At first glance, the world economy appears encouragingly resilient. America is booming even as its trade war with China escalates. Germany has withstood the loss of Russian gas supplies without suffering economic disaster. The war in the Middle East did not bring an oil shock. The rocket-firing Houthis have barely touched the global flow of goods. As a share of global GDP, trade has rebounded since the pandemic and is forecast to grow this year.
However, if you look deeper you will see the fragility. For years, the order that has governed the global economy since World War II has been undermined. Today it is close to collapse. An alarming number of triggers could trigger a descent into anarchy, where the powerful are always right, and war once again becomes the tool the great powers turn to. Even if conflict never occurs, the consequences of the collapse of norms for the economy can be swift and brutal.
The disintegration of the old order is visible everywhere. Sanctions are used four times more than in the 1990s; America recently introduced “secondary” sanctions against entities that support the Russian military. A subsidy war is underway, as countries seek to copy China's and America's extensive state aid to green manufacturing. Although the dollar remains dominant and emerging economies are increasingly resilient, global capital flows are beginning to split.
The institutions that preserve the old system are either dysfunctional or rapidly losing credibility. The World Trade Organization celebrates its 30th birthday next year, but has spent more than five years stagnating due to American neglect. The International Monetary Fund is going through an identity crisis, caught between the green agenda and ensuring financial stability. The United Nations Security Council is paralyzed. And international courts like the International Court of Justice are increasingly being used as weapons by warring parties. Last month, US politicians including Mitch McConnell, the leader of the American Republicans in the Senate, threatened the International Criminal Court with sanctions if it issues warrants for the arrest of the leader of Israel, whom South Africa has accused of genocide before the International Court of Justice.
Until now, fragmentation and decay have imposed a silent toll on the global economy: visible, but only if you know where to look. Unfortunately, history shows that deeper, more chaotic collapses are possible - and they can strike suddenly once a downturn begins. World War I killed the golden age of globalization that many believed would last forever. In the early 1930s, after the onset of the Great Depression, American imports fell by 40 percent in just two years. In August 1971 Richard Nixon suddenly suspended the conversion of dollars into gold; just 19 months later, the Bretton Woods fixed exchange rate system collapsed.
Today, it is easy to imagine similar splits. Return Donald Trump to the White House would mean the continuation of the erosion of institutions and norms. Fears of a second wave of cheap Chinese imports could accelerate that. A direct war between America and China over Taiwan, or between the West and Russia, could lead to a general collapse.
In many of these scenarios, the loss would be much deeper than many realize. It is popular to criticize rampant globalization as the cause of inequality, the global financial crisis and climate neglect. But the achievements of the 1990s and 0,0002s - at the height of liberal capitalism - cannot be compared to anything in history. Hundreds of millions of people have been lifted out of poverty in China as it integrates into the global economy. The worldwide infant mortality rate is twice as low as it was in 2005. The percentage of the global population killed in interstate conflicts reached a post-war low of 1972% in 40; while in XNUMX it was almost XNUMX times higher. The latest research shows that the "Washington Consensus" era, which today's leaders would replace, was one in which poor countries began to enjoy catch-up growth, closing the gap with the rich world.
System collapse threatens to slow that progress, or even reverse it. Once it is broken, new rules will hardly replace it. Instead world events will fall into their natural state of anarchy favoring violence and plunder. Without trust and an institutional framework for cooperation, it will be more difficult for countries to tackle the challenges of the 21st century, from curbing the arms race to artificial intelligence or cooperation in space. Clubs of like-minded countries will deal with the problems. It can work, but more often it will involve coercion and resentment, as is the case with Europe's carbon border tariffs or China's spat with the IMF. When cooperation gives way to armaments, states are less rational.
In the eyes of the Chinese Communist Party, Vladimir Putinor other cynics, a system in which the powerful is always right is nothing new. They see the liberal order not as the realization of lofty ideals but as the exercise of raw American power—a power now in relative decline.
It is true that the system established after World War II brought about a marriage between America's internationalist principles and its strategic interests. However, the liberal order also brought numerous benefits to the rest of the world. Much of the world's poor are already suffering because of the IMF's inability to resolve the sovereign debt crisis that followed the covid-19 pandemic. Middle-income countries like India and Indonesia hoping to enter the world of the rich are looking at the opportunities created by ripping apart the old order, but will ultimately rely on the global economy remaining integrated and predictable.
And the prosperity of a large part of the developed world, especially small, open economies like Britain and South Korea, depends mostly on trade. Buoyed by strong growth in America, it may seem as if the world economy can survive anything that befalls it. That is not true.
Translation: NB
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