Multilateralism Is the Only Way Forward
Since the end of World War II, multilateral institutions have helped countries around the world avoid catastrophic wars and achieve unprecedented levels of economic growth. But with resentment against the very idea of international cooperation on the rise, multilateralism must address the needs of those who have missed out on its benefits.
PARIS – International cooperation is under strain. The voices of protectionism and nationalism are gaining strength, and governments are increasingly pursuing policy goals through unilateral or ad hoc measures, rather than by working together.
Even against this backdrop, it remains abundantly clear that effective international cooperation improves economic outcomes and everyday lives. The automatic exchange of financial information based on the OECD’s Common Reporting Standard has allowed governments to collect close to €85 billion ($99 billion) in additional tax revenue worldwide; this money can help fund better social policies. Under the OECD Anti-Bribery Convention, business bribes are now a criminal offense in 43 countries. And thanks to the OECD’s Program for International Student Assessment, more than 70 countries are making better-informed decisions about education policies for their children.
These are just a sample of the benefits that multilateral institutions deliver for modern societies. But the value of multilateralism itself transcends any particular program or policy.
The international system and its institutions were created as a bulwark against war. After helping Europe recover from the ruins of World War II, multilateralism gave countries a common purpose: to improve their citizens’ wellbeing and quality of life. Beyond any economic metric, we should measure the success of multilateralism in wars not fought and lives not lost.
Yet ever more people are losing confidence that international cooperation can solve today’s problems. While deepening interconnections among the world’s economies have fueled growth, lifted millions out of poverty, and raised living standards, the benefits have not been sufficiently shared.
If multilateralism is not delivering all that we want, the solution is not to give up on it. Rather, we must make it deliver results for the modern day.
Given the magnitude of the world’s challenges, no country will get far going it alone – or even bilaterally. It is only in multilateral settings that we will find solutions for today’s complex challenges. Multilateral cooperation provides venues to resolve differences peacefully; platforms to agree on common rules of the game; mechanisms to better manage international flows; and channels for exchanging ideas, experiences, and practices so that countries learn from each other. Global cooperation and integration have been critical to the impressive expansion of wellbeing and opportunities that we have witnessed over the past 70 years.
This week, ministers from OECD countries will convene in Paris under the chairmanship of French President Emmanuel Macron. They will gather in the belief that international cooperation is more crucial than ever, but that it must better address people’s frustrations and expectations, and help them realize their highest hopes.
We know what must be done. We must ensure that the intelligent regulation of markets both anticipates the disruptive effects of new digital technologies and harnesses the opportunities they offer. We must update – not abandon – the rules of global trade and investment to spread their benefits more widely. We must find new ways to combat inequality and protect the most vulnerable. And we must provide our children not just with a quality education, but also the skills they need to thrive and a clean planet on which to live.
Countries can learn from one another how to achieve inclusive growth when addressing issues like unemployment, falling wages, housing, and health care. But without cooperation to counter global challenges like corruption, illicit financial flows, cybersecurity threats, unfair competition, pollution, and climate change, solutions to such domestic issues will be partial and short-lived.
In his recent speech before the US Congress, Macron called for a “new breed of multilateralism … effective, accountable and results-oriented,” a multilateralism that “will allow our cultures and identities to be respected, to be protected, and to flourish freely together.” To that end, the OECD will focus this week not just on defending the principle of international cooperation, but also on discussions about what must be improved.
Finding solutions requires that we listen to everyone, particularly to those who have lost trust in governments and institutions. Multilateralism must evolve with the explicit purpose of serving all those who long for better lives.
In a divided world, we all lose. But by combining our knowledge, experiences, and resources, and by recommitting to a responsible, effective, and inclusive multilateral system, we can reclaim a brighter and more prosperous future for everyone.
Working Toward the Next Economic Paradigm
Building support for a new unifying economic paradigm to replace the discredited Washington Consensus will be an analytically challenging, politically demanding, and time-consuming process. In the meantime, both economists and policymakers must ensure that the existing paradigm doesn't cause more damage than it already has.
LAGUNA BEACH – For decades, the Western world put its faith in a well-defined and broadly accepted economic paradigm with applications at both the national and global levels. But, against a background of declining confidence in the ability of “experts” to explain, let alone predict, economic developments, that faith has deteriorated. With a new paradigm having yet to emerge, the world economy faces a heightened risk of fragmentation, with already-vulnerable countries being left even further behind.
The paradigm that, until recently, dominated much of economic thinking and policymaking is embodied in the so-called Washington Consensus – a set of ten broadly applicable policy prescriptions for individual countries – and, at the international level, in the pursuit of economic and financial globalization. The idea, simply put, was that countries would benefit from embracing market-based pricing and deregulation at home, while fostering free trade and relatively open cross-border capital flows.
Deepening the economic and financial linkages among countries was viewed as the best way to deliver durable gains, enhance efficiency and productivity, and mitigate the threat of financial instability. This approach was also deemed to yield collateral benefits, from enhancing internal social mobility to reducing the risk of violent conflict among countries. And it promised to support the positive convergence of developing and developed countries, thereby reducing both absolute and relative poverty and weakening economic incentives for illegal cross-border migration.
Supported by the traditional economic theories taught at most universities, this approach was energized after the fall of the Berlin Wall and the disintegration of the Soviet Union, when the former communist countries, together with China, joined the Western-dominated world order, boosting total production and consumption.
But, at a certain point, confidence in the Washington Consensus turned into something like blind faith. The resulting complacency, among policymakers and economists alike, contributed to the world economy becoming more vulnerable to a series of small shocks that, in 2008, culminated in a crisis that pushed the world to the brink of a devastating multi-year economic depression.
Suddenly, the advantages of globalization paled in comparison to the risks. It didn’t help that the crisis originated in the United States, which had hitherto been the main advocate for the Washington Consensus and unbridled globalization, including through its role in multilateral organizations like the G7, the International Monetary Fund, the World Bank, and the World Trade Organization.
Analytical failures were partly to blame for this. The economics profession did not go far enough to develop a comprehensive understanding of the connection between a rapidly growing and increasingly deregulated financial sector and the real economy. The impact of major technological innovations was poorly understood. And insights from behavioral science were inadequately regarded – if not shunned altogether – in favor of analytically elegant microeconomic underpinnings that were model-friendly, but unrealistic and overly simplistic.
Meanwhile, policymakers overlooked the economic, political, and social consequences of rising inequality – not just of income and wealth, but also of opportunity – thereby allowing the middle class gradually to be hollowed out, a trend that was exacerbated by both technological and non-technological developments. They also underestimated the risks of financial contagion and surges in migration flows. As a result, behavioral norms and rules lagged far behind realities on the ground, and political polarization intensified.
At the international level, the established post-war order was increasingly challenged by a rising China, whose sheer size, in terms of both geography and population, enabled it to achieve systemic importance, despite a relatively low per capita income and a political system that seemed at odds with a liberal market-based economy. The major global economic institutions struggled to adapt quickly enough.
In fact, notwithstanding a few tweaks, the governance structure of the IMF and the World Bank remained more reflective of past realities, with Europe, in particular, maintaining disproportionate influence. Even the G20, which emerged when the G7 proved too narrow and exclusive to support effective economic-policy coordination, failed to change the game. A lack of operational continuity, together with disagreements among countries, quickly undermined the G20’s effectiveness, especially after the threat of a global depression had passed.
Given all this, it should come as no surprise that enthusiasm for economic and financial globalization has faltered. Indeed, both advanced and emerging economies have long balked at the notion of strengthening regional and international institutions by delegating more national authority to them.
Now, some countries are adopting a more inward-looking approach and/or shifting their focus to bilateral and, in Asia, to regional linkages. Such shifts give larger economies like the US and China a distinct advantage, while some economies and regions – particularly in Africa – face increasing marginalization.
Building consensus around a revised unifying paradigm will not be easy. It will be an analytically challenging, politically demanding, and time-consuming process that will probably entail the consideration and rejection of a few bad ideas before good ones take root. It will also be a more multidisciplinary and intellectually inclusive process – more bottom-up than top-down – than the one that preceded it. It will need to adapt intelligently to innovations in artificial intelligence, Big Data, and mobility.
In the meantime, both economists and policymakers have an important role to play in improving the existing situation. At the international level, the concept of “fair trade” – not to mention social displacement – should be a bigger part of policy discussions. And economies – especially Europe – need to work actively to reform a tired system of multilateral governance that increasingly lacks credibility.
Moreover, feedback loops between the real economy and finance need to be examined in greater depth. Distributional issues, including pressures on the middle class and the predicament of population segments vulnerable to slipping through stretched social safety nets, need to be better understood and addressed. This demands deeper comprehension of technology-driven structural changes, with Big Tech recognizing and adjusting to its growing systemic importance in step with government.
Complacency was a central reason for the last economic paradigm’s loss of credibility. Let us not allow it to do any more damage than it already has.
International Cooperation 2.0
As faith in US leadership declines, so may other countries’ commitment to international cooperation – trends that could culminate in an economic race to the bottom or even violent conflict. But another way already seems to be emerging, based on new coalitions, as well as updated global institutions, spearheaded by more diverse actors.
OXFORD – After decades of serving as the backbone of a rules-based global order, the United States, under President Donald Trump, is touting an “America First” agenda that extols narrow economic nationalism and distrust of international institutions and agreements. But a new type of international cooperation may be emerging – one that works around Trump.
To be sure, as the Trump administration continues to repudiate long-established patterns of cooperation, the risk to global stability is becoming increasingly acute. For example, at the World Economic Forum’s annual meeting in Davos last month, US Secretary of the Treasury Steven Mnuchin spoke positively about a weaker dollar as a way to boost US trade.
For a country that relies on foreign demand for strong dollars and Treasuries to finance its rapidly expanding deficit, this is a foolhardy perspective. Moreover, it amounts to a betrayal of the longstanding US commitment to uphold a rules-based monetary system that discourages competitive currency devaluation.
In foreign policy, US Secretary of State Rex Tillerson has endorsed the revival of the Monroe Doctrine – the nineteenth-century assertion of US primacy in the Western Hemisphere that aimed to keep out European competitors – in Central and South America, in order to curb China’s growing influence. Tillerson’s nostalgia for 1823 was not shared south of the border, where, as one Mexican commentator pointed out, the Monroe Doctrine “served to justify gringo interventions,” and where China’s increasing engagement is viewed as a counterweight to the US.
The Trump administration has also unveiled a new, more aggressive nuclear policy. Its Nuclear Posture Review proposes using nuclear strikes in response to non-nuclear threats, and deploying new “low-yield” nuclear devices that would deliver by submarine a nuclear bomb equivalent in power to those that destroyed Hiroshima and Nagasaki in 1945. This policy – aimed, according to Defense Secretary James Mattis, at convincing adversaries that “they have nothing to gain and everything to lose from the use of nuclear weapons” – amounts to a reversal of 40 years of US leadership on reducing nuclear stockpiles and encouraging non-proliferation.
Unsurprisingly, other countries are quickly losing faith in the US as a stable partner, much less a reliable leader. According to a Gallup poll, trust in US leadership across 134 countries has dropped from a median of 48% in 2016 to 30% in 2018, plummeting by 40 points (or more) in Canada, Portugal, Belgium, and Norway. Meanwhile, disapproval of US leadership has surged by 15 points, to a median score of 43%, compared with 36% for Russia, 30% for China, and 25% for Germany.
As faith in America’s international leadership declines, so may countries’ commitment to cooperation – trends that could culminate in an economic race to the bottom or even violent conflict. After all, a country is unlikely to play by the rules if it does not believe that its opponents will do the same. Japan, for example, will more likely refrain from devaluing its exchange rate if it believes that the US will also refrain.
Of course, some of the Trump administration’s declarations might turn out to be mere bluster. During President Ronald Reagan’s first term in the early 1980s, he also questioned the international monetary order; took a tougher line on Latin America; and expressed doubts about nuclear deterrence (preferring the idea of nuclear superiority). But, by his second term, Reagan had come to embrace international cooperation.
At that time, however, US leadership was virtually guaranteed, given that the only other global superpower – the Soviet Union – was in sclerotic decline. That is not the case today. But that does not mean that international cooperation is doomed.
In his 1984 book After Hegemony, the American scholar Robert Keohane argued that international cooperation could continue, even without US global dominance. Keohane’s core insight was that the creation of institutions like the International Monetary Fund, the World Health Organization, and even ad hoc institutions like the G20 may require a clear leader, but running them may not.
Indeed, thanks to such institutions, the burden of leadership is now lighter. If governments seek to benefit from rules-based systems, such as those governing global trade, they can do so through existing multilateral institutions. This enables a more diverse array of governments to assume leadership in different areas.
In January 2017, after Trump announced that the US was withdrawing from the Trans-Pacific Partnership – the ambitious US-led initiative to create a massive trade and investment bloc encompassing 12 Pacific Rim countries – many assumed that the TPP’s days were numbered. But a year later, the remaining 11 countries announced that they would be moving forward, based on the so-called Comprehensive and Progressive Agreement for the TPP.
Likewise, after Trump announced last June that the US would withdraw from the Paris climate agreement, many observers feared the worst. By the end of last year, every other country in the world had become a signatory to the agreement. Moreover, 15 US states formed the US Climate Alliance, which is committed to upholding the objectives of the Paris agreement.
Finally, Trump’s public questioning of NATO, the US-led security alliance, has spurred Europeans to forge ahead with their own common security plans. The US, fearing that it could be sidelined, has now raised objections to these moves.
That is not surprising. The form of international cooperation that is now beginning to emerge promises to reflect more diverse views and interests, with countries adjusting their policies based on a variety of international considerations, not just the preferences and interests of the US. The result could be new cooperative coalitions, along with updated global institutions. As for the US, the Trump administration may well find that “America First” really does mean “America Alone.”
The World According to Trump and Xi
Trump’s “America First” strategy and Xi’s “Chinese dream” are founded on a common premise: that the world’s two biggest powers can act in their own interest with impunity. The G2 world order that they are creating is hardly an order at all; for everyone else, it's a trap.
NEW DELHI – The world’s leading democracy, the United States, is looking increasingly like the world’s biggest and oldest surviving autocracy, China. By pursuing aggressively unilateral policies that flout broad global consensus, President Donald Trump effectively justifies his Chinese counterpart Xi Jinping’s longtime defiance of international law, exacerbating already serious risks to the rules-based world order.
China is aggressively pursuing its territorial claims in the South China Sea – including by militarizing disputed areas and pushing its borders far out into international waters – despite an international arbitral ruling invalidating them. Moreover, the country has weaponized transborder river flows and used trade as an instrument of geo-economic coercion against countries that refuse to toe its line.
The US has often condemned these actions. But, under Trump, those condemnations have lost credibility, and not just because they are interspersed with praise for Xi, whom Trump has called “terrific” and “a great gentleman.” In fact, Trump’s behavior has heightened the sense of US hypocrisy, emboldening China further in its territorial and maritime revisionism in the Indo-Pacific region.
To be sure, the US has long pursued a unilateralist foreign policy, exemplified by George W. Bush’s 2003 invasion of Iraq and Barack Obama’s 2011 overthrow of Muammar el-Qaddafi’s regime in Libya. Although Trump has not (yet) toppled a regime, he has taken the approach of assertive unilateralism several steps further, waging a multi-pronged assault on the international order.
Almost immediately upon entering the White House, Trump withdrew the US from the Trans-Pacific Partnership (TPP), an ambitious 12-country trade and investment agreement brokered by Obama. Soon after, Trump rejected the Paris climate agreement, with its aim to keep global temperatures “well below” 2°C above pre-industrial levels, making the US the only country not participating in that endeavor.
More recently, Trump moved the US embassy in Israel from Tel Aviv to Jerusalem, despite a broad international consensus to determine the contested city’s status within the context of broader negotiations on a settlement of the Israeli-Palestinian conflict. As the embassy was opened, Palestinian residents of Gaza escalated their protests demanding that Palestinian refugees be allowed to return to what is now Israel, prompting Israeli soldiers to kill at least 62 demonstrators and wound more than 1,500 others at the Gaza boundary fence.
Trump shoulders no small share of the blame for these casualties, not to mention the destruction of America’s traditional role as a mediator of the Israeli-Palestinian conflict. The same will go for whatever conflict and instability arises from Trump’s withdrawal from the 2015 Iran nuclear deal despite Iran’s full compliance with its terms.
Trump’s assault on the rules-based order extends also – and ominously – to trade. While Trump has blinked on China by putting on hold his promised sweeping tariffs on Chinese imports to the US, he has attempted to coerce and shame US allies like Japan, India, and South Korea, even though their combined trade surplus with the US – $95.6 billion in 2017 – amounts to about a quarter of China’s.
Trump has forced South Korea to accept a new trade deal, and has sought to squeeze India’s important information technology industry – which generates output worth $150 billion per year – by imposing a restrictive visa policy. As for Japan, last month Trump forced a reluctant Japanese Prime Minister Shinzo Abe to accept a new trade framework that the US views as a precursor to negotiations on a bilateral free-trade agreement.
Japan would prefer the US to rejoin the now-Japan-led TPP, which would ensure greater overall trade liberalization and a more level playing field than a bilateral deal, which the US would try to tilt in its own favor. But Trump – who has also refused to exclude permanently Japan, the European Union, and Canada from his administration’s steel and aluminum tariffs – pays no mind to his allies’ preferences.
Trump’s trade tactics, aimed at stemming America’s relative economic decline, reflect the same muscular mercantilism that China has used to become rich and powerful. Both countries are now not only actively undermining the rules-based trading system; they seem to be proving that, as long as a country is powerful enough, it can flout shared rules and norms with impunity. In today’s world, it seems, strength respects only strength.
This dynamic can be seen in the way Trump and Xi respond to each other’s unilateralism. When the US deployed its Terminal High Altitude Area Defense system in South Korea, China used its economic leverage to retaliate against South Korea, but not against America.
Likewise, after Trump signed the Taiwan Travel Act, which encourages official visits between the US and the island, China staged war games against Taiwan and bribed the Dominican Republic to break diplomatic ties with the Taiwanese government. The US, however, faced no consequences from China.
As for Trump, while he has pressed China to change its trade policies, he has given Xi a pass on the South China Sea, taking only symbolic steps – such as freedom of navigation operations – against Chinese expansionism. He also stayed silent in March, when Chinese military threats forced Vietnam to halt oil drilling within its own exclusive economic zone. And he chose to remain neutral last summer, when China’s road-building on the disputed Doklam plateau triggered a military standoff with India.
Trump’s “America First” strategy and Xi’s “Chinese dream” are founded on a common premise: that the world’s two biggest powers have complete latitude to act in their own interest. The G2 world order that they are creating is thus hardly an order at all. It is a trap, in which countries are forced to choose between an unpredictable and transactional Trump-led US and an ambitious and predatory China.