The End of Globalisation?

The Rise of Minilateralisation and Economic Security

The opinions expressed in this article reflect the opinions of its author(s). They do not represent the views of UCL's Diplomacy Society, Diplomacy Review nor The Diplomat.

Introduction: The origins of free trade system and globalisation

We now live in a world where the free trade regime has become the global standard international rule. But when and why was the free trade system established?

The origins of this global system date back to 1932, during the Great Depression. In that year, the UK convened a conference of the autonomous territories of the Commonwealth in Ottawa, Canada. There, the UK reduced or exempted tariffs on imports from the autonomous regions to the UK, whilst imposing a 10% tariff on imports from other countries to the UK and establishing a framework for imposing tariff preferences on UK exports to the autonomous regions. The customs agreement known as the 'Ottawa Agreement' thus created a bloc economic system. The world economy had been in a prolonged recession since the Wall Street Crash in 1929, and the UK sought to survive the Depression by creating an exclusive bloc economic area where intra-regional trade is encouraged. The UK imposed high tariffs on imports from outside the bloc and established a currency bloc based on the federal currency, the sterling pound. The US enacted the Smoot-Hawley Tariff Act and increased tariff rates on imports, forming a dollar bloc economic area with South American countries, whilst France and the Netherlands also built a franc bloc. As a result, the bloc economies restricted world trade, and between 1929 and 1932, total world trade fell by 60%. These economic blocs that prioritised their own countries also led to an uneven distribution of wealth, and Japan, Germany and Italy, which were unable to emerge from recession and whose economic downturns accelerated, developed incentives to carry out invasions.

The block economy contributed to the Second World War, which is why the international community built a system promoting free trade after the war. However, more than 75 years after World War II, countries are now moving to create new economic blocs. The division in the international community is deepening due to the Sino-American conflict and Russia's illegal and unprovoked invasion of Ukraine. Not only are there signs of the demise of the once-promising globalisation, but the free trade system itself is on the verge of a crisis.

The tragedy of Ukraine and the end of globalisation

'There are decades where nothing happens; and there are weeks when decades happen.’ These words of Lenin were quoted over and over again after Russia's illegal and unprovoked invasion of Ukraine began: in the weeks since 24 February 2022, decades worth of changes have occurred.

The invasion by Russia was an illegal aggression against an independent country, a violation of the UN Charter and a breach of international law. The framework of peace in Europe that had been maintained after the Second World War and the Cold War has collapsed. Japan's new security strategy document, published in December 2022, begins with the following sentence: 'we are reminded once again that globalisation and interdependence alone cannot serve as a guarantor for peace and development across the globe'. The world is being drawn back to the Realpolitik era of the 'two decades of crisis' between the two world wars.

In conclusion, the challenges the world will face in the future will be as follows. All of them have geopolitical and geoeconomic dynamics that will undermine the international order.

(ⅰ) There is an increasing risk that Realpolitik, in which major powers change the status quo and expand their own 'sphere of influence' through military and economic power, will prevail.

(ii) The fact that the nuclear power (Russia) has clearly made a nuclear threat, suggesting the use of nuclear weapons, raises questions about the legitimacy of the nuclear non-proliferation and, as a result, may increase incentives for non-nuclear states to acquire nuclear weapons.

(iii) The exchange of economic sanctions, such as the severe showdown between economic sanctions and energy sanctions, and the weaponisation of supply chain networks are likely to carry over not only to wartime punishments but also to post-war peace agreements and compensation negotiations, making the economic security threat permanent.

(iv) China and Russia share a threat perception towards democracies such as the US, Europe and Japan, and this will provide an opportunity to deepen strategic relations and form a 'China-Russia bloc'.

(v) Cyber warfare as a result of the digital transformation of war and the homefront, information warfare and cognitive warfare will emerge as new strategic domains, and the 'globalisation of total warfare' is taking place, in which citizens and companies from all over the world ‘take part in the war’.

The war in Ukraine and the bloc-ification: Economic sanctions against Russia and the birth of the China-Russian bloc

The bloc-ification of the world will not only be economic, but also ideological and political.

Economic sanctions against Russia are expected to be prolonged, and long-term economic sanctions will greatly increase Russia's dependence on China; it is recalled that after the Crimean crisis in 2014, gas pipeline contracts between Russia and China were signed in a way that was extremely favourable to China. China will take over the renewable energy and green gas no longer provided to the West. For China, this is also a way to solve the so-called 'Malacca Strait Dilemma' (the issue of vulnerability of China's sea lanes) and its dependence on the Strait of Hormuz, and the interests of both China and Russia are aligned.

In addition, the renminbi/Chinese yuan accounts for 17% of Russia's foreign exchange reserves, and Russia's dependence on the renminbi and China will increase as a means of storing value and as a means of store of value. Thus, a 'Chinese bloc' will be created.

There will be psychological resistance within Russia to becoming China's ‘junior partner’, and Russia is very wary of China's growing influence in Central Asia, including Kazakhstan, which it considers its sphere of influence. There is a struggle between China and Russia to fill the vacuum in Central Asia created by the US withdrawal from Afghanistan, but ultimately it is the 'economy' that will ultimately decide everything.

Minilateralisation: A network of interdependent alliances

The Biden administration formed a coalition of allies in response to Russia's invasion of Ukraine, and was agile in providing support to Ukraine and implementing various sanctions against Russia. If Putin had expected a repeat of the impunity shown by the US in its withdrawal from Afghanistan, it was a major miscalculation.

However, the war in Ukraine may have forced a major rethink in US national strategy. For the past decade, the US has been pursuing an Indo-Pacific strategy focused primarily on countering China and 'rebalancing' towards the Indo-Pacific region. If the cooperation between China and Russia deepens after the war in Ukraine, and if it develops into a quasi-alliance-like relationship, it becomes uncertain whether the existing strategy will be sufficient for the US to deal with future security threats.

In addition, the existence of a number of countries that have not joined the economic sanctions against Russia or to resolutions condemning Russia at the UN must also be taken into account. In fact, 'democracies' are a minority in the world. Even among the countries included in the regional middle powers or ‘abstain caucus’, the reasons for a 'neutral' foreign policy vary. Each of these countries is an actor acting in its own national interest and should not be simply categorised as 'a bunch of anti-great power‘.

US national power is also described as having declined in relative terms. The decline in US national power is a growing need for the US to rebuild alliances based on the concept of inter-dependence. In an alliance network based on such a concept, countries that are more independent and more complementary in providing personnel and other resources would be seen by the US as 'good partners'.

Finland and Sweden have applied to join NATO together; the country most fearful of NATO's 'eastward expansion' is China. China fears that Japan and India will deepen their cooperation with NATO. 'Expansion of the bloc' will be observed in various aspects and regions, including the above factors. Ultimately, decoupling between the US and China, including financial, will be irreversible.

In this context, in recent years, a 'minilateral' security framework, consisting of a relatively small number of states, composed of three or more countries, has developed, particularly in the Indo-Pacific region. An example is the security cooperation between the United States, Japan and Australia. Australia is now regarded as a 'quasi-ally' of Japan. QUAD and AUKUS are also minilateral frameworks. There has also been an increase in Minilateral cooperation between regional countries that do not include the US, such as economic and supply chain discussions between Australia, Japan and India, and TCAs between Indonesia, Malaysia and the Philippines.

Underlying the development of minilaterals are increasingly complex security challenges that cannot be addressed by a single country, and conflicts of national interest that exist even within the framework of like-minded countries. The joint statement issued in February 2022 by the UK, Poland and Ukraine is a minilateral framework that links NATO's internal and external affairs, but it can also be criticised as damaging NATO's unity.

Economic security or protectionism?

Economic security policies are often used as a cover for protectionist policies for domestic industry. Indonesia will ban bauxite exports from June 2023. Whilst the line between economic security and protectionism is inevitably blurred, suspending exports with the aim of protecting the country's industrial policy is clearly a protectionist policy that would not have been allowed under previous trade rules.

Protectionist and home-first tendencies are evident in the policies of both the US and China. In his State of the Union address, President Biden said that ‘everything from the deck of an aircraft carrier to the steel of a highway guardrail, from top to toe, will be “made in America”’. President Xi Jinping also stressed that ‘the Chinese people's rice bowls must all be filled with Chinese grain’. In addition to the US government's promotion of ‘reshoring’, which encourages supply chains to return to the domestic market, ‘friendshoring’ is now being aimed at. Whilst this is not necessarily an 'America First' policy, it will foster decoupling, given the orientation towards global supply chains only with allies and when it comes to strategic technologies and products.

Economic sanctions are something that liberal internationalism has started to use since the 20th century as a means to realise its vision of the international order. With regard to economic sanctions, it must be noted that the difference between their 'effectiveness' and their 'effects'. Even if economic sanctions are effective, they may later have unintended counter-effects and trigger new conflicts and wars. The biggest of such 'economic sanctions traps' is that they are supposed to be a means of protecting the 'free and open international order', but the more they are abused, the more they weaken the free trade and rules that are the basis of that order.

Conclusion

The bloc economies of the 1930s were, so to speak, zero-sum economic blocs intended to strengthen the links between home and overseas territories for the purpose of self-sufficiency. However, today, with globalisation and the complex intertwining of human resources, goods and capital across national borders, the zero-sum concept cannot contribute anything to the construction of economic blocs. Instead of the pursuit of economic profit, 'economic security' has become a major cause for the construction of economic blocs. The US is leading a 'friendshoring' initiative to rebuild supply chains with like-minded countries in order to reduce dependence on China for strategic goods. Countries are now trying to build economic blocs focused on economic security, including advanced technology, whilst maintaining broad economic links with potential ‘adversaries’. Whilst the trend of deglobalisation and the escalation of economic security threats will continue, policies that limit the scope of trade to friendly countries and areas could further divide the world. The history of the domino-like economic bloc-ification in the 1930s, which led to a world war, must not be forgotten.

Perhaps the era of free trade systems and globalisation is coming to an end or undergoing a major transformation. The world is becoming increasingly complex, and whether it will be a multi-polar or a collection of many minilaterals, the future is uncertain. Yet, it is clear that there is no single policy that is absolutely right. Even US foreign policy towards Russia is not confined to sanctions, and it is also continuing dialogue with China. If we cannot base our thinking on a multifaceted and flexible approach and make a range of choices, we will diminish our ability to deal with unexpected situations.