcame the worst in a few years; those who were completely wrong about the nature of the crisis-related debt accumulation, such as the eurozone, have seen the shock reverberate for years.

This time around, there were plenty of worried finance ministers at meetings last week, but only one (Kwasi Kwarteng from the UK) was summoned home by his head of government to be fired. As I’ve also written before, shocks are common but responses are not, and errors such as the recent UK taxcutpalooza are unforced.

Sorry, folks, but the global governance lifeboat is not coming. The Fed isn’t there to think about the rest of the world, and there’s no big monetary realignment going on. Everyone faces the same stormy sea, but some navigate better than others.

“Armed interdependence”: it’s here

Some people (by which I inevitably mean the twin gurus of the subject, Henry Farrell and Abraham Newman, whose works I have already mentioned) have been warning for some time about how governments can exploit trade and financial ties with potentially hostile countries to force them into submission.

Well, suddenly there’s a bunch of examples of armed interdependence for everyone, the most obvious being the starkly far-reaching semiconductor export bans from the United States to China, as announced recently. See Farrell Twitter feed here for more examples, including the battle between Opec and the US/EU over price caps and production quotas, the EU’s growing awareness that it needs to improve its geo-economic instruments and the lessons China is learning from the tools used against Russia over Ukraine.

I’ll come back to this in more detail later in the week, but today I’ll just give some background on trade secrets. You may think that the writer of this newsletter has long been skeptical of the idea that globalization is hitting a wall, and even of the belief that the world is breaking up into geopolitical blocs. Am I mistaken? (It happens.)

Here’s what I would say: I’ve always thought that shocks that weren’t specifically designed deliberately to sever economic ties (food and energy shocks, the global financial crisis, a big ship stuck in the Suez Canal, Covid et al) would not stop globalization. I still think so. I said deliberate attempts to do so, particularly for geopolitical reasons, have the potential to do so. But only if governments really try really tough, certainly tougher than Trump did with his Chinese tariffs.

Biden, depending on how this latest announcement is implemented, certainly looks set to do more than I expected. The impact this has and the type of retaliation the United States sees from China will depend on very specific details about the semiconductor supply chain. And we won’t find out until the policy is in place. We will all be watching closely.

In addition to this newsletter, I write a Trade Secrets column for FT.com every Thursday. Click here to read the latest news and visit ft.com/trade-secrets to see all my previous columns and newsletters too.

Mapped waters

Two cards today. The first shows us the state we are in when it comes to inflation – it has risen rapidly in many countries and is even taking hold in Asia, a region that until recently has been largely an exception to the global scheme.

The second chart is sobering. Rising fuel prices are one of the main factors behind the current inflationary spike. But it should be noted – as the second graph shows – that these were increasing before Russia invaded Ukraine.

The conflict, however, has made matters worse, leaving Europe to worry about its gas supply over the next few quarters. Inflation has also spread to other household items – including food and housing basics – making the problem much bigger and more concerning. You can read more about this in our excellent analysis of inflation. (Jonathan Moules)

Commercial links

In an interview, French President Emmanuel Macron is pushing for an American-style (perhaps even Chinese-style) industrial policy in a surprisingly aggressive way, even by French standards, and focusing on electric cars made specifically in France rather than just in the EU.

Colombia has become the first country to use the Multiparty Interim Appeals Arbitration Arrangement (MPIA), the dispute resolution workaround invented after the United States crippled the United Nations Appellate Body. WTO. Colombia has appealed an initial decision in a case brought by the EU concerning Colombian anti-dumping duties on imports of frozen French fries from Germany, the Netherlands and, where elsewhere, Belgium.

The Trade Talks podcast examines whether Donald Trump’s trade war has made China more protectionist.

The FT reports on how ministers are trying to persuade the IMF and World Bank to increase their support for governments struggling to cope with the effects of climate change.

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Trade Secrets is published by Jonathan Molds

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