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The economic policy of many countries has entered a new era of support and subsidies. But global financial markets have not yet caught up.
Consider some of the headlines from last week. At IMF and World Bank meetings in Washington, the so-called Bretton Woods institutions were under siege as leaders of the Global South denounced the hypocrisy of rich country creditors demanding austerity from borrowers while accumulating huge debts themselves.
In Brussels, the former president of the European Central Bank, Mario Draghi, gave a speech in favor of an industrial policy on a European scale. Across the Atlantic, the Biden administration tripled tariffs on China and took up unions’ petition for shipbuilding trade relief to counter Chinese state support for its own industry.
Yet at the same time, cross-border activities continued as usual. German Chancellor Olaf Scholz led a group of industrial leaders on a trip to Beijing with the aim of establishing joint ventures in China. And US Commerce Secretary Gina Raimondo helped Microsoft, a so-called US “national champion”, invest $1.5 billion in artificial intelligence in the UAE.
The best way to bridge the gap between these headlines is to understand that even as rich countries’ fiscal policy shifts to support the long-term process of reindustrialization and climate transition in their countries, global financial markets remain resolutely focused on short-term profit maximization of the private sector. The struggle between the two will continue until a new balance emerges.
In Europe, fiscal is opposed to financial. “We have pursued a deliberate strategy to reduce labor costs relative to each other,” Draghi said, referring to Europe’s post-2008 strategy of belt-tightening rather than investing. “The net effect,” he continued, “has only weakened our own domestic demand and undermined our social model.” Now the EU is desperately trying to bridge the gap with a new Capital Markets Union.
Meanwhile, the White House has doubled down on its view that free trade simply doesn’t account for the cost of negative externalities like climate change. Last week, John Podesta, President Joe Biden’s senior adviser on clean energy, said in a speech: “When you seriously consider the emissions contained in tradable goods. . . emissions from the production processes that create the raw materials and manufactured products we buy and sell in the global marketplace. . . traded goods then account for about 25 percent of all global emissions.
From this perspective, free trade itself is the second largest carbon polluter after China. Indeed, the current global trade and financial framework still encourages what is cheapest for businesses and most profitable for shareholders, not what is best for the planet.
As Podesta pointed out, the United States was once the world’s largest producer of aluminum. Today, half of the world’s aluminum comes from China, but with 60% more emissions. Indeed, the emissions that the Inflation Reduction Act hopes to reduce by 2030 are only equal to what the United States imported in carbon-intensive manufactured goods in 2019.
To try to square the circle, the White House announced the creation of a new task force on climate and trade which will build on the idea of the American Trade Representative, Katherine Tai, of a “postcolonial” trading system that assesses carbon burden and labor standards. Such a system could, for example, offer technology transfers to developing countries in exchange for essential products.
But global financial institutions will also need to change if we truly want to move towards a better system. At an Oxfam panel in Washington last week, Adriana Abdenur, special economic adviser to Brazilian President Luiz Inácio Lula da Silva, denounced the “disconnect” between “rich countries and regions that now openly embrace and defend industrial policy” while “continuing to put pressure on the international community”. financial institutions to impose an outdated Washington Consensus requirement.”
The White House knows that the countries of the South are right. Last week, U.S. Deputy National Security Advisor for International Economics Daleep Singh called for increased use of the U.S. Sovereign Loan Guarantee Authority to lower interest rates for developing countries.
But he also floated several ideas aimed at boosting investment in the United States that seemed straight from the pages of an industrial strategy manual for developing countries. These included a “strategic resilience fund” to secure clean energy supply chains, and even a US sovereign wealth fund to make long-term investments in strategic technologies.
All of this shows us that we are at a major turning point and that no country has all the answers. Many stakeholders, however, want to cling to the past, even if the future is changing. I am surprised, for example, at the willful blindness of German car manufacturers who sign a joint declaration to work on connected vehicles with China, even if Europe is likely to impose restrictions on Chinese electric vehicles in Europe. Likewise, I fear that U.S. efforts to counter Chinese AI will lead to a handful of U.S. tech giants having even more market power than they already have.
The shift to a new economic paradigm has begun. Where this will end up is entirely uncertain.