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The G-Minus-2 Threat

The US-dominated G1 world is long gone, and the G2 system in which America and China shared hegemonic responsibilities is now fading into memory. In today's G-minus-2 world, US and Chinese policies threaten to have devastating consequences for the global economy.

CAMBRIDGE – For an all-too-brief period between the late 1980s and the late 2000s, the world was characterized by convergence, both ideological and economic. The West and the Rest agreed that an open liberal order was the best way to increase prosperity. Now, however, this ideological order threatens to unravel, with adverse consequences for the world economy.

The two-decade-long “golden age” was one of trade hyper-globalization, reflected in an unprecedented increase in the ratio of world exports to GDP. It was also an era of economic convergence: for the first time in centuries, living standards in a broad cross-section of developing countries started catching up with advanced-economy indicators. Moreover, globalization and convergence were handmaidens: open markets enabled developing countries to prosper by building up modern, efficient, export-based industries. And no country benefited more from hyper-globalization than China.

The liberal order underpinning this era was largely created by the United States. Exactly 75 years ago, when both the economic turmoil of the 1930s and World War II were fresh in the collective consciousness, the US was able and willing to supply three vital global public goods through the postwar institutions created at Bretton Woods. Emergency finance would come from the International Monetary Fund, and long-term lending from the World Bank. Above all, open markets would flourish under the General Agreement on Tariffs and Trade (and its successor, the World Trade Organization). It was a G1 world, and America was the unchallenged hegemon.