IT IS THE GEOECONOMICS, STUPID!

While the world is justifiably focused on geopolitical friction and the
major theatres of conflict, important developments are afoot in the world
of trade, investment and technology. Countries of the Global South may
ignore these developments only at their peril.
For those interested in geoeconomics, the 400-page report submitted by
former Italian Prime Minister Mario Draghi to the President of the
European Commission, Ms Ursula von der Leyen in September is a
must-read. The report is aimed at improving the competitiveness of the
EU in the face of developments in the US and China. Draghi calls it an
existential challenge for the EU and bluntly warns that if the EU does not
take immediate steps to craft a strong industrial policy in response, it will
endure a slow and painful death. To do this, Draghi suggests state
funding to the extent of $1Trillion per annum for an indefinite period.
This development in the EU follows the prior adoption of strong industrial
policy measures by the other two economic giants, namely, the US and
China. The US, it may be recalled, passed the Inflation Reduction Act
and the CHIPS and Science Act in 2022 to ensure that American
industry is duly protected and is able to regain its dominance in cutting
edge technology.
China has always had a strong industrial policy but beginning with the
reign of Xi Jinping in 2013, it has restored the pre-eminence of state-
owned enterprises and has taken industrial policy to the next level. As
early as 2015 Xi Jinping launched the “Made in China 2025” plan aimed
at rapidly expanding its high-tech sectors. The results so far have been
impressive.
Important questions arise in the light of the above. First, if the three
major economic players, the US, China and now the EU, are adopting
industrial policy as the main leitmotif of their blueprint for development,
then is it correct to conclude that the overall role of free trade is
significantly diminished in today’s world? Second, who among the three
players is likely to succeed, because that will perhaps be the most
consequential thing in deciding who will win the geopolitical battle. Third,
where does this leave the World Trade Organization (WTO) which after
all was established on well-known principles of free trade. Last, but not
least, where does this leave countries of the Global South?

As for the first question, there is no denying that the state is back with a
bang, as evidenced in the aftermath of the COVID-19 crisis. And if you
take the most critical sectors like semi-conductors, critical minerals,
electric vehicles, AI or quantum computing, there is no denying that the
state is vigorously seeking to direct, regulate and if possible, control
economic activity in these areas. Free trade is clearly passe in this
sense.
The most difficult question to answer is which of the three powers above
will prevail in the ensuing geopolitical competition. Normally, the basic
features of the state may provide clues to the answer. For a state to be
successful, it must fulfil at least three criteria: efficiency in delivering
services, be uncontested and finally, provide an enabling policy
environment. Prima facie, China fulfils at least two of the above criteria
in substantial measure. However, that alone cannot ensure success,
since a state must also be uncontested, which is hard to achieve in
authoritarian regimes. But both the US and EU must avoid complacency
and take note: if the state is not fundamentally efficient and an enabling
policy environment not assured, then all bets are off.
It is now a cliché to say that the WTO faces an existential crisis. The
WTO is displaying signs of a patient condemned to a life of coma, with
little prospect of recovery. In these circumstances, it is not enough to
merely tinker with WTO rules anymore. With the three big players
resorting to massive industrial policy, the WTO stands obsolescent and
helpless precisely because it is based on principles of free trade which
the major players do not share anymore. It is time therefore to
renegotiate the fundamental rules of WTO to bring it in line with trade
practices of all countries, particularly developing ones. The alternative is
for the WTO to slowly reduce itself to irrelevance.
The Global South finds itself between a rock and a hard place. To begin
with, most countries simply do not have the resources to conceive and
execute an industrial policy at scale. Creating an enabling policy
environment is an issue as well in many countries where a long-term
vision is lacking. Most of all, the fundamental requirement that the state
must be efficient and uncontested is terribly hard to meet in many
countries. In light of this, countries of the Global South would be well
advised to take serious remedial policy measures at home and to
renegotiate the terms of trade and technology with the major players to avoid being put at a perennial disadvantage. Tall order? Welcome to the brave new world of Geo-economics!!