A tangled web: geopolitics, economic security and trade

Frontier's Amar Breckenridge spoke at a panel session on geopolitics, economic security and trade at the second UK Trade Policy Forum, organised by the Centre for Inclusive Trade Policy in London on 2 February 2024.

The panel focused on understanding the increasing trend for governments worldwide to intervene selectively in trade and investment flows.

Amar explained that trade and geopolitics have always been closely intertwined. The ‘Most Favoured Nation’ principle, one of the pillars of the global trading system, was a response to the geopolitics of the 1920s and 1930s based on imperial rivalry. However, it is true that the nexus between geopolitics, economic security and trade is now qualitatively different and has reached a very high degree of complexity. Amar identified six reasons explaining this:

  • The role of global value chains. While interdependencies created economic benefits, they also generated concerns that countries would be exposed to exogenous shocks, and about who controlled key parts of value chains, especially in “dual use” (industrial and military) sectors.
  • The rise of “capitalism without capital”e based on intangible assets, which was associated with a concentration in economic activity in certain high-value added and strategic activities, across and within countries.
  • The demands on policy makers to address collective action problems, often of a global nature, such as climate change. Correcting the market failures that underly these problems requires an array of instruments. These could be welfare enhancing, but also were likely to have effects on trade. Optimal policy design was complicated by assigning multiple objectives to the same policy – for example, couching industrial decarbonisation policies in terms of strategic industrial interventions.
  • The role played by businesses in anticipating and responding to these trends. This could have positive effects – for example, when businesses seek to build resilience in value chains, or enter into cooperative sustainability arrangements. But it could also have negative effects, for example if businesses tacitly, or otherwise, stimulate bidding wars on subsidies or incentives.
  • The persistent inability by governments to address distributional effects of trade (in part) and technology (mainly). These reflected failures of domestic policy, but also created political constituencies willing to blame foreign partners for these domestic failings.
  • Failing political willingness in industrialised economies, particularly the US and the EU, to contain domestic protectionism.

These factors in combination create multiple challenges for policymakers and economists. The first is to be clear about what objectives are being pursued, and where there are multiple objectives, to ensure that the right instruments are selected. The second challenge is to create a compelling narrative that highlights the costs of protectionism and economic fragmentation.  There is a considerable amount of analysis on this front. The main challenge is that costs are almost always articulated in terms of reductions in growth rates relative to a baseline. These lost growth opportunities are real costs. But they are hard to spot politically, and become practically inaudible when set against the narrative of nationalism and autonomy wielded by politicians.

It is up to economists to come up with a compelling narrative so that, in the face of complex and multiple challenges, the world does not repeat the mistakes of the past.   

For further reading, please see the Centre for Inclusive Trade Policy’s article ‘Economic security and the geo-politicisation of trade’