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Liberal capitalism losing shine! New era of Wild West setting in!

TIOL - COB( WEB) - 921
MAY 23, 2024

By Shailendra Kumar, Founder Editor

THE history of globalisation seems to have run full circle! The era of liberal capitalism, which stood as a major propeller behind free trade and unrestricted movement of FDI, appears to be rapidly folding up! And there is very little room for second opinion - fragmentation of the global economy is the only imaginable future in the coming decades! All the good done by globalisation in the past few decades is increasingly being undone by a torn-apart world. All the institutions assiduously crafted to establish the supremacy of rule of law are painfully unravelling - be it the WTO or the United Nations Security Council or the International Criminal Court! The liberal world order, passionately nourished by the United States of America, is shockingly being reversed by the 'creator' itself! A case of craven abdication, perhaps! The guiding force of 'Washington Consensus' has been substituted by the 'Build Back Better' and 'America First' sort of economic policies with unstinted support from both the Democrats and the Republicans. A new phase of Wild West has set in! The rise of China as an economic giant and its not-so-covert geopolitical bids to upend the US-led global order have got dander up in the US Congress as well as the Senate. With pressure piling on the White House to take more punitive actions against China, the Biden Administration has done what the world was hoping to see only from Donald Trump! Joe Biden has jaw-droppingly out-trumped Trump! How?

The White House last week unveiled a bundle of punishing spikes in tariff on a large assortment of Chinese imports - semiconductors, medical goods, steel and aluminum products, batteries, critical minerals and electric vehicles (EVs). Eeek! Quite petrifying - 100% tariff on EVs! From 7.5% to 25% on lithium-ion EV batteries and from 25% to 50% on solar cells. It sounds more like going back to 70s on the time-machine! Though the spiked tariff would hurt imports worth only USD 18 billion but it would snap off a few more threads of Sino-American bilateral trade. Another severe blow to the global supply chain rather than China alone! More intriguingly, Biden has outdone Trump who had proposed only 60% tariff on Chinese goods if he is re-elected to the White House in November elections. Though such a policy move hurts Mr Biden's own green goals but he has apparently tried to kill two birds with one stone - extinguishing the scoring point of Donald Trump in his election campaigns and also protecting domestic industries which have been fed billions of dollars of subsidies and tax incentives a la Inflation Reduction Act. Another incidental benefit which may be reaped by Mr Biden is - the yawning trade gaps may come down. The US imported goods worth USD 427 bn from China last year and its exports were worth only USD 148 bn. The soaring trade deficit has been a major source of heartache in Washington.

The White House statement noted that China has been using a tried and tested playbook to power its own growth at the expense of others - going for huge investments despite having excess capacity and dumping its underpriced goods in the global markets. The USTR Katherine Tai alleged that China continues to thieve US intellectual property and its cyber intrusions targeting US technologies. She hoped that the new tariff will have minimal impact on consumer prices and employment but would be effective in reducing imports from China and also increasing imports from other countries. Interestingly, the US has taken note of how China has been bypassing its stifling tariff regime by aggressively investing in US-led friend-shoring countries such as Mexico and Vietnam. Chinese companies have furtively been pumping in capital in new plants in Mexico and Vietnam ever since the imposition of Trumpian tariff on Chinese goods worth USD 300 bn in 2018. A large number of Chinese companies have set up shops where their value-additions are dismally low but they get flattering subsidies and tax incentives from Mexico. To top it all, they also qualify for zero tariff on imports by the US under America-Mexico-Canada free trade agreement. BYD, the largest EV maker of China, is the latest one which has been recceing for a location in Mexico. The US Trade office is aware of Mexico becoming the transshipment hub for the Chinese goods and has asked Mexico to deny subsidies and tax incentives to such companies. However, the monstrous problem for the US is - It can make changes in the FTA only when it comes up for review in 2026 - six years after it was signed in 2020. Till then, the US will have to look for a different toolbox to deal with the deluge of cheaper Chinese goods. Vietnam will throw a similar gauntlet if it is granted 'market status' by the USTR - this basically means lower anti-dumping duties.

Not only America, even the EU has, of late been erecting protectionist barriers and jeopardising the future of globalisation. Immensely impacted by the US New Industrial Policy, the EU economies, caught in inflation and low-growth spiral, have been working on a policy-mix to protect its local industries. China has so aggressively dumped its EVs that the EU has initiated anti-subsidy probe against EVs and solar cells. EU has also, like the US, begun screening Chinese investments and take-over of companies of 'strategic nature'. EU has unilaterally proposed Carbon tax on all imports and that would come into force from 2026. Sensing alienation of EU, Chinese President Xi jinping, recently took off on a whirlwind tour to Paris, Belgrade and Budapest. But it turned out to be not so skilful diplomatic feint as the world could clearly see that China had 'maladroitly' chosen the EU destinations along its political fault-lines. What put waters on the embers of dying optimism of Brussels was no word of commitment from China to reduce the growing trade gaps. Interestingly, immediately after his return from the European visit, Jinping greeted the numero uno bete noire of Europe, Russian President Putin, in Beijing, for a mano-a-mano tete-a-tete. It was a sort of debriefing event where Jinping shared his assessment of the EU's fractured unity on some of the geopolitical issues like Gaza War and Ukrainian War and both had a chortle over how China managed to sow chaos for the Brussels leadership by influencing Hungary and France! Though Mr Jinping is not known for showing effusive warmth in public but, for a change or for a long-term geopolitical posturing, both the 'Caesars' hugged each other twice! More interestingly, for the consumption of the supposedly jilted West, Putin stated that "Together, we defend the principles of justice and a democratic world order that reflects multipolar realities". Ha ha ha! Putin was viscerally parsimonious with truth! A case of all fingers and thumbs in delivering his perfunctory barbs!

Another face of liberal world order, which is getting blunted, is the movement of capital. With national security being prioritised above unrestricted investment, it is reshaping the flow of capital across borders. The global FDI flows have nosedived, and now cruising along geopolitical preferences. Statistically, capital flows were impaired after the financial crisis of 2007-09. But the drop in FDI became sharper and chilblained after the onset of Sino-America trade war. After Russia invaded Ukraine and Western sanctions flew in thickets, cross-border bank lending and portfolio debt flows crashed by 20% and 60% respectively, in countries which voted for Russia at the UN. As per IMF, there has been precipitous fall in FDI flows to China after trade tensions rose by several notches in 2018. Strategic FDI flows plummeted to Europe and Asia also, but by lesser percentage. The IMF research has also concluded that geopolitical alliance has become more pivotal than the geographical proximity for the flow of capital. The IMF's last year study modelled the fall-out of the fragmenting world into FDI blocs along America, China and the Global South and projected that the split is likely to cost the global GDP by about one per cent in 5 years and 2% in the long-run! Though the Global South may profit from splintering of the world but lower global growth may nudge them to join blocs in the long run!

The US is evidently sabotaging some of the institutions it had helped build after the end of Cold War. Till the time the nuptial bond between the US-led internationalist principles and strategic interests was well-served, America was in the vanguard to promote liberal global trade through the WTO. After a tiff with China, there is nuff evidence to indicate that America wants to suffocate the global trade regulator to its macabre demise! For the 75th time in a row, it last month stalled the WTO motion to fill vacancies at its moribund appellate panel. It started with Trump and Biden has vetoed it several times in the past four years - completely defanging this institution! The dysfunction of the WTO is immensely emblematic of a world where rules-based institutions are being robbed of their raison d'être! A gander at the UN Security Council tells us no different parable. The failure of UNSC can be quantified by reckoning a number of open wars and state-backed violent conflicts across the world! The members with the veto-power have themselves become sinners and have lost moral fangs to intervene in low-intensity ethnic conflicts in many continents. Similarly, the fiat of International Criminal Court does not run in many parts of the geography! Though it issued an arrest warrant against Putin and is likely to do so for the Israeli Prime Minister 'Bibi' but it stands feeble chances of enforcing its orders as mega military powers in the world have not signed the global treaty, granting the ICC the much-needed jurisdiction. In fact, the Democrats and the Republicans are on the same page to sanction ICC. America and China are two leading military powers which have not signed the global treaty.

In a nutshell, it would not be presumptuous to observe that though the global trade would survive and may also grow in the respective geopolitical blocs but it would be at the cost of the fundamentals of international trade i.e comparative cost advantage. This would mean higher commodity, metal and energy prices - a chilling economic scenario of high inflation and steep consumer prices, making comestibles unaffordable for a sizeable chunk of poor population in the Global South! This would also spell unsustainable fiscal health and dangerous political instability in the low and middle-income countries! A much prognosticable consequence would be the rapid rise of authoritarian political system at the cost of already-fatigued system of democracy! Aha! A golden era for autocracy - this is what forms the bedrock of the political philosophy of the duo of Putin and Jinping! The planet is indeed heading for a newfangled era of missing personal liberty coupled with relative poverty and heightened inequality! A sharp reversal of what the world has achieved in the past 50 years! Plus ça change


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