1. Introduction
Since the Second World War, the US has consistently functioned as the anchor of the monetary system and the rules that underpin international trade, which together enable cross-border commerce for much of the global economy. Growing international economic integration, gradually undoing the protectionism of the interwar years, has accompanied rapid increases in global incomes. In recent decades, global inequality has decreased for the first time since the Industrial Revolution.1 Yet despite these gains, the principle of globalization is now under attack. A splintering of global trade and finance could inflict serious economic damage by restricting the free movement not just of goods, services and capital, but of data, technology and ideas.
The paradox of multilateralism is that while it involves putting countries of different sizes and stages of development under the same set of laws, it may also require a single nation to lead and, where necessary, incur costs in doing so. The idea with a dominant power is that it wields outsized de facto influence over the rules and leadership of a region, society, culture or, here, global economic order. This actor, although it may be a ‘structurally advantaged’ leader that makes net gains from the system it underpins, wins widespread legitimacy through embodying a wider consensus.2
The US has long played such a role – though not always enthusiastically or indeed universally – in the international trading order. It has also done so, whether formally or informally, in the world monetary system. Without a leader providing coordination, there is a risk that the trade and monetary systems may break. Either the US attempts to become a coercive economic hegemon, wielding dominant power in its own interest, or a free-for-all ensues wherein a variety of larger and more powerful countries dictate terms bilaterally or regionally to those smaller and weaker. The US anchor, certainly as far as the rules-based trading order is concerned, is looking shakier than at any point since 1945.
There was always a tension between the US’s respective roles in the international monetary and trading systems. Its role in the former is predicated on being willing to run current-account deficits, if necessary, to supply the world economy with currency. The animating philosophy of the US approach to the latter is mercantilism, with exports regarded as intrinsically ‘good’ and hence trade deficits as self-evidently ‘bad’. That contradiction was always likely to cause difficulties. They have come to a head under US President Donald Trump, who has insisted on trying to use trade tools to affect the fundamentally macroeconomic issue of the current account.
On the monetary front, the administration’s contempt for fiscal restraint and its willingness to use the international financial system for political ends may pose a threat to the dominance of the US dollar in trade, global banking and official foreign exchange reserves. In the area of trade, even before Trump’s election, there were signs that the US was growing tired of its responsibilities as the protector of the system, and specifically as protector of the World Trade Organization (WTO). Trump has threatened not just to remove that anchor altogether but to turn it into a wrecking ball, destroying the system that earlier generations of US politicians did so much to create.
These developments have raised fundamental questions about global economic governance: including not just whether a new leader is required, but whether reliance on a single dominant actor is itself sustainable. In various areas – trade, data, technology, currency – there is a risk that the world will split into two or more regional powers or spheres of influence, reducing the gains from the exchange of goods, services, capital and ideas. For example, US moves to put the Chinese technology firm Huawei on an export blacklist, if sustained, indicate a deliberate shift that goes beyond simply reducing trade deficits to a fundamental decoupling of the global economy. There is a very widespread belief that rules-based systems are preferable to fiefdoms and pure power relations, but it is less obvious how to rebuild and sustain a multilateral system once a mainstay such as the US has gone.
Depending on the particular issue and the diagnosis of the problem, one solution might involve a new power being broadly accepted as an alternative in the US’s role. Another would involve a more fundamental change in the way that multilateral rules are set and enforced, and in the institutions that currently perform those tasks. A third potential solution, particularly in the monetary sphere, would entail simply allowing free competition for the role of global anchor rather than trying to manage the system through international cooperation.
This paper will seek first to examine the governance problems in the separate but related areas of the monetary system and global trade and regulation. It will then explore whether issues have indeed arisen because the US has given up its dominant role, and if so how these might be rectified. It will also consider shorter-term solutions to the Trump administration’s apparent willingness not just to leave the multilateral edifice but – metaphorically speaking – to destroy the building on the way out. For the moment, the ambitions for multilaterally minded governments may be limited to ensuring that future challenges will involve redesigning the policy architecture rather than sifting through rubble.
At least as regards trade, it is likely that the model of US leadership that has endured for so long is gone for good, not just because of the current state of US politics but because the global economy – and its relation to national security – has fundamentally changed. Unless the world is going to retreat into a system of separate economic spheres of influence, new ways will be needed to renew the multilateral spirit and the institutions that embody it.
To this end, the leading economic powers outside the US must first correctly diagnose the problem. They must then examine their own willingness to undertake the challenges of solving it. This will be a long-term proposition. It seems highly unlikely that an administration headed by Trump will ever be a reliable participant in global economic governance. The challenge will be to prepare an offer that can persuade a future, more internationally minded president to take more responsibility for maintaining an open global economy while protecting her or him against domestic accusations of being exploited by China.
An economic leader may lose its position because the trade-off to that country (or bloc) of managing the system no longer gives it sufficient benefit to justify bearing the costs. Or it may be because the underlying consensus fractures to the point that no single leader can propagate credible and effective rules and norms. Either way, a thorough examination of the principles and institutions of global economic governance is necessary in order to determine whether US leadership needs to be replaced, and – if so – by what.
1 Milanovic, B. (2016), Global Inequality: A New Approach for the Age of Globalization, Cambridge MA: Harvard University Press,
http://www.hup.harvard.edu/catalog.php?isbn=9780674737136 (accessed 14 Jun. 2019).
2 Stokes, D. (2018), ‘Trump, American hegemony and the future of the liberal international order’, International Affairs 94(1), pp. 133–50, doi.org/10.1093/ia/iix238 (accessed 14 Jun. 2019).