Wednesday, June 7, 2023

America’s deep suspicion of globalisation makes it an outlier

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There have been two elections of significance for the future of globalisation over the past two weeks. In one, a radical leftist relatively sympathetic to China was elected promising a sharp break with his predecessor, a business-friendly rightwinger who had signed one of the world’s largest-ever trade agreements. In the other, a traditionally mainstream conservative party with a historically free-market outlook is bidding for control of the nation’s legislature.

Yet the former, the victory of Luiz Inácio Lula da Silva in Brazil, is almost certainly more positive for an open global economy than the latter, the Republicans trying to retake the US Congress. These are strange times. But it takes an appreciation of international rules and values more than vague deregulatory instincts to support the modern trading system, and the US in general and the Republicans in particular have long abdicated their role as defenders of economic openness.

Lula has form in surprising those expecting a reckless, fiscally incontinent and protectionist administration. Ahead of his first election as Brazil’s president in 2002, the bond markets took fright, forcing the IMF to launch a then-record $30bn bailout. In the event, Lula’s government tightened fiscal policy even more than the IMF programme required, avoided default and saved the banking system. It was a similar story in trade policy. Brazil continued actively to promote its farm exports and was a highly competent and enthusiastic participant in World Trade Organization talks.

This time round, Lula has signalled a closer alignment to Beijing than did his predecessor, the populist conservative Jair Bolsonaro. But he’s certainly not signalling a definitive leap into a big China-led geopolitical camp, not least because such a thing doesn’t really exist. The big middle-income countries all have to negotiate maintaining relations simultaneously with the US, EU and China. This was also true of Bolsonaro, instinctively pro-US but mindful of the three-quarters of Brazilian soyabean exports that go to China.

In fact, the new president’s political and environmental stances also improve his position with Brazil’s second-biggest trading partner, the EU. Bolsonaro signed the Mercosur trading bloc’s preferential trade agreement (PTA) with the EU in 2019. But ratification stalled in Europe, due to its stated commitment to values-based trade, because of concerns over slash-and-burn agriculture in the Amazon.

The EU has been dragging its heels and waiting for the election before coming up with a side agreement on deforestation. The deal will unlock ratification if Lula can live with some fudge to assuage his desire for more leeway on domestic industrial policy, and assuming EU objections are principled environmentalism rather than disguised protectionism from beef farmers. In September Lula predicted he could conclude the agreement with the EU within six months.

Meanwhile in Washington, whether or not they take control of the House (and, less probably, the Senate), the Republicans remain a threat to an open world economy. Congressional Republicans are traditionally somewhat more positive towards PTAs than Democrats, though it was a Republican-dominated Senate that stalled the US’s last big deal, the Trans-Pacific Partnership (TPP) after it was signed by Barack Obama in 2015. Since then, the GOP has been dominated by an eccentric, aggressive economic nationalist in the form of Donald Trump — to say nothing of the threat posed to US and thus global political stability by its contempt for democratic institutions.

Joe Biden’s presidency, which has kept tariffs and quotas in place along with Buy America-type local content provisions, has disappointed trading partners expecting a marked shift away from Trumpism. But, even given the underperformance of Trumpist Republicans in this week’s midterms, it’s hard to imagine any Republican president will risk alienating the base by returning to an instinctively open international economic policy.

The reality is that among the main trading powers — including middle-income countries — the US is an outlier in its deep suspicion of globalisation and trade deals and its willingness to bypass institutions like the WTO. China is recalibrating its trading and investment relations with the rest of the world and in particular walling off its data and some of its tech-heavy economy. But Japan, the EU, South Korea, Brazil, Chile, India, the Asean countries, even Mexico under the populist Andrés Manuel López Obrador — none has shifted towards protectionism like the US.

More leaders like Lula and fewer like the US Republicans would have been an eccentric recipe for protecting globalisation when he was first elected president of Brazil 20 years ago. But economically isolationist populism is now more of a threat in American politics than in most other major trading nations, and it poses a clear and present danger to an open world economy.



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