Weaponizing economic policy

By Dian Cohen
Weaponizing economic policy
(Photo : Dian Cohen)

There was a time not too long ago when leaders around the world thought their citizens would be better off if they integrated their markets, trade and investments to allow the free flow of products and services between nations. Although the world has been globalizing for centuries, “globalization” came into popular use in the 1990s to describe the unprecedented international connectivity of the post-Cold War world.
Though globalization lifted a lot of people out of poverty, a lot got left behind. General discontent has given rise to a trend to de-globalize. It started before the COVID-19 pandemic and has accelerated with the fallout over Russia’s invasion of Ukraine. Central banks and governments everywhere are shunning international cooperation in favor of going it alone to deal with inflation and economic uncertainty.
The financial and political drama in the UK these past couple of weeks, as well as the market interventions of Japan, India, Chile and others to shore up their own currencies highlights the questionable ways countries are restructuring their economies to protect their own interests. It’s not pretty.
Weaponizing economic associations is one dramatic change. The current energy debacle is just one arena. The sanctions imposed on Russia by the West were supposed to force Moscow into submission. They have not. They have simply balkanized the global economy. Russia is weakened, still moving to arrange new economic outlets for its natural resources, and still dangerous.
Under Xi Jinping, China has become the world’s dominant manufacturer of everything, as well as the main trading partner and dominant lender for most of the developing world. At the Communist Party congress starting in Beijing on Oct. 16, Mr. Xi is expected to be named to a third five-year term as leader, giving him the ability to consolidate power and turn China into a more state-led society that will prioritize national security and ideology before economic growth. Tensions over the future of Taiwan as well as the damage Chinese lockdowns have done to supply chains have prompted the US and others to reduce their dependence on China for strategic and other goods. All this has hurt China’s economy, which has slowed dramatically. It can no longer be counted on to lead global growth.
An economically weakened China and Russia is bad for Europe. The EU has been weakened by the damage of Chinese supply chain shocks. Germany has been negatively affected by the Nord Stream 1 supply cuts. France has not been able to launch a new reform agenda. Italy just elected a new right-wing government. Central and Eastern Europe are mostly preoccupied with military threats from Russia.
The US Fed’s hiking interest rates to bring down inflation is like a wreaking ball on the rest of the world — the appreciation of the world’s reserve currency hurts everyone. When the global economy is stable, countries like Germany, the UK and Japan may be able to increase their exports to the American market. But the global economy is not stable – everyone is dealing with the same problems that the U.S. is.
A recession is likely around the corner. Recession is not new. De-globalization is. Watch for evidence of global economic restructuring processes in the next few months — with governments becoming more active in shaping their national economies. More government activity doesn’t necessarily mean responsible spending or lower inflation. It could mean more aggressive activity in the name of protecting strategic assets and critical infrastructure.
The world has experienced protectionism as a preferred trade policy many times in the past, with all the populist and nationalist sentiment that comes with it. It wasn’t pretty then. It won’t be pretty this time round.
Dian Cohen, C.M., O.M., economist

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