Before I divulge any further into this, it is important to provide a definition of dollarization.  In the most basic sense, dollarization occurs when the residents of a foreign country continuously use foreign currency concurrently (in our case the US$) or instead of the domestic currency (if we are looking at any other country).  Dollarization can occur unofficially, individuals holding foreign currency bank deposits or paper money, or officially, the government adopting foreign currency as the dominant legal currency.  Panama and East Timor are two examples of official dollarization, while others, such as Ecuador, were also considering official dollarization in 2021; in the case of East Timora and Panama economic stability and credibility avoiding political unrest is the primary reason why dollarization there works well (for East Timor, Indonesia, this has served as rescue tactic from the Asian Financial Crisis which occurred in late 1990s in East and Southeast Asia). I do agree the lack of controls with regards to their money supply and devoid of any local currency advantages are a concern, but for these countries dollarization has served to be beneficial. Now, I will look at dollarization as an official policy for the US.      

There are four broad sets of advantages for dollarizing: eliminating the risk of increasing exchange rate adjustments, lower transaction costs, lower inflation, and increasing economic stability and transparency.  The primary advantage for countries to dollarize is that it eliminates the risk of increasing exchange rate adjustments.  This benefit triggered by dollarization can produce a “domino-effect” for the dollarized country.  Countries which have very high exchange rates are often led to a state of currency crisis, dollarization helps avoid this scenario.  However, an immediate result of this advantage is that there would be lower interest rates and less country risk premia (Berg & Borensztein, 5).  This additional benefit of dollarization would lead to stable international capital inflows.  Such capital movement stability will eventually lead to increasing investor confidence, lower international borrowing, and increasing foreign investments in the dollarized country.  

The second advantage is lower transaction costs, the cost of exchanging one currency for another, since the dollarized country does not have to pay for currency exchange with other countries in the unified currency zone.  This also increases trade and investment with countries within the unified currency zone due to the incentive of lower transaction costs.  Additionally, this incentive may compel banks to hold lower reserves, thereby reducing their cost of doing business.  The implications of a country’s domestic currency are that banks would have to separate their domestic currency and foreign currency portfolio.  However, with official dollarization, the portfolio in essence would be part of one large pot.  

The third advantage is lower inflation. By using a foreign currency. a dollarized country obtains a rate of inflation close to that of the issuing country.  Dollarization for a country, such as Panama has served to be a significant advantage, with lower inflation today.  The risk of high inflation has always been of extreme concern for countries, since its consequences are so grave.  A historical example is the “drowning Argentina” when the peso sunk from one-to-the-dollar to three-to-the-dollar.  From deflation, Argentina has moved to inflation, with a rise of 4% in the consumer price index for March. (Financial Times, 5/2002). For Argentina the big question is whether it will be able to rise above water before it reaches hyperinflation.  In view of Argentina’s predicament in 2021, implementing dollarization to reduce inflation appears to be the imminent savior. Using not only the dollar, but also the Euro or the Yen would reduce inflation substantially for developing countries in the western hemisphere.

The fourth advantage is greater economic stability and transparency.  With regards to greater economic stability, since there is no domestic currency that needs to be factored in, the threat of magnified depreciation and devaluation are no longer there.  Therefore, dollarization eliminates the balance of payments crisis, effectively a currency crisis when the value of the currency declines, and there is less support for exchange controls, restrictions on buying foreign currency.  Also, another element of economic stability would be a closer financial integration of the foreign country to the issuing country.  Such integration would decrease the financial vulnerabilities a developing country may have, decreasing country risk and this is because the “integration” itself eliminates this “risk”.  With regards to transparency, since there is a greater economic openness on the part of the government, by eliminating its power to create inflation, and dollarization promotes an inevitable budgetary discipline.  This means that deficits must be financed by transparent methods, and these are higher taxes or increased debt, rather than through printing money.   

In outlining the advantages of dollarization, it appears to be an attractive alternative for some countries, but this would not be a fair assessment, unless the disadvantages are highlighted as well.  There are four main disadvantages of dollarization: the cost of lost seigniorage, default risk, the irreversible monetary policy dilemma, and elimination of the lender-of-last-resort function.  The first disadvantage involves seigniorage (profit made by a government for minting currency).  The magnitude of the “cost of lost seigniorage” is embedded in its two components: stock cost and flow cost.  The “stock cost” is the cost of obtaining enough foreign reserves needed to replace domestic currency in circulation.  An IMF study estimated that the stock cost of official dollarization for an average country would be 8% of gross national product (GNP was $23 trillion); a notably large amount. To compare an extreme example, in 2001, for the United States the stock cost was over $700 billion.  In terms of gross domestic product, the stock cost would be about 4% instead of 8%, which is still a significant number.  The other component of seigniorage, “the flow cost” is the continuous amount of earnings lost every year.  This cost generates future revenue for a country by reprinting of money every year to meet the increase in currency demand.  Besides the obvious attraction of seigniorage being a revenue source, it can be used to purchase assets or used towards resolving a deficit. (Berg & Borensztien, 15)  Seigniorage can also be used to finance a portion of the government’s expenditures potentially without having to raise taxes.      

The second disadvantage is the risk of default by the dollarized country, which may occur as a consequence of devaluation risk increasing sovereign risk.  The sovereign risk may occur as a result of eliminating currency risk, which would reduce the risk premium on dollar-denominated debt.  Such an effect potentially could be prevented by a devaluation of the exchange rate, which may improve the domestic economy, thereby decrease default risk.  This disadvantage almost negates the rationale for dollarizing, since the desired effect of dollarization is to improve a country’s financial position and save it from a country crisis scenario.   

The third disadvantage is that dollarization is irreversible.  The lack of a flexible monetary policy may bear a high cost to the dollarized country in a situation where the issuing country is tapering its monetary policy during a boom, while the dollarized country needs a more flexible monetary policy because it is in a recession.  A country’s tolerance for economic shocks decreases due to this.  Another aspect of this disadvantage is that with dollarization being irreversible, a country losses’ its’ symbol of nationalism forever.  Although, this may not carry as much weight comparatively, it is a key factor in being a cost to the country, particularly, in view of the gold standard period (1870s, when the currency was tied to a fixed amount of gold). 

The fourth disadvantage is that dollarization eliminates the lender-of-last-resorts function, which would mean that the dollarized country would lose the domestic central bank as a lender of last resort, which is a grave predicament for any country and if dollarized then it should be proven that it is infact an advantages policy to implement for that particular country.  The issue is that the dollarized country may not be able to obtain sufficient funds to save individual banks if need be.  This would create further banking problems in the dollarized country.  Since the banking systems in many developing countries are weak and vulnerable to market problems, they are not capable of handling the system-wide banking problems.  Such a disadvantage would lead to a handicapped dollarized country, an even worse predicament. 

Dollarization is not the optimal route for every country, but it is also not to be eliminated as an option and my recommendation is that the macroeconomic and microeconomic factors of any country should be carefully evaluated if dollarization is to be considered there, and in view of optimum currency areas (where benefits of using a common currency outweigh the costs).  Optimum currency areas will allow us to judge whether dollarization is desired.  This theory states that the economy is part of an optimum currency area when a high degree of economic integration makes a fixed exchange rate more beneficial than a floating rate.  However, it is difficult to define this area accurately.  Measuring the implications of “not dollarizing” economically will indicate when we should implement dollarization and factor in an exchange rate.  For a mid-sized country in the Western Hemisphere, the characteristics, such as high exchange rates, susceptibility to higher inflation and overall weak economic conditions will lead to increasing default risk, which will lead to a country crisis. (Paul Krugman, 1998). 

To illustrate this country crisis three conditions exit for our country:

1.The first is that a “Goods Market” exists and contributes to the crisis, expressed as Y = C + G + CA + I (Q).  In this economy, (Y), the output or goods a economy produces is a result of a certain amount consumed (C), consumption of goods by government (G), goods exported and imported in (CA), and whatever amount is left over invested (I) to produce more goods for the economy.  Since all the goods invested (I) are not domestic, (Q) is the price of foreign goods relative to a domestic good.  As (Q) increases, the foreign goods are more expensive. 

2.The second is the “Equilibrium in Asset Market”, expressed as MPK = (K, L) = (1 + R*) Qt/Qt , where the marginal product of capital (MPK) is created through investment (K) and entrepreneurs or lenders (L).  The assumption is that capital lasts only one period; this period’s capital is equal to last period’s investment.  So, the capital produced through investment and entrepreneurs is equal to the interest rate for this period multiplied by the exchange rate on goods for this period. 

3.The third condition, for our purposes, is the “Credit Constraint”, expressed as I <λW = λ (P) – (DD) – Q (FD).  With this condition, the assumption is that investment cannot be negative and lenders cannot lend more than half their wealth (I < λW), which is a result of the profits (P) minus the domestic debt (DD), minus the foreign debt (FD); (Q) the exchange rate is applied to the foreign debt for conversion.  

If time permitted, applying real numbers to these conditions would indicate that the interaction of these three conditions will result in a depreciating exchange rate, our sovereign’s wealth will be significantly less since the declining exchange rate has already triggered a downward-spiral, and debt would be on the rise.  Figure 1 illustrates that as the exchange rate (Q) shifts to the right and continues to do so, the “Credit Constraint Line” at conflict with the “Goods Market Line” results in our sovereign’s debt rising and leading towards default.

Figure 1. Country Crisis Model

Therefore, with such a distressing illustration of a country leading to the predicament of a country in crisis, with country characteristics such that default is an inevitable consequence, Dollarization is the best alternative, and it is arguable that just before this juncture is the optimal point at which dollarization should be implemented, thereby proving my case for Dollarization here.  

Today, the ideas of de-dollarization have become more widespread and it seems that the geopolitical events in many countries are the major factor for this. Once the dominant reserve currency, it is becoming more expensive due to high interest rates being another factor. “The US dollar’s shares in international foreign reserves, global trade invoicing, international debt securities, and cross-border loans are many times greater than the United States’ shares of global gross domestic product (GDP) and international trade (The International Banker 2024). The question at hand is how does de-dollarization help any situation from a macro-perspective when it diminishes the US stance and position in the foreign currency world and in the past this supremacy has always aided countries and represented a nationalism that advances trade policies generally? Exceptions to this are always there; dollarization today for Argentina is not conducive and rather would be an expensive route for the economy there; among the list of the countries that have de-dollarized today are Russia, India, China, Kenya, and Malaysia, while promoting local currencies for them is an enormous motivation, and the many advantages they aim to gain. 

The following illustration (from JP Morgan as of April 2023) on “The Dollar’s Contrasting Fortunes” highlights the US’s share of global FX volumes increasing tremendously, and US’s share of global exports (%) decreasing equally, which implies that the value of the US $ currency decreasing and its demand, at least, as of late 2018.

So, where exactly are we with dollarization today? The best answer is to strategically evaluate on a case by case basis for any given country. 

Sonal Patney is a corporate and investment banker and author having originated, marketed, structured, executed, and closed over 100 debt and equity financings that ranged from $5M to $4B. As of October 2022, Sonal became an author with the international publishing of her book on sustainable finance debt by Europe Books – “How Should We Think About Debt Capital Markets Today? ESG’s Effect on DCM”. As a graduate of Columbia University, and New York University, she holds an MPA with a concentration in International Economic Policy, and a BA in Political Science, respectively. Her academic research has focused on emerging market countries and trade. Additionally, she has been a pro bono SCORE LI mentor for small business’ and the recipient of a mentoring award from SCORE; a member of varying nonprofit associations and a former Board member of some. She is also a “Contributor” for The Financial Executives Networking Group Journal online on capital markets topics.

The post On The Relevance of Dollarization: Advantages & Disadvantages of the US Dollar appeared first on WITA.

There is persuasive force in calls for reform that are framed around a return to the past. The appeal to Bretton Woods conjures a period of sustained economic prosperity and relative political stability—at least among the liberal democracies of the West. More generally, embracing the authority of history anchors reform proposals on seemingly firm ground during a time of mounting international turbulence. But the call for a new Bretton Woods elides considerable disagreement. There are many competing views of the post-1945 international economic order, and each generates alternative understanding of how Bretton Woods should guide today’s proposed reforms.

This paper presents an historical-analytical review of Bretton Woods, based on the assumption that a better understanding of the postwar order can inform today’s efforts to restructure governance of the global economy. The paper first looks at the goals of those who evoke Bretton Woods in their calls for reform, focusing especially on the way leading U.S. officials link their ambitions to the history of the postwar settlement. It then shows that today’s calls for reform reflect four attitudes toward Bretton Woods that have been present in analysis since its inception. The next section explains how these attitudes are attributable to different understandings of Bretton Woods and its core features. The final section offers a periodization of the global economy since the end of the Second World War, showing that each understanding of Bretton Woods explains important developments over the following decades. The paper concludes by drawing on these insights to show how a new Bretton Woods moment can deliver on reformers’ ambitions for a renewed economic multilateralism—one that attempts to manage geopolitical change and to establish a clear role for the state in addressing today’s many economic governance challenges.

Renewing Economic Multilateralism: Expectations and Aspirations
Several factors animate growing calls for a new system of international economic governance. A shift in the composition of global power is changing the scope and aims of international cooperation. Many states now view preexisting forms of multilateralism as a source of unacceptable risks. Some also seek to reorganize the rules governing international economic relations around an updated set of goals.

The suspension of the Appellate Body of the World Trade Organization (WTO) is a prominent example of these parallel trends. Ever since the Trump administration first blocked the appointment of new Appellate Body judges in 2019, an approach maintained by the Biden administration, the WTO has been prevented from addressing disputes relating to membership. This move reflects a choice by the United States, alongside many other states, to protect its perceived strategic interests by sidelining the existing international trade regime. States are increasingly intervening in markets to hedge against vulnerabilities that arise from economic interdependence in an uncertain geopolitical context. They seek to ensure that inputs to produce essential technologies (such as for defense and the green transition) will neither be weaponized nor withdrawn from their country’s markets. This logic guides the U.S. CHIPS Act of 2022, which aims to jump-start a domestic semiconductor industry, as well as many efforts to reorganize key global supply chains.

Meanwhile, states are departing from a longstanding emphasis on the efficiency-enhancing effects of a multilateral trading regime. Prominent among their new priorities are efforts to require trading partners to adjust their production processes to meet higher environmental standards. This is the case with the European Union’s carbon border-adjustment mechanism and with the attempt to strike an agreement on steel production between the European Union and the United States through the General Agreement on Sustainable Steel and Aluminum. Shifting goals for economic multilateralism can also be seen in efforts to build greater labor protections into the United States-Mexico-Canada Agreement, which limited the potential for weaker labor laws in Mexico to maintain its competitive advantage. These emerging priorities mean that core features of the existing trade regime, like equal treatment and nondiscrimination, now face significant strain.

Change in the international trade regime is but one example of how geopolitical dynamics increasingly shape international economic relations. This is a far cry from past visions that aimed to use the rules of international economic governance to promote peaceful relations among states. Instead, there is now pressure to adjust the rules, norms, and institutions that manage the global economy to competing ambitions between states, so as to ensure they do not lose their coordination function altogether.

At much the same time, a decades-long rise in inequality has shaken preexisting consensus as to the irrefutable benefits of free trade and financial flows, as well as the general presumption against state intervention in the economy. This is seen in the United States, where both Democrats and Republicans now embrace industrial policy and reject efforts to further liberalize trade. As part of this broader change, governments increasingly see the need to adjust international economic relations to address challenges outside the traditional purview of the Bretton Woods institutions, such as tax policy, public health, technological regulation, and climate change. Paradoxically, as space for global cooperation appears to recede, demand grows to restructure the global economy in order to manage shared challenges that are straining politics and reshaping governance across the world.

Against the background of these trends, there are intensified calls to overhaul international economic governance, which are often guided by perceptions about the history of Bretton Woods. For example, leading U.S. officials treat Bretton Woods as a source of justifications, principles, and strategies for reform. In their telling, history shows that a new Bretton Woods moment can manage geopolitical change and also transform the role of the state in the economy.

Secretary of the Treasury Janet Yellen has emphasized the potential for a renewed economic multilateralism to stabilize geopolitical relations. This formed a key part of her invocation of Bretton Woods to legitimize the United States’ response to Russia’s invasion of Ukraine. Beyond forcefully criticizing Russia for “having flaunted the rules, norms and values that underpin the international economy,” she said that the war demonstrated a need to “address the gaps in our international financial system” during a moment of geopolitical disorder. In Yellen’s interpretation, the history of Bretton Woods showed that restructuring international economic relations could generate the enabling conditions for sustained peace and stability. As she put it, a new Bretton Woods moment offers to turn global “problems into opportunities.” It is poised to secure a volatile international order even as rules first agreed with the initial post-1945 settlement still grounded the Biden administration’s response to the crisis.

Meanwhile, Trade Representative Katherine Tai has cited the Atlantic Charter of 1941—which set out principles that guided the Bretton Woods negotiations—to argue that economic multilateralism should be reorganized to underwrite a “new social contract.” In her interpretation, the Atlantic Charter’s vision for an open world order was predicated on a more expansive role for the state in managing the domestic economy to ensure “improved labor standards, economic advancement and social security.” Tai emphasized that during the Second World War the leading powers created new norms for economic governance and an international structure that supported states in maintaining them. She suggested that a new relationship between the state and international order is necessary to manage contemporary economic governance challenges. If an alternative paradigm for economic policy is to meaningfully take root within the United States, Tai stressed that there must be a complementary set of reforms in the rules that govern the global economy and delineate the proper role of the state in the market.

In his keynote speech on the Biden administration’s international economic policy, National Security Advisor Jake Sullivan cited both these ostensible lessons of Bretton Woods. He argued that a restructured international economic order could simultaneously respond to geopolitical dynamics and shape a new paradigm for domestic economic governance. Sullivan framed the administration’s policy as an effort to return to fundamental Bretton Woods principles. He described it as a plan to repair the “cracks” that have appeared in the foundation of the international economic order since 1945. Beyond advancing the United States’ national security through the restructuring of international economic relations, Sullivan said that the administration was “returning to the core belief…that America should be at the heart of a vibrant international financial system that enables partners around the world to reduce poverty and enhance shared prosperity.” Sullivan suggested that the U.S.-led international economic order needed not only to secure the country’s interests, but also to enable a paradigm for economic governance that generates positive outcomes for partners in a shared multilateral system.

As the above attests, those seeking to reform the international order often draw on the history of Bretton Woods. They do so to suggest that reform should serve two ends: to stabilize geopolitical change and to facilitate a new role for the state in managing urgent economic governance challenges. At the same time, they often fail to detail how the post-1945 order achieved these purported accomplishments or to explain whether its lessons might still be applicable today.

Appeals to the lessons of Bretton Woods are hardly unique to U.S. officials. Others around the world make frequent, if selective use of the same history. UN Secretary-General António Guterres and IMF Managing Director Kristalina Georgieva, for instance, have both called for a “new Bretton Woods moment.” A recent report by a global consortium of leading think tanks identified the 1944 Bretton Woods negotiations as an “unprecedented moment of collective action.” These think tanks—hailing primarily from developing countries—argued that the world needs a similarly monumental instance of cooperation to address today’s challenges, while also correcting the global “hierarchies” that persisted as other core elements of the postwar arrangement “withered.” The analysis presents Bretton Woods as a model of broad cooperation to instruct the present and as a cause of global inequalities to be overcome.

However, not all invocations of Bretton Woods treat it as a useful guide. A recent report by the Chinese Communist Party casts the settlement as one in need of replacement rather than renewal. Stressing China’s opposition to “unilateralism and protectionism” in international economic relations, it depicts the goal of modernization as a “brand-new option” for organizing the international economy. The report endorses an international principle rooted in a strict idea of economic self-determination: namely, that “every country’s effort to independently explore the path to modernization in line with its national conditions should be respected.” (This is ironic, considering this was also a formative principle for Bretton Woods’ leading architects.) This framing depicts Bretton Woods as an antiquated regime featuring a set of impositions that a few powerful states foisted on the rest of the world. The Chinese Communist Party seeks to start anew and to present a meaningful rival—notwithstanding the benefits that current global economic arrangements brought to China.

These comparisons underscore the growing competition, within and among states, to redefine the priorities, principles, and rules for international economic governance. Much of this contestation is waged through different interpretations of the history of Bretton Woods and varied conceptions of the type of international system that it created. In fact, there is even disagreement as to whether the postwar system still exists. Such disparate understandings of the past shape discussion of what reforms are possible and desirable today. Closer attention to the history of Bretton Woods—and to the different interpretations of its role in the postwar economy—can inform these contemporary debates. It deepens appreciation of shifting geopolitical pressures and the novel governance challenges that are closely related to today’s global economy, but it also shows how similar developments have previously been managed through economic multilateralism. Reviewing the history of Bretton Woods thus helps to evaluate various approaches to reforming international economic order.

Four Attitudes Toward Bretton Woods
There is a recurrent tension in today’s invocations of Bretton Woods: must it be recovered or is it now being supplanted? A closer look reveals four long-standing attitudes toward it in scholarship and commentary—attitudes which mirror those evident in today’s calls for reform.

A first tradition looks to Bretton Woods with nostalgia. This view is reflected in the recent pronouncements by Biden administration officials. It is also prominent in academia, notably in the political science literature on “embedded liberalism.” This tradition interprets Bretton Woods as the basis for “a form of multilateralism…compatible with the requirements of domestic stability.” It stresses that the system’s main aim was to prevent a repeat of the economic nationalism and escalatory beggar-thy-neighbor policies that led up to the Second World War. This legacy of providing countries with sufficient room to structure domestic economic policy so as to preserve the multilateral system is viewed by its champions as a primary source of stability throughout the second half of the twentieth century. Many sense that this principle for economic multilateralism has been lost, and with it the stabilizing function of the international economic order.

A contrasting tradition charges Bretton Woods with responsibility for global economic inequality. This critique peaked with the calls for a New International Economic Order (NIEO) in the 1970s. As one leading international lawyer explained at the movement’s onset, the calls for a NIEO were due “first and foremost to the determination of the new States that emerged from decolonization to participate effectively in international life and, if not to discredit, at least to radically overhaul the global economic system put in place in the aftermath of the Second World War.”

From this perspective, Bretton Woods preserved an old world instead of delivering a new one. It constrained postcolonial states rather than facilitating their ambitions for economic transformation. (That is in spite of the fact that one of the major efforts in negotiating Bretton Woods was to diminish the likelihood of a return to an international economic system organized around imperial preference.) Proponents of a NIEO asserted that full membership in the international community—and, in turn, the legitimacy and continued stability of the international system—hinged on delivering a fairer share of the benefits from international economic cooperation to postcolonial and developing countries. In this view, the gains from economic multilateralism did not matter as much as their distribution. The view that Bretton Woods is responsible for sustained inequality and global instability persists today. Many critics, particularly from the Global South, blast the IMF, the World Bank, and other international institutions for their failure to respect different national pathways to development or to ensure fair access to international capital. These institutions are also seen as sclerotic in addressing climate change and other global collective-action problems that disproportionately hurt states that are already most disadvantaged in the global economy. This is why calls for a NIEO persist.

A third tradition treats Bretton Woods as in need of an update, which is manifest in several attempts to revitalize its core institutions to solve urgent challenges. The Bridgetown Initiative, one of the most prominent reform efforts, seeks to make the existing Bretton Woods institutions fit for purpose in a world of climate change by ensuring that vulnerable countries can access financing to manage the effects of a fast-changing environment. Recent reform efforts led by the G20 also set out to drastically expand the capacity of the World Bank and other multilateral development institutions to mobilize financing for sustainable development. These initiatives treat Bretton Woods as an institutional infrastructure that remains uniquely positioned to address global challenges, provided that it can be reinforced. They echo long-standing efforts to boost the capacities of international financial institutions, such as through the creation and expansion of the IMF’s Special Drawing Rights.

A fourth tradition frames Bretton Woods as something that must be recovered. Instead of calling for its institutions to be revitalized, proponents suggest that its animating purpose has been lost. Commentators with this perspective interpret Bretton Woods as a set of ideas for managing the postwar international system that were superseded by other arrangements. The scholars Michael Pettis and Robert Hockett, for example, seek to recover the initial vision of John Maynard Keynes, one of the architects of Bretton Woods. They stress how Keynes sought to create an International Clearing Union that featured an automatic mechanism to correct global economic imbalances and smooth the burdens of adjustment between surplus and deficit states. Appeals to recover Bretton Woods’ foundational ideas bring together the other three attitudes: nostalgia for what has been lost, criticism of the outcomes that global governance institutions produce today, and confidence that the original vision for the postwar order can make existing institutions fit for purpose.

The above shows that there has long been a mix of inspiration and dismissal with respect to Bretton Woods. Some celebrate it for stabilizing the post-1945 world; others disparage it for deepening global inequality. Many treat it as uniquely positioned to meet today’s challenges; others as something lost to the past. Each attitude reflects a different historical interpretation. When some cite Bretton Woods, they are referencing the institutions that have been at the center of managing the international economic order since the end of the Second World War. Others refer to the ideas that shaped initial plans for these institutions rather than subsequent practice. Still others suggest that the ideas and institutions overlapped at some point, even if they no longer do so today. Some also view the terms Bretton Woods II and Bretton Woods III as analytic descriptions of dynamics in the global economy rather than of the system that governs it.

Four Definitions of Bretton Woods
The first major study of the conference and its aftermath declared Bretton Woods dead by 1949, when the demands of economic recovery in Europe led to a very different set of responses than those envisioned during wartime negotiations. By contrast, one of today’s leading scholars of Bretton Woods says that the system did not begin until the late 1950s, when the restoration of current-account convertibility across Western Europe brought many states in line with commitments they had undertaken in the IMF Articles of Agreement. Others date the collapse of the Bretton Woods system to the Nixon administration’s decision to end the dollar’s convertibility to gold, and inaugurate floating exchange rates. Still another view suggests that Bretton Woods lasted longer, insofar as it represented an international system rooted in principles for structuring economic multilateralism around a common purpose, rather than any one mechanism for managing international monetary and trade relations. Other commentators claim that Bretton Woods primarily served to ratify the hegemony of the dollar in the global economy, which suggests that the regime remains in place today.

This shows there is little agreement as to when Bretton Woods existed, let alone on its core features. This lack of consensus helps to explain the varied attitudes taken toward Bretton Woods—both throughout its history, and in today’s calls for reform. At least four plausible definitions of Bretton Woods are on offer:

• As the institutional arrangement that managed interstate economic relations following the Second World War;
• As a regime of international economic governance built around a particular understanding of the interaction between international trade and finance in structuring the global economy;
• As a set of ideas about the proper relationship between international economic order and the role of the state in managing the economy;
• As an ambitious vision for international economic governance that failed to organize international economic relations.

The first definition takes Bretton Woods as a specific configuration of institutions established to manage the global economy and “win the peace” after the Second World War—namely the IMF and the International Bank of Recovery and Development (the precursor to the World Bank). This appears to be the most straightforward definition, but things become complicated upon reflection. The liberal trading regime is often considered essential to post-1945 economic multilateralism, yet its origin cannot be traced directly to the Bretton Woods Conference. The initial agreement focused on the international financial architecture as well as issues of recovery and reconstruction. Discussions of international trade were deferred to separate negotiations over the Havana Charter and its ambitious vision to create an International Trade Organization. Opposition in the U.S. Congress and the British parliament upended this plan, meaning that trade liberalization occurred under the auspices of the less comprehensive General Agreement on Trade and Tariffs (GATT). Nevertheless, many continue to see the GATT/WTO regime, alongside the IMF and the World Bank, as part of the Bretton Woods regime and as byproducts of an international economic bargain forged under U.S. hegemony. Viewing Bretton Woods through the prism of institutions created at the onset of the postwar period makes it possible to treat it as something that remains largely intact.

The second definition treats Bretton Woods as a consensus regarding the proper relationship between international trade and finance in structuring the global economy. For example, the political scientist Eric Helleiner stresses that the initial agreement secured the renewal of a liberal trade regime by allowing states to limit international capital flows. From this perspective, Bretton Woods enshrined a rare point of consensus between Keynes and its other leading architect, Harry Dexter White. It granted states an “explicit right to control all capital movements” as a way of ensuring the efficacy of their domestic economic policies. Fear of footloose capital, alongside the early postwar experience with the Marshall Plan, solidified a transatlantic consensus as to the need for public management of international capital movements. Limits on capital flows allowed states to effectively pursue full employment policies, and the resultant macroeconomic stability promised to reinforce their commitment to the multilateral trading system. The architects of Bretton Woods anticipated that a stable and steadily expanding international trade regime would secure broadly distributed economic benefits as well as a peace dividend. On this definition, the arrangement continued until a persistent shortage of dollars generated pressure in the late 1960s and early 1970s to lift capital controls and accelerate financialization of the world economy. This led to the emergence of the eurodollar market and eventually to a much different set of prescriptions to liberalize cross-border financial flows. It also prompted the Nixon administration’s decision on the dollar’s convertibility to gold. According to this understanding, Bretton Woods lasted as long as the consensus held to limit flows of capital to rebuild a viable liberal system among trading partners.

The third definition treats Bretton Woods as a set of ideas about the proper relationship between the international economic order, the state, and the market—suggesting it is a norm-governed consensus rather than any particular institutional arrangement. From this perspective, Bretton Woods’ core consisted of an international economic order in which social democracies retained a significant degree of autonomy in their domestic economic governance, thus guaranteeing their ability to enact policies in pursuit of full employment, macroeconomic stability, and essential regulatory goals. At the same time, the consensus ensured coordination to manage market pressures, like flows of hot money, and potential backlashes to expanding markets, like the risk of spiraling protectionism—neither of which could be addressed successfully through unilateral means. In this view, Bretton Woods and postwar social democracy were mutually constitutive. It produced an international economic framework that prioritized the efficacy of social democratic governance by ensuring that the state could manage various market dislocations. At the same time, well-functioning social democracies were expected to maintain support for economic multilateralism and give clear direction to adaptations in the Bretton Woods institutions as new circumstances arose. This offered to secure the continued benefits of international trade for members of the multilateral system as well as the durability of a common economic bloc among like-minded states. According to this understanding, the Bretton Woods era lasted as long as the international economic regime legitimized social democratic forms of governance (and vice versa).

The fourth definition takes Bretton Woods as a set of ambitions for a better functioning and more just international economic order that never took hold. Its proponents point out that wartime negotiations and postwar realities watered down the role of international institutions as envisioned by the architects of Bretton Woods. This meant its seemingly fundamental commitments were never realized. For instance, although Keynes envisioned the creation of an international currency managed by the IMF to facilitate clearing and to ensure sufficient liquidity for all members, the dollar ended up playing this role. Likewise, Keynes’s initial vision assumed that surplus countries would automatically bear some costs of adjustment to correct for global economic imbalances. This plan represented a drastic departure from the gold standard, which had imposed deflationary pressures on deficit countries to maintain stable exchange rates. But these more radical proposals were struck from the plans for the IMF. In a similar manner, the failure to launch an International Trade Organization marked diminished ambitions for the governance of trade. The GATT’s focus on lowering tariffs formed a significant contrast with the Havana Charter’s attempt to organize the rules of trade to promote full employment, macroeconomic stability, and broadly distributed development.

Postwar conditions also turned out to be much different than those anticipated by the Bretton Woods negotiators. With the IMF unwilling and unable to meet the demand for liquidity across Europe, the United States launched the Marshall Plan (formally, the European Recovery Program). This support ensured the continent’s ability to purchase food, capital goods, and other imported necessities to jump-start its recovery. By 1950, the European Payments Union emerged—deepening Western Europe’s economic integration, while instituting a protectionist approach toward the rest of the world to facilitate the continent’s further recovery. From this perspective, ideas at the core of Bretton Woods were never implemented, due to their dilution during negotiations and unanticipated postwar exigencies. From such a view of Bretton Woods, this stillbirth marked the end of its aspirations to guarantee economic stability in order to secure a more just and peaceful world.

Four Periods of the Post-1945 Global Economy
Understanding how Bretton Woods has shaped the global economy since the Second World War clarifies its role in managing geopolitical shifts and securing a new mandate for economic governance—the challenges at the root of today’s calls for a new Bretton Woods moment. The record suggests that each of the four competing definitions of the postwar settlement explains key developments in the global economy and thus sheds light on the possibilities of a revitalized economic multilateralism.

The history of the global economy since 1945 can be divided into four periods. The first extends until around 1960, and featured reconstruction and rapid economic growth across the West. The second lasted from 1960 until the late 1970s—a period of challenge and transition that involved the initial liberalization of global finance, the end of the dollar’s convertibility to gold, the expansion of the GATT’s remit, and the onset of stagflation. A third period from the 1980s to the late 2000s consisted of accelerating globalization alongside shifting geopolitics at the end of the Cold War. A fourth period of reaction and proposed reform began after the 2008 financial crisis and continues today. This came amid a return to geopolitical competition, rising discontent with the experience of rapid globalization and growing appreciation of the need to manage shared challenges such as climate change, inequality, financial instability, pandemic risk, and dislocations resulting from rapid technological change.

At the start of the first period, in the war’s immediate aftermath, the demands of economic recovery upended much of the blueprint agreed at the Bretton Woods Conference. Europe faced a severe balance-of-payments crisis in 1947, but the IMF hesitated to intervene for fear that this would exhaust its resources and prevent it from exercising its primary functions over the longer term. The ensuing crisis affirmed fears that full convertibility and the free flow of capital would lead to destabilizing consequences. Deteriorating conditions across Europe and the onset of the Cold War prompted the United States to launch the Marshall Plan instead. Although the Soviet Union and the Eastern European countries under its control participated in the negotiations, they did not ratify Bretton Woods or accept Marshall Plan aid. Instead, two economic blocs solidified, and largely mirrored the continent’s political split. The academic Richard Gardner suggested that, at this point, the “universalism” at the core of the “spirit of Bretton Woods had suffered a major eclipse.” On this reading, Bretton Woods never came into being; rather, its main features were sidelined as a result of unanticipated developments and new ways of managing them. An alternative view is that postwar circumstances actually cemented the animating purpose of Bretton Woods: it structured the international economic order to strengthen social democratic forms of government in a divided world.

Initial plans for the international economic order underwent significant adjustment in the early postwar years. With the failure of the Havana Charter, efforts to drastically reshape the international trade regime gave way to a far more modest attempt to facilitate lower tariffs through the GATT, while enshrining nondiscrimination and equal treatment in their application (even if the meaning of these principles changed significantly over time). The European Payments Union was launched in 1950 to bring about currency convertibility in Europe, and also to protect the continent from international competition that might otherwise undercut its industrial reconstruction. Meanwhile, Japan adopted its own regime for control of foreign exchange, which remained in place until 1980, to facilitate its recovery and development. As Helleiner details, the early postwar moment set the stage for an international economic order that sanctioned limits on financial liberalization to ensure states retained the capacity to pursue full employment and other key economic policies. This, in turn, offered to maintain the multilateral trade regime and secure its anticipated economic and political benefits. These developments show how different adaptations in the early postwar period upheld one purported core element of Bretton Woods: the restoration of multilateral trade and its expected benefits through managed financial flows.

This first period is now associated with les Trente Glorieuses—an approximately thirty-year period of rapid recovery from total war, sustained economic growth, and falling inequality across major Western economies. However, economic trends elsewhere, including in some members of Bretton Woods were far more mixed. During these decades, the Bretton Woods institutions enjoyed significant economic tailwinds. Their early development also unfolded alongside that of the Cold War. Economic multilateralism became part of the growing geopolitical contest, rather than serving as a means of avoiding it. Geopolitical pressures strengthened support for a postwar international economic order built around symbiosis between economic multilateralism and the furtherance of social democracy as a bulwark against communism. The multilateral system’s institutions solidified in tandem with the development of NATO and deeper security alliances between its leading economies. Thus, following another view of Bretton Woods, a shared economic system deepened a political-security alliance that maintained social democracy throughout the Cold War.

But this period also created the conditions for key elements of the Bretton Woods institutions to come undone. The lack of an international system for clearing led to the dollar’s rise as the global reserve currency. Due to the United States’ massive postwar surplus, persistent shortfalls in global liquidity and limited access to reserve assets proved a feature of the early postwar global economy. The eurodollar market developed to circumvent this dynamic, and the balance between a liberal trading order and capital controls began to unravel. Insufficient multilateral arrangements between like-minded countries—specifically, the failure to adhere to the initial ambitions to ensure liquidity, share burdens of adjustment, and give countries space to enact key economic policies—eventually placed significant strain on the Bretton Woods order. This supports the view that Bretton Woods was never properly equipped to ensure its initial vision.

At a minimum, it soon became clear that the IMF, the World Bank, and the GATT were insufficient to uphold many of their foundational commitments on their own, and significant other arrangements were made for managing the global economy. The Marshall Plan injected substantial liquidity into Western Europe’s economies to prevent their collapse. The European Payments Union deepened economic coordination across the continent and facilitated protection against the rest of the world, sustaining the continent’s recovery for some time thereafter. These institutions were not just postwar stopgaps; they reflected the deeper limitations of the main Bretton Woods organs. Over time, important commitments in the Bretton Woods settlement would be secured by many other institutions—including domestic legal regimes, regional forms of cooperation, and governance bodies such as central banks, the G10, and the Bank of International Settlements. However, these additional institutions eventually advanced goals other than those that animated the initial Bretton Woods settlement.

The second period in the evolution of the global economy began around 1960, when some key parts of the Bretton Woods agreements came into force. The restoration of current-account convertibility brought major economies into alignment with their obligations as members of the IMF. For this reason, many regard this as the one period when the Bretton Woods system functioned as intended. At the same time, ad hoc responses were increasingly needed to ensure that the international monetary system did not recreate deflationary pressures, beginning the shift toward a financialized global economy. As tariffs had also fallen significantly from their wartime highs by 1960, efforts began to repurpose the GATT—namely by expanding its ambit toward the reduction of nontariff barriers to trade. The space for states to pursue their own economic policies—one of the core Bretton Woods principles—started to shrink. Western liberal democracies began to face diminished policy autonomy while states that were peripheral to the system bucked the evolving rules to jump-start their development, such as the East Asian Tigers protecting their infant industries.

With the onset of stagflation in the 1970s, the Keynesian consensus around macroeconomic policy shattered. Alternative economic ideas—from monetarism to neoliberalism—filled the vacuum. Simultaneously, demands for a NIEO gathered momentum. The structure of Bretton Woods thus faced mounting opposition from two directions: from those who perceived it as a basis for continuing economic inequality in a postcolonial world, and from those who regarded its approach to economic governance as vulnerable to demands unleashed by decolonization and thus as ill-equipped to deal with the challenges of stagflation. Some calls for reform viewed the existing system as too susceptible to social democratic pressure; others argued it was not responsive enough to the demands generated by democratic process as it expanded to new parts of the globe.

The third period in the development of the global economy saw neoliberal change and accelerating globalization, alongside the unwinding of the Cold War and the start of momentous economic governance reforms in China. The increasingly dominant Washington Consensus attempted to extend a particular model of neoliberal economic governance across the world, as opposed to supporting social democracy in countries where it was already rooted. Technological advance, including the rapid reduction in shipping costs with the container revolution, spurred dramatic growth in global trade and financial flows. This permitted the rise of development models in which manufacturing and export developed around regulatory arbitrage, rather than comparative advantage in the classical sense used by economists. Geopolitical, technological, and ideational change combined to drive a much more expansive form of economic globalization.

Structural changes were furthered by institutional developments, particularly as the international economic order increasingly turned into a legalized arrangement. The creation of the WTO’s Appellate Body, the proliferation of investor-state arbitration under the International Centre for the Settlement of Investor Disputes regime, and the increased prominence of U.S. and European courts in managing global finance and sovereign debt transformed the multilateral regime into a far more juridical system. The Bretton Woods institutions began to condition their external support to developing states on their further liberalization of capital flows, instead of the other way around. In short, states faced growing limits on their capacity to shape their economic policies. By this point, the international economic order created at Bretton Woods had seemingly turned upside down: states were now pressured by, instead of protected from, the global economy.

By this period, the international economic order diverged from most plausible views of Bretton Woods. Much of what remained were the institutions themselves, but the IMF and the World Bank adopted very different roles than the ones envisioned by their architects or those they played in the first postwar decades. More strikingly, the GATT was transformed into the WTO, which was charged with managing many new dimensions of trade with a view to creating nominally competitive global markets. The international economic order no longer functioned to strengthen social democracies; rather, it set out to extend markets while limiting the way states could intervene in them.

Still, the core ideas of Bretton Woods did not lose all purchase. For example, the European Union emerged during this period, cementing a monetary and customs union that realized one of the first Bretton Woods ideas. In his initial plan, Keynes called for a future of “small political and cultural units, combined into larger, and more or less closely knit, economic units.” This period also led to a configuration of the international monetary system that some economists term as Bretton Woods II. Thus, even as it appeared to have been supplanted, Bretton Woods still cast a long shadow in both shaping and understanding the global economy.

The fourth and still ongoing period in the history of postwar international economic order began after the 2008 financial crisis. Economic downturn kickstarted a rise in populism, protection, and economic nationalism across much of the world. Perhaps paradoxically, this period of turbulence coincided with deepening awareness of the need for international cooperation to address new challenges. The growing rejection of neoliberal globalization elicited two counter-movements: one rejecting nearly any form of international economic cooperation and another for reorganizing economic multilateralism to grapple with issues not traditionally associated with Bretton Woods, such as climate change, artificial intelligence, and the management of various risks associated with heightened interconnections ranging from finance to public health. These shifts thus return us to the question of whether Bretton Woods is being rejected or must be revived. This review of the history of Bretton Woods—and of competing interpretations of it—can sharpen debate as to the right answer.

The New Bretton Woods Moment
In the United States, growing calls for a new Bretton Woods moment often reflect grand ambitions for reform. Senior officials frame this as a means of managing geopolitical change and substantiating a new role for the state in the economy.

There are nevertheless glaring differences between the present and the context out of which Bretton Woods emerged. Today’s calls to restructure the international economic order are intensifying in circumstances of rising geopolitical competition, and amid the growing risk of fragmentation in the global economy. Demand for reform also comes against the backdrop of proliferating challenges that imply novel responsibilities for the state in governing the economy, and in a moment where America is no longer the world’s unrivaled economic hegemon. By contrast, Bretton Woods emerged near the end of the most destructive war in history and at the height of U.S. economic power. It aimed at managing the one overriding economic governance challenge of macroeconomic instability and resulting unemployment, which had been enabled by the prewar international system. Amid the destruction of total war, preventing another spiral of depression and economic nationalism was seen as fundamental to maintaining peace.

Today’s geopolitical and economic challenges are different. The necessary elements of a stable, prosperous, and just world order are far more multidimensional. Efficiency and growth must be balanced against risk and resilience. Demographic shifts complicate prospects for sustained growth in mature economies. Various sectors now operate in ways that depart from assumptions that explained the benefits long associated with more free trade. The most recent period of the international economic order also generated substantial imbalances between countries that are now geopolitical rivals. Bearing in mind these key differences, this review sharpens understanding of what a new Bretton Woods moment should aim to deliver.

First, policymakers should not focus on a particular institutional configuration, but on the common orientation of a range of institutions. A new Bretton Woods moment will not generate a well-defined set of arrangements to manage the global economy and stabilize geopolitics. Even in a moment when much of the world aspired toward universalism, and when the United States’ unrivaled economic power allowed it to dictate many terms of the postwar arrangement, the implementation of Bretton Woods proceeded in a fragmented way. A diverse institutional landscape proved necessary to uphold its basic commitments. Alongside the IMF and the International Bank of Recovery and Development, the GATT substituted for the International Trade Organization, the Marshall Plan and the European Payments Union were necessary mechanisms to sustain recovery, and the G10, the Bank of International Settlements, and the Organization for Economic Cooperation and Development coordinated vital reforms in the international monetary system. Key functions of international economic governance were often delegated to various institutions as new circumstances arose. But, at least for some time, these institutions maintained commitments that were foundational to the original Bretton Woods project of buttressing social democratic governance and, by so doing, maintaining the peace.

Second, the sustainability of economic multilateralism hinged upon the functions that the international economic order left to the state. One of the key features of Bretton Woods was recognition that continued economic cooperation required assurance that states could still chart their domestic economic course. Each member of the system had different needs, circumstances, and demands from its citizens. For cooperation to be positive-sum, it had to remain limited to managing shared challenges, or else the entire system risked unraveling. Preventing destructive economic nationalism required an international order built around guarantees of economic self-determination, not least to maintain the legitimacy of the social democratic governments that were at the core of the multilateral arrangement.

Third, governance of the international economy tracks geopolitical dynamics, just as much as it shapes them. The belief that economic multilateralism can tame world politics through a rigid set of rules intensified in the era of neoliberalism, which turned Bretton Woods upside down. Yet in the early postwar period, when wartime aspirations gave way to Cold War realities, it became clear that Bretton Woods was part of the geopolitical contest rather than an antidote to it. The arrangement strengthened like-minded states, and ensured the legitimacy of a common form of government by spreading the benefits of cooperation, while guaranteeing the capacity for member-states to manage pressing challenges. Both were necessary ingredients for maintaining Bretton Woods’ commitments across time. One ambition associated with a new Bretton Woods moment might thus be slightly refined: rather than seeking to reshape or to stabilize geopolitical relations, restructuring economic multilateralism can be one tool in a broader approach for doing so.

These lessons come with a caveat. The like-minded social democracies at the core of Bretton Woods were principally the large, industrialized economies of the West. The system did not extend its essential commitments to all members, which is why calls for a NIEO emerged. Today, the definition of like-minded states must be expanded beyond advanced Western market democracies if a new Bretton Woods is not to recreate the kind of inequalities that placed significant pressure on the old one. Steps toward this approach are evident in the Biden administration’s Indo-Pacific Economic Framework. Some ideas that first animated Bretton Woods, such as closer forms of economic cooperation within a broader multilateral structure, offer further options for expanding the conception of like-minded states as an organizing principle for a new economic multilateralism.

These lessons lead to a final conclusion: the various ways of interpreting the history of Bretton Woods overlap in a crucial way. They all suggest that the two primary goals for a new Bretton Woods moment are deeply related. If a restructured international economic order is to play a role in responding to a fast-changing geopolitical landscape, then it must legitimate the approach of like-minded states in solving urgent challenges. This means the international economic order needs to assume responsibility over new governance issues, while empowering the state to take on a different role in managing the economy. Reviewing the history of Bretton Woods highlights plausible ways to structure economic multilateralism toward these ends. A subsequent paper will explore one way forward, focusing on how the international economic order can organize cooperation around common challenges that confront like-minded states and, in the process, play a role in stabilizing a turbulent moment in world politics.

To read the paper as it was published on the Carnegie Endowment for International Peace Institute webpage, click here.

To read the full paper, click here.

The post What Is Bretton Woods? The Contested Pasts and Potential Futures of International Economic Order appeared first on WITA.

These negotiations are playing out against the backdrop of American and European efforts to decarbonize their heavy industries to achieve net-zero climate targets by midcentury, as well as long-standing problems of excess capacity in global steel and aluminum markets. Steel and steel products have some of the highest embedded carbon content of all traded goods, and the iron and steel industry produces nearly one-third of global emissions from industry. Aluminum, meanwhile, is energy and carbon intensive and is consequential to global greenhouse gas emissions, albeit on a comparatively smaller scale.

Yet recent reporting reflects that GASSA negotiations have stalled on account of different U.S. and EU approaches to linking market access to the carbon intensity of traded goods, which may result in the deal being indefinitely shelved. This would be an immense missed opportunity. GASSA, if concluded in a way that links market access to carbon intensity, would mark a paradigm shift in the organization of cross-border commerce, one in which like-minded democracies use trade—and the institutions that facilitate and govern it—as a tool to address shared problems. Furthermore, by laying the groundwork for a transatlantic climate bloc, the deal would strengthen other U.S.-EU partnerships aimed at confronting some of the major global challenges of the 21st century—above all, climate change, but also the influence of authoritarian states in the international system and the need to recalibrate the global economy in a way that better serves the interests of workers and the planet.

This issue brief offers an overview of GASSA, explains why it matters, and examines challenges to its implementation. It assesses that a strong agreement would both constitute a major step forward in aligning trade with climate action and offer a productive mechanism for countering abuses of the global trading system by nonmarket economies while strengthening transatlantic relations. Finally, it recommends that if GASSA cannot move forward in a timely fashion, the United States should seek similar partnerships with other high-ambition steel- and aluminum-producing nations.

Background to the deal

In 2018, the Trump administration imposed tariffs of 25 percent on European steel products and 10 percent on European aluminum products under Section 232 of the Trade Expansion Act of 1962. The Trump administration justified the tariffs—which covered most U.S. trading partners—on national security grounds, provoking a sharp reaction in most European capitals, given that the United States and most European states are bonded together through the NATO alliance to ensure each other’s security. As a result of the tariffs, alongside a broader drop in demand relating to the COVID-19 pandemic, EU exports to the United States in steel and aluminum, worth about $7 billion, declined more than 50 percent between 2018 and 2020. Although the effects of the tariffs on the U.S. steel market are contested, some respected economists have concluded that they did not meaningfully affect domestic steel prices and coincided with an improved economic outlook for the U.S. steel industry.

As a “rebalancing,” or retaliatory, measure, the European Union imposed a range of duties on various U.S. products, including steel products but also motorcycles, bourbon, and other trade-exposed goods. Both the United States and the European Union initiated disputes at the World Trade Organization (WTO) over the other side’s tariffs. While steel tariffs addressed legitimate concerns the U.S. steel industry had over steel overproduction—concerns that European producers shared, ironically—they nonetheless were a major thorn in U.S.-EU relations, and the EU has pressed the new administration to reverse the tariffs since President Joe Biden came into office.

In October 2021, on the eve of the 26th U.N. Climate Change Conference in Glasgow, American officials announced they would exempt imports of European steel and aluminum from the Section 232 tariffs up to a certain volume through the end of 2023, beyond which the tariffs would remain in effect. In return, the European Union agreed to suspend its countervailing tariffs on a range of U.S. products and refrain from imposing additional tariffs that were set to go into effect on December 1, 2021. According to a joint statement released at the time of the announcement, this suspension would create space for the two sides to agree to negotiate “future arrangements” to address both “non-market excess capacity” and the “carbon intensity” of the steel and aluminum industries. In addition, both sides agreed to drop WTO disputes they had filed against one another concerning their reciprocal tariffs. And in a somewhat unusual move, they agreed to transfer those cases to arbitration panels, as permitted under WTO rules, based on the understanding that arbitration would only go forward if the arrangements contemplated in the deal were to fail.

In a separate, unilateral statement, the European Union asserted that it considers the residual tariffs on European steel and aluminum retained by the United States under the agreement to be “incompatible with World Trade Organization rules,” although there is no indication Brussels intends to challenge those tariffs before the WTO. Notably, although the European Union suspended its dispute relating to the Section 232 tariffs, other non-EU countries—Switzerland, Norway, China, and Turkey—pursued claims against them before a WTO adjudicative panel and obtained a finding that the tariffs were incompatible with WTO rules.

What GASSA would do

The “future arrangements” contemplated in the 2021 joint statement included, most significantly, measures that “restrict market access”—by imposing tariffs or other barriers to import—for economies that either contribute to global steel and aluminum oversupply or that do not meet certain emissions thresholds in their steel and aluminum production. In other words, this agreement could lead to the United States and the European Union coordinating efforts to impose costs on high-polluting steel and aluminum producers.

In addition, the two sides agreed to “refrain from non-market practices that contribute to carbon-intensive, non-market oriented capacity,” as well as ensure their domestic policies support these goals. Finally, they agreed to consult on government investment in decarbonization and “screen inward investments from non-market-oriented actors”—which, as discussed below, refers to nonmarket practices and actors, including Chinese steel producers. When the United States and the European Union came to agreement, they set a goal of concluding the negotiations in two years, by October 2024, and noted that the agreement could be expanded to include “like-minded economies.” This means that once the United States and the European Union reach an agreement, other allies could sign on, potentially making this the basis for a global agreement consisting of a large portion of the global economy.

Why GASSA matters

GASSA would be more narrowly focused than a conventional free trade agreement. But from an economic and climate perspective, the scope of the deal would nonetheless be substantial: Steel is one of the most used products in the world as well as one of the most widely traded commodities, both in finished products and as a component of other goods. There are few sectors of the global economy untouched by steel production, which is used in everything from cars, buildings, and appliances to wind turbines, nails, and screws. The annual value of global steel products has been estimated to be as high as $2.5 trillion, about one-quarter to one-third of which can be attributed to exported goods. Aluminum is likewise one of the most traded commodities in the world and a key component of many finished goods.

From the perspective of addressing climate change, the deal is even more consequential: The iron and steel industry accounts for about 11 percent of global CO2 emissions and nearly one-third of industrial emissions. Notably, the United States and European Union are the second- and third-largest import markets for steel—after China, which is both the largest importer and the largest exporter of steel—and are also major exporters. Aluminum, meanwhile, accounts for about 3 percent of global CO2 emissions.

American and European steel manufacturing is less carbon intensive than that of many other countries with major steel industries, particularly China and India, because of greater prevalence of low-carbon manufacturing methods, a greener electric grid, and greater efficiency in traditional blast-furnace production methods. Inflation Reduction Act and EU Green Deal Industrial Plan investments in steel decarbonization and related technologies such as green hydrogen mean that the carbon gap in steel and aluminum is poised to widen substantially in the coming decade. In contrast, the Chinese steel sector recently invested $100 billion in coal-fired steel production—the most carbon-intensive steel production method by a considerable margin.

By tying market access to sectoral manufacturing practices, GASSA has the power to shape production standards beyond the American and European markets. Specifically, by raising market barriers on imports of carbon-intensive steel and aluminum and creating a free-trade area for lower-carbon versions of those commodities, the deal creates incentives for other steel- and aluminum-exporting countries to pivot to greener production methods. The arrangement would also safeguard the livelihoods of American and European steelworkers by advantaging their lower-carbon steel vs. more-carbon-intensive steel produced in other regions. In this sense, GASSA could substantially reshape supply chains and significantly contribute to industrial decarbonization on a global scale. It would also be a boon to domestic industrial decarbonization efforts by rewarding domestic greenhouse gas emission improvements in the steel and aluminum sectors with access to a protected market.

Just as importantly, GASSA would mark a fundamental shift in understandings of how global trade should function that have persisted since the end of the Cold War. In particular, a strong GASSA arrangement would signal alignment between the world’s two largest free-market economies on two pressing issues: responding to the climate crisis and managing China’s role in the global economy. In addition, the deal offers a crucial opportunity for leading democracies to influence global trade rules and institutions with a view toward a more sustainable, fit-for-purpose global trade system. As an additional benefit, GASSA has the potential to strengthen transatlantic cooperation on a broad range of issues at a time when solidarity between democracies is more important than ever.

A long-overdue alignment of trade with climate action

Multilateral and plurilateral trade arrangements have, to date, done little to nothing to address the climate crisis. Arguably, they have contributed to it by lowering the barriers to carbon leakage—the shifting of production to regions with lower climate standards—through investor-state dispute resolution mechanisms, which favor corporate interests, and tariff reductions on high-emission products. No trade agreement involving major economies has sought to account for the carbon content of traded goods.

The European Union recently introduced a Carbon Border Adjustment Mechanism (CBAM), which imposes a fee on imported goods based on the carbon intensity of their production. Comparable legislation has been introduced by both Republican and Democratic legislators in the U.S. Congress. Both the EU CBAM and possible U.S. carbon tariffs are watershed developments in the sense that they reflect a shift toward internalizing negative externalities—that is, costs to society not reflected in the price of traded goods. Yet these measures are the product of a unilateral legislative process and have not been designed with a view toward compatibility with each other or with other economic and regulatory systems. As a result, they leave on the table the multiplying effects of aligning the combined market power of the two largest free-market economies, which together can act with far greater effect to influence global standards and production methods.

By contrast, GASSA may resemble a sector-specific version of what economists describe as a “climate club”—that is, a preferential trade arrangement between countries in which enhanced market access (or exclusion from market barriers) is linked to a common or harmonized set of emission reduction policies. A key feature of climate clubs is that countries inside the club will move toward freer trade between themselves. But countries that do not meet the club’s climate standards are subject to less favorable trade terms than countries within it. Here, again, China—whose steel has a carbon footprint that is nearly two times greater, on average, than U.S. steel and is widely exported to both the American and European markets—is the third party that stands to be most affected by the deal. But other countries with highly carbon-intensive steel industries, such as Russia and India, would also be affected absent significant measures to decarbonize their industries.

Notably, the disparity between U.S. and Chinese steel emission intensities differs by production method. Chinese steel produced by the traditional blast oxygen furnace (BOF) method—the most carbon-intensive method—produces about 50 percent more emissions than U.S. BOF steel. Meanwhile, Chinese steel produced using an electric arc furnace (EAF), a more recent manufacturing method that is less carbon intensive than BOF, is about three times more carbon intensive than U.S. EAF steel.

A new approach to managing the economic rise of China—and other authoritarian, nonmarket states

Although China is not mentioned by name in the joint statement released in 2021, it remains the elephant in the room. The joint statement’s repeated references to “non-market excess capacity” and the need to ensure “market-oriented conditions” clearly allude to Chinese steel production, which has surged from 15 percent to about half of global production since 2000. There are long-standing transatlantic concerns that the Chinese economic system of state capitalism has conferred unfair advantages to Chinese business and resulted in overproduction of key commodities—above all, steel—driving down global prices and harming domestic industry. Most notably, in 2018, the United States circulated a detailed memorandum to all WTO members concerning China’s “trade-disruptive economic model,” assessing that a variety of “non-market” practices—such as “massive, market-distorting subsidies,” foreign investment restrictions, and state-controlled financial institutions—had given Chinese manufacturing an unfair trade advantage to the detriment of market economies.

Although the European Union has been less vocal in challenging the Chinese economic model on a general level, it has repeatedly expressed frustration over Chinese steel overproduction and trade-distorting subsidies, most recently regarding subsidies to Chinese electric vehicles.

In this sense, GASSA would represent the first coordinated multilateral effort to address China’s integration into global markets without directly engaging Beijing or invoking WTO dispute resolution measures. It would also reflect a new approach to promoting Chinese climate ambition, in which direct engagement with Chinese authorities is supplemented by market-shaping policies that create economic and reputational incentives for Chinese manufacturers to decarbonize. Such an approach would reinforce unilateral measures to promote decarbonization of carbon-intensive sectors such as carbon tariffs, green procurement standards, and subsidies to clean industry.

China, of course, is not the only nonmarket state with a major role in the global economy. Russia, which the United States recently assessed to be a nonmarket economy, also produces considerable volumes of steel and aluminum, and steel production is expanding in a number of nondemocratic states in the Middle East and Southeast Asia, with a record of trade-distorting practices. As with China, GASSA would protect U.S. and EU industries from being undercut by steel and aluminum produced cheaply or in excessive quantities by these countries as a result of carbon-intensive manufacturing, exploitative labor conditions, or other unpriced externalities and social harms. In this sense, GASSA could be an important first step in reversing what U.S. Trade Representative Katherine Tai has described as a “race to the bottom” in the organization of the global economy, “where exploitation is rewarded and high standards are abandoned in order to compete and survive.”

A catalyst for remaking the global trade system

In recent years, the WTO and globalization itself have come under unprecedented pressure to remain relevant in an international environment defined by the U.S.-China geopolitical rivalry, supply chain disruptions, and the emergence of climate action as an urgent priority in the international agenda. As observed by current WTO Director-General Ngozi Okonjo-Iweala:

“A series of shocks in the space of 15 years—first the global financial crisis, then the COVID-19 pandemic, and now the war in Ukraine—have created an alternative narrative about globalization. Far from making countries economically stronger, this new line of thinking goes, globalization exposes them to excessive risks. Economic interdependence is no longer seen as a virtue; it is seen as a vice. The new mantra is that what countries need is not interdependence but independence, with integration limited at best to a small circle of friendly nations.”

Whether this accurately describes the position of the United States or another major economic power is up for debate, but there is little question that current U.S. trade policy is grounded in the assessment that economic integration cannot proceed on the neoliberal terms envisioned by the late 20th century architects of the WTO system.

On the one hand, GASSA can be seen as affirming the WTO’s continued relevance in managing trade relations between sovereign economies. The provisional lifting of steel and aluminum tariffs under the 2021 U.S.-EU agreement, with recourse to WTO arbitration should negotiations fail, could buttress the WTO system by using the WTO’s own procedures to resolve a dispute that would otherwise have languished under the organization’s currently inoperative dispute resolution mechanism. Even so, some analysts and senior European officials have expressed reservations that GASSA could, depending on its design, be incompatible with WTO rules. Although the WTO system has long tolerated plurilateral free trade agreements, in which participating countries reciprocally reduce trade barriers for one another, the same cannot be said for agreements to increase trade barriers on third-party countries; such arrangements could be read to run afoul of the WTO’s “most-favoured-nation” principle, which requires treating imports from all WTO members equally.

Yet such concerns are not reason to avoid moving forward with GASSA. The urgency of the climate crisis militates against an excessively cautious, self-limiting approach to the design of trade arrangements, and there is a case to be made that GASSA is a permitted trade measure under WTO rules. Ultimately, the trade system must be responsive to the broader policy context in which it operates and current public priorities—most notably the need for alignment with the global commitment to reduce greenhouse gas emissions. Given the outsize role the United States and European Union play in global trade, GASSA may prove to be a vehicle for reappraising WTO rules to better align with climate action.

In this respect, GASSA could have the surprising consequence of galvanizing a long-overdue conversation about overhaul of the global trade system. In particular, GASSA would add further ballast to an emerging trade reform agenda that recognizes that the WTO and the global trade system more broadly must move beyond their current focus on clearing barriers to trade—what U.S. Trade Representative Tai has called a system that encourages “low cost at any cost—and be regeared to promote specific kinds of economic activity that carry positive environmental and social benefits—for example, trade in low-carbon goods and goods that can support a green transition, such as inputs into EVs, photovoltaic solar panels, and wind turbines. If landed, GASSA would mark a major pivot toward what national security adviser Jake Sullivan has called the “new Washington consensus,” which rejects reflexive lowering of trade barriers and seeks alignment of trade policy and trade institutions with climate action, equitable economic growth, and resilient supply chains that avoid excessive dependence on any one country for strategically important goods. Sullivan has identified WTO reform as one element of this new approach to international economics.

A special economic relationship between democracies

GASSA negotiations began in earnest in November 2021, in the first year of the Biden administration. It is not surprising that the administration’s first major move in trade policy was with the European Union. U.S. trade officials have stated their desire to deepen economic ties with existing economic partners and allies and to use trade as a tool to strengthen global democracy.

GASSA would create a new set of economic relationships among the world’s two largest democratic economies, organized around a novel set of trade policy propositions. In other words, it could presage a long-term trend in the global trading system in which trade arrangements and the cross-border investment and supply chain cohere more closely with shared values among trading partners, rather than the narrow notions of economic efficiency that have created economic interdependence between the economies of democracies and authoritarian regimes such as China and Russia.

Of particular note, once established, GASSA could be broadened to one or more democracies in the Global South, such as Brazil, with requisite investment in lowering carbon intensity and (where needed) strengthening of core labor rights. In addition to the climate benefits, this would help address concerns that linking market access to climate ambition is a form of “green protectionism” designed to disadvantage developing countries.

A much-needed step forward in transatlantic relations

Despite a long history of security cooperation and shared democratic values, economic cooperation between the United States and the European Union has been a recurring source of tension and even conflict. During the Obama administration, negotiations over the Transatlantic Trade and Investment Partnership floundered and were eventually abandoned. And during the Trump administration, Brussels was blindsided with tariffs on national security grounds, which antagonized European leaders and prevented more constructive discussions over collaborating to address a range of economic challenges, including China’s unfair trade practices. More recently, provisions of the Inflation Reduction Act linking tax credits to domestic content incentives and providing direct subsidies for domestic production provoked anger and accusations of protectionism and trade discrimination from European officials, which in turn led the United States and European Union to begin negotiating a one-off agreement that would make European firms eligible for some of the disputed credits.

Given this history, GASSA represents a much-needed step forward in U.S.-EU economic relations, as it not only turns a page on past acrimony but also opens a pathway for U.S.-EU cooperation in other critical areas of the relationship, such as digital regulation, investment screening, and technology standards. Moreover, the agreement may serve as a template for trade clubs organized around standards other than climate—for example, labor standards—and facilitate coordination between Brussels and Washington in how they engage the Global South on economic issues. In short, GASSA should be viewed as a key building block in the construction of a durable U.S.-EU economic partnership, one that will prove vital in combating climate change, calibrating economic relations with China in a way that balances fair competition with the need to derisk key sectors, and ensuring that democracies are able to set the global rules of the road on technology and trade.

Conclusion

The particulars of any GASSA arrangement—provided it has tangible, market-shaping effects—are ultimately less important than the crucial precedent a deal would set in demonstrating that like-minded democracies can work constructively within the global trading system to condition market access on carbon intensity, all while managing the distorting practices of nonmarket economies. At a moment when climate change, the lingering aftershocks of the COVID-19 pandemic and Russia’s invasion of Ukraine, and a deepening U.S.-China rivalry have placed unprecedented strain on the post-Cold War consensus on globalization and regulation of cross-border trade, GASSA offers a potential path forward: a new approach to economic relations capable of meeting the challenges of the 21st century head on. However, for this new approach to succeed, leaders in both Washington and Brussels must be willing to set their differences aside and use their immense market power to guide the global economy toward a more sustainable, resilient future.

Given the urgency of the climate crisis, U.S. officials should also consider allowing the two-year tariff rate quota—which partially lifted the Trump-era Section 232 tariffs on European steel—to expire, if the European Union is unwilling to agree to a sufficiently ambitious global arrangement. This effort should include a firm implementation plan that sends a strong signal to industry that the future of steel and aluminum trade will be marked by clear carbon intensity-based tariffs.

In addition, U.S. officials should strongly consider pursuing a GASSA-like arrangement with other democratic trading partners with high levels of climate ambition—such as Canada, Norway, and Australia—while seeking to conclude negotiations with the European Union. As the world’s foremost economic power, currently led by an administration committed to climate leadership and democratic values, the United States is uniquely capable of providing proof of concept of a new model of trade policy that supports a just transition to a decarbonized global economy.

To read the full issue brief, click here.

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For Southeast Asia, growth prospects look comparatively better against the global backdrop at 4.6% as forecast by the Asian Development Bank (ADB). This was a slight downgrade from earlier predictions, due to lower export growth and a deceleration of industrial activity. Regional growth has been anchored by domestic demand and services, and the recovery of tourism activities. The need to fully leverage the region’s growth momentum amidst economic uncertainty and rising geopolitical risks was aptly highlighted by Indonesia’s ASEAN Chairmanship theme, ASEAN Matters: Epicentrum of Growth. The conclusion of the 43rd ASEAN Summit and Related Summits in September was once again a testament of Indonesia’s leadership, with over 90 documents issued and concrete deliverables announced throughout the three-day meetings that include several dialogue partners. Now that it has passed the baton to Laos, our Analysis contributors assess Indonesia’s Chairmanship and whether it has lived up to expectations.

Although it was unable to move the needle on the Myanmar crisis and the South China Sea, Jakarta managed to reaffirm ASEAN Leaders’ commitment to strengthen economic resilience. Among the Summit’s key economic outcomes were the launch of the Digital Economic Framework Agreement (DEFA) negotiations and the adoption of the ASEAN Blue Economy Framework. These outcomes embrace the region’s new growth drivers in an inclusive and sustainable way. With this in mind, this issue casts a Spotlight on the region’s many different emerging economic drivers. Our contributors look at potential growth engines in the region, from the quest for an ASEAN single QR payments network to the rise of unicorns, and the role of innovation in advancing digital health. Looking at external partners, regional experts examine how the Indo-Pacific Economic Framework for Prosperity (IPEF), the European Green Deal, and the Korea-ASEAN Solidarity Initiative can help unlock new economic and development pathways.

Beyond the economy, the region is facing another momentous development with several Southeast Asian countries undergoing leadership transitions. To help make sense of this changing political landscape and what it means for regional cooperation, ASEANFocus convened a roundtable featuring views from experts on seven ASEAN countries, namely Cambodia, Indonesia, Malaysia, the Philippines, Thailand, Singapore, and Vietnam.

To read the full report, click here.

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Their vision is right, but it is highly contested — in part by authoritarian governments seeking to restore or strengthen controls over their publics (or even, at least in part, other countries’ publics), and in part by often friendly countries mistakenly believing that their own technological leadership might depend on diminishing that of the U.S. tech industry. The administration can help achieve its vision, and in doing so contribute to the realization of the Declaration’s vision, through four steps: 

1. An idealistic and ambitious approach in the 15-country “Indo-Pacific Economic Framework” (IPEF), that provides a future vision more attractive than authoritarian alternatives resting on free flows of data, opposition to forced localization of server and data, strong consumer protection, non-discriminatory regulation, anti-spam and anti-disinformation policies, cyber-security, and broad-based growth through encouragement for open electronic commerce.

2. A strong response in the U.S.-EU Trade and Technology Council (TTC) to European Union attempts to create discriminatory regulations and taxes targeting American technologies and firms.

3. Defense of U.S. values in the U.N., WTO, and other venues against “digital sovereignty” campaigns by China and others that endanger the internet’s multi-stakeholder governance, normalize large-scale censorship and firewalling, and generally place the political fears and policy goals of authoritarian government above the liberties of individuals.

4. Supporting responsible governance of technology and politely but firmly pushing back on attempts either at home or internationally to demonize technological innovation and American success.

Ed Gresser is Vice President and Director for Trade and Global Markets at Progressive Policy Institute (PPI).

To read the full summary, please click here.

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Armed with massive subsidies and tariffs, the US and EU are leading this trend towards protectionism. This may change the global trade system as we know it.

Avantika Goswami, the writer of the DTE report and programme manager for climate change at the New Delhi-based think tank Centre for Science and Environment (CSE), said:

In the race to build low-carbon economies, countries are introducing policies to speed up the transition from fossil fuels, promote manufacturing of clean energy technologies and decarbonise industries. On the face of it, this race appears to be part of the global effort to cut greenhouse gas emissions. But they have also sparked fears of trade wars, as governments on the pretext of climate action try to reshore green industries and dominate the global supply chain of goods and technologies essential to avert a climate catastrophe.

CSE, which helps publish DTE, recently organised an international webinar on the subject, which was addressed by Rob Davies, former minister of trade and industry in South Africa; Paul Butarbutar, executive director, Indonesia Centre for Renewable Energy Studies; Katie Gallogly-Swan, economic affairs officer, UNCTAD; Apratim Sahay, senior policy manager, Green New Deal Network; Sunita Narain, director general, CSE and editor of DTE; and Goswami.

A new trade order

In August 2022, the US passed the Inflation Reduction Act (IRA) — a bill offering about $370 billion in subsidies, mainly through tax credits over 10 years, for renewable energy, electric vehicles, energy-efficient appliances, carbon capture and storage and clean hydrogen.

This has rankled other green technology manufacturing powers like the EU, South Korea and Japan, which fear that their companies may jump ship and expand business in North America.

“Developing countries like India cannot match the IRA’s scale of subsidies. If we take the example of electric vehicles (EVs) in our country, there are three incentive schemes that are offered — the Faster Adoption and Manufacturing of Electric Vehicles (FAME II) with an outlay of Rs 10,000 crore; and two Production-Linked Incentive (PLI) schemes of Rs25,398 crore (automotive sector including EVs) and Rs 18,100 crore (battery storage), respectively,” Goswami said.

There is also the question of access to critical minerals. Prices of minerals in the global market are set by the big players.

China is the biggest buyer today. Once the US enters this race for its own domestic manufacturing on a large scale, India will have to aggressively scale up its EV production to command prices on its own terms.

CSE experts suggest that India should focus on the EV sectors in which it has a ready domestic market — two-wheelers and three-wheelers, which constitute 63 per cent and 34 per cent of the domestic EV market.

It can also become a hub for recycling of spent batteries, which will enable it to recover the processed critical minerals that it is currently lacking. 

In December 2022, the EU reached a provisional agreement on a Carbon Border Adjustment Mechanism (CBAM) — a tax on imports of goods like steel and aluminium from countries with lax emission reduction rules.

The CBAM has been criticised by BRICS countries, and India’s finance minister has warned the country’s firms to reset themselves and be ready for “tariff walls coming up newly in the name of climate change”.

According to UNCTAD (United Nations Conference on Trade and Development), if applied at $44 per tonne, a CBAM will reduce global carbon emissions by not more than 0.1 per cent — but it will have an adverse distributional impact because it will decrease global real income by US $3.4 billion, with developed countries’ incomes rising by US $2.5 billion while developing countries’ incomes fall by US $ 5.9 billion. Other developed countries like the UK may follow suit and implement a carbon border tax.

When faced with the CBAM, developing countries need access to finance and technology to decarbonise their manufacturing sector so that export competitiveness is maintained.

For India, the EU is its third largest trading partner — the DTE report points out that India’s iron and steel and aluminium sectors would be the most exposed to CBAM, albeit to a lesser extent than other countries. India does not have one domestic carbon price – but it has an upcoming domestic carbon market, a national NDC and net zero target, and voluntary climate targets by industrial firms.

Whether or not this patchwork of market-based schemes and climate signals will create a case for Indian industry to avoid the tariff burden from CBAM is yet to be seen, Goswami said.

“A CBAM is directly attacking the market access of developing countries; and it could be expanded to all exports eventually. African countries are emitting the least, and the gain from imposing this tax on them would be minimal in terms of carbon emission reduction. We need to respond to these measures,” Davies said at the webinar.

As per UNCTAD, “policies like IRA and CBAM point to a missing developmental dimension in trade commitments, combined with growing evidence that industrialised economies are outsourcing pollution at the same time as they avail themselves of industrial policy tools to bolster their dominance within emerging green industries.”

Industrialisation has enabled sustained productivity growth in the EU and US, but industrial development has been an uphill battle for developing countries, in part due to trade agreements designed to constrain their policy space.

WTO — heavily influenced by developed countries — treats subsidies, tariffs and export bans as “trade distorting”. Thus, current trade rules prevent developing countries from using local content and technology transfer requirements,or tools like government procurement to stimulate domestic industries.

Now that rich countries are increasingly embracing industrial policy to ensure their economic resilience, it is difficult for them to prevent developing countries from implementing similar policies.

Katie Gallogly-Swan of UNCTAD echoed these sentiments expressed in DTE: “We need to reframe the trade rules for a time of climate change and address the long-standing concerns of developing countries. We need to strengthen the core principles of ‘special and differential treatment’ at WTO and ‘common but differentiated responsibilities’ in the UNFCCC process. A more positive agenda would support developing countries’ priorities, additional financing, green technology transfers, capacity building supporting environmentally sustainable economic diversification, and adequate policy and fiscal space to support their own integrated policies to advance towards their climate and developmental goals.”

Sunita Narain from CSE said: “We should look at what rules will work for us best (the developing world), and work for us in a climate-constrained world. We need to make sure we can combat emissions, and at the same time, have economic growth. In doing so, maybe for the first time we will end up making a trade deal which does not work against the environment, but for it; a deal that works for people.”

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Global trade will continue to face multiple challenges in 2023 as inflation and high interest rates, debt distress and geopolitical frictions weigh on many economies. The downside risks to the global economy and international trade are significant, ranging from an escalation of Russia’s war on Ukraine to deepening tensions between the US and China.

‘Reglobalization’ – rather than deglobalization – best describes the current pattern of economic integration and fracturing across different economies and sectors. Globalization is far from finished, but will increasingly emphasize greater regional links and the formation of economic blocs for sensitive and strategically important sectors. Comprehensive decoupling from China is neither achievable nor desirable for the G7 and like-minded partners.

The supply-chain disruptions of 2020–22 will continue to ease. Given that extreme weather events are the biggest threat to global production networks, supply-chain resilience and diversification efforts will persist, with added impetus to act on ‘greening’ trade.

The future of trade is closely linked to the transition to green and digital economies. As climate ambitions and technological leadership are intertwined with industrial policy objectives, concerns about unfair trade practices and protectionism are coming to a head not just as regards China, but also among the US, the EU and like-minded partners.

With major breakthroughs at the World Trade Organization unlikely in 2023, limited progress can be expected in some bilateral, regional and sectoral agreements. Meanwhile, efforts to avoid further trade fragmentation will progress more readily under Japan’s G7 presidency than under India’s G20 presidency.

Introduction

This briefing paper analyses the outlook for global trade in 2023, and examines the structural forces shaping global trade and globalization more broadly.

It argues that ‘reglobalization’ – rather than deglobalization – best describes the current and likely future pattern of economic integration and fracturing across different economies and sectors. Trade policy has an important role to play in underpinning the positive aspects of a reglobalized world and in balancing geopolitical competition and cooperation, not just through coordinated efforts to strengthen supply-chain resilience, but also in harnessing the twin transitions to green and digital economies.

The paper draws on insights from expert roundtable discussions and a high-level speaker series under the umbrella of the Chatham House Global Trade Policy Forum. It is the first of a new annual series that will highlight some of the major global trade trends and prospects for the year(s) ahead.

Marianne Schneider-Petsinger is a senior research fellow in the Global Economy and Finance Programme at Chatham House, responsible for analysis at the nexus of political and economic issues. Before joining Chatham House in 2016, she managed the Transatlantic Consumer Dialogue, an international membership body representing consumer organizations in the EU and the US. She also worked for a think-tank on transatlantic affairs in the US, and for the Thuringian Ministry of Economic Affairs in Germany.

To read the full report, please click here.

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The global race to lead the production of these cleantech, as well as raw materials that go into them, has been unfolding for a few years now. Europe has secured much commitment and investment in the area of electric cars (EV) and batteries already. Dozens of billions have poured into scaling EV manufacturing and batteries. Over half of all lithium-ion batteries on the EU market in 2022 were produced in Europe, with the continent projected to become the world’s second biggest battery cell manufacturer by the end of the decade. 

But the US Inflation Reduction Act (IRA), launched in August 2022, has changed the rules of the industrial game and might make companies re-prioritise the current announcements in Europe towards the US. For EVs and batteries, the risk is that the projects – and therefore Europe’s ambition – gets delayed. For critical metals and their processing, where Europe is only starting to catch up, the risk is that investments would simply go elsewhere. In just a few months since the launch of the US IRA, investments into battery factories, new mines and electric vehicles have mushroomed in North America. This is in response to the requirement that 40% of battery metals need to come from the US and half of all battery components made in North America from 2024 for the full EV tax credit to apply. The battery supply chain of an electric car will receive up to USD 50 of subsidy per each kWh of battery, or over a third of the total battery costs today. 

So far Europe has one of the most ambitious climate regulations in the world. The next step now is to beef it up with a robust industrial muscle to ensure we capture parts of the growing value chain for our jobs and economic resilience. 

To view the full report, please click here.

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Here in America, real average weekly earnings of all U.S. workers fell 3.1 percent in 2022. A central policy challenge in the year ahead is not just creating jobs. It is creating good jobs, i.e., jobs with high and rising incomes.

How to meet this challenge? Just before the winter holidays, the U.S. Bureau of Economic Analysis released new data that show the way forward. In 2020, a certain set of U.S. companies employed 28.4 million workers in America at an average annual compensation of $84,925—about 20 percent higher than the average for the rest of the U.S. private sector.

Which companies? The U.S. parents of U.S.-headquartered multinational companies. U.S. multinationals have long been among America’s strongest firms. Although they comprise far less than 1 percent of U.S. companies, in 2020 their U.S. parents accounted for 23.1 percent of all private-sector jobs, 38.5 percent of investment in plant and equipment, 46.4 percent of exports of goods, and a remarkable 72 percent of business spending on research and development.

Despite the common allegation that multinationals simply “export jobs” out of America, research consistently shows that expansion abroad by these firms has tended to complement—not substitute for—their U.S. operations. More investment and employment abroad have tended to create more American investment and jobs as well. From 1988 to 2020, employment in foreign affiliates of U.S. multinationals rose from 4.8 million to 14 million. Over that same period, employment in U.S. parents rose from 17.7 million to 28.4 million—a slightly larger increase at home than abroad.

Thanks to all their global dynamism, for decades U.S. multinationals have driven an outsized share of U.S. productivity growth, the foundation of rising standards of living for everyone. They accounted for about 40 percent of the increase in U.S. business labor productivity since 1990. For workers, the bottom line of all this is high and rising incomes. Globally connected jobs tend to pay more because global engagement fosters—and is fostered by—innovation and growth.

There is vast potential for creating more good jobs in America that are connected to the world. From 2000 to 2020, U.S. output expanded by $10 trillion—but over that generation the rest of the world grew by over $40 trillion, such that by 2020 America’s share of global output had fallen to just 24.8 percent, down from about 30 percent in 2000. Growth in labor forces and productivity around the world has boosted the purchasing power of millions of companies and billions of consumers. U.S. multinational companies have harnessed this growth through their exports from America and, even more, through the local sales of their foreign affiliates. And in the postpandemic years ahead, forecasts of continued faster growth in the rest of the world mean even greater potential for U.S. multinationals to build more jobs and opportunity in America connected to that global growth.

But realizing this potential is not a foregone conclusion, because global growth has also spawned new competitors for U.S. multinationals. The McKinsey Global Institute recently documented and analyzed the world’s “superstar” companies that generate the largest economic profits thanks to features including high productivity. From 1995 to 2016, the U.S. share of global superstar companies fell from nearly 50 percent to 38 percent. Particularly ascendant are superstars from fast-growing Asian countries, including China, India, and South Korea. There is no guarantee that past global strength of U.S. multinationals will be prologue.

And unfortunately, the sobering reality is that the United States has become largely adrift in its policy engagement with the global economy. America’s many post–World War II decades of liberalizing trade, investment, and immigration—all to the benefit of American companies, as well as to the American economy overall—have largely stalled out.

Consider trade. America has stopped pursuing new trade agreements and instead has launched and maintained a trade war. From 2010 to 2020, the United States implemented just four new free-trade agreements—three of which (Colombia, Peru, and South Korea) had been negotiated and ratified before 2010, and the fourth of which, the USMCA, was largely refining the NAFTA that had been negotiated decades earlier. Meanwhile, so many other nations have maintained and even accelerated their efforts at trade liberalization. Free-trade agreements that exclude the United States are agreements that impede the growth of U.S. companies both abroad and at home.

To support American workers, the White House and the new Congress need to turn their attention away from pandemic ad hockery. High-productivity, high-wage jobs tend to be global jobs. We should recommit to investing in creating them.

Matthew J. Slaughter is the Paul Danos Dean of the Tuck School of Business at Dartmouth, where in addition he is the Earl C. Daum 1924 Professor of International Business.

Matthew Rees is the founder of Geonomica, an editorial consulting firm that has worked with clients across a number of industries, and a senior fellow at Tuck’s Center for Business, Government & Society.

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