Tag Archives trade war

The New World “Order”: Brexit, Trump and the Developing Countries by Peter A.G. van Bergeijk

Deglobalisation is not the mirror image of globalisation. The losers of globalisation will thus not be the winners of deglobalisation. Indeed, the vulnerable and poor will be the big losers of deglobalisation both in the Global North and Global South.

In the world economy, the guards are changing: we see the emergence of China as the major trading economy of the world continue and at the same time the crumbling of the economic power of the United States of America. Handing over world economic leadership is always a painful process, and it is certainly not a new phenomenon. The rise of the British Empire ended the period of Dutch hegemony. After the Second World War, the USA became global leader, and now we see China emerging on top of many economic rankings. Both before and during these phases of geo-economic transformation, similar processes occurred that reflected shifts in the costs and benefits of hegemony.[1]


A non-contested hegemon has significant market power and can appropriate a substantial part of the benefits of the rules and regulations of the world order. These benefits enable the hegemon to finance the costs of world order maintenance. However, when an emerging economic power contests the incumbent, the balance of costs and benefits shifts to the detriment of the hegemon. It also becomes apparent that the division of the benefits of the world order are not proportional to the costs. Clearly, US actions currently are being fed by popular sentiments (and also feed these sentiments!), but a rational explanation of what we see happening is certainly not beside the point. Modelling exercises of a great diversity of trade disturbances and trade wars show that the United States hurts itself, but that China has to pay a higher price (Figure 1).

Figure 1

Source: J. Bollen and H. Rojas-Romagosa, 2018, ‘Trade wars: Economic impacts of US tariff increases and retaliations. An international perspective’, CPB Netherlands Bureau for Economic Analysis, The Hague.

Making America the Greatest Again can be done in two ways: either by putting more effort into improving the US economy, or by trying to hurt China more. In the current context, the outcome of the second option is more certain, especially in the short run. Economists therefore cannot but conclude that this form of neomercantilism for the United States in a political sense is quite effective. A trade war that involves the United States, China, and the European Union (the blue bars in figure 1) consistently finds that the negative impact in other regions is always larger than for the United States. For an all-out trade war of the US with all advanced economies (the orange bars in Figure 1), a somewhat different picture emerges, but still China is hurt most.

It is important to recognise that the current context extends well beyond trade disturbances and that this is part of a new long downward phase. Indeed, an important empirical finding is that Make America Great Again and Brexit should be seen as symptoms rather than causes of deglobalisation: already long before the elections and referendum, a significant break could be observed in the pace and direction of internationalisation of leading democratically oriented economies.[2] It is not obvious that a change can be expected with respect to these trends in the near future. Indeed, policy uncertainty is on a clearly upward trend and has entered uncharted territory (Figure 2). This increase in uncertainty already has a negative impact on investment decisions of firms and consumers. Certainly, deglobalisation has a much broader palette than the trade disturbances that presently make the headlines.

Figure 2 Global policy uncertainty (monthly data 2000-2018)


Source: S. J. Davis, 2016. “An Index of Global Economic Policy Uncertainty,” Macroeconomic Review, October, http://www.policyuncertainty.com

The impact of deglobalisation goes further and also includes development cooperation and other international flows. Attacks on global institutions and multilateral agreements is an essential element of neomercantilism and its impact is felt all around the globe. A comprehensive deglobalisation scenario of the International Futures Model shows that the long-run losses are large and always negative (Table 1). The impact in the US in this scenario is relatively limited, and strong losses in income level appear on other continents. A recent study of the German Institute for Development has analysed the impact of Brexit and finds that losses outside the UK are important. In particular, the impact on the least developing countries is significant.[3]

Table 1 Estimated impact of deglobalisation on per capita income in 2035


Source: Hillebrand, E. E., 2010, ‘Deglobalization scenarios: who wins? Who loses?’ Global Economy Journal 10 (2) article 3 available at: http://www.ifsprev.du.edu/assets/documents/hilldeglob.pdf

The European Union can make a difference here. It is clear that developing countries are not part of the conflict between the big powers and that their plight is due to collateral damage. The European Union has always supported trade as a means to achieve development. It should step up efforts to facilitate trade and help the least-developed countries to divert their trade so as to make up for the losses caused by the deglobalisationists.

[1] Z. Olekseyuk and I.O. Rodarte How Brexit Affects Least Developed Countries, Deutsches Institut für Entwicklungspolitik, Briefing Paper 2/2019

[2] P.A.G. van Bergeijk, On the brink of deglobalization … again, Cambridge Journal of Regions, Economy and Society 11, 59–72. In the same vein China’s support for the multilateral trade and investment system did not come unexpectedly.

[3] P.A.G. van Bergeijk, Deglobalization 2.0: Trade and openness during the Great Depression and the Great Recession, Edward Elgar Cheltenham 2019. https://www.e-elgar.com/shop/deglobalization-2-0 https://www.e-elgar.com/shop/deglobalization-2-0

In 2018, Bliss Blog featured a series on deglobalisation. Articles of this series can be read here, here and here.

About the author:

pag van bergeijk

Peter van Bergeijk (www.petervanbergeijk.org) is Professor of International Economics and Macroeconomics at the ISS.

The imperial intentions of Trump’s trade war babble by Andrew M. Fischer

In defence of his trade war with China, Trump claims that ‘when you’re $500bn down you can’t lose.’ The problem with this stance is that persistent US trade deficits with China are arguably a sign of US strength or even imperial privilege, not weakness. However, on this issue, he has much of conventional economics wisdom supporting him in his delusions that the US is being treated unfairly or is ‘behind’ based on these deficits.

Trump’s trade tirades are being vigorously disputed by liberal economists the world over, although the riposte is usually in defence of free trade and existing trade deals. However, many of these same economists have promulgated the underlying idea that US trade deficits are the result of some sort of disadvantage or decline.

For instance, as I discussed in 2009, 2010, 2011 and 2012, many prominent economists such as Paul Krugman argued then (and many still do now) that China’s undervalued currency gave it an unfair advantage, causing deficits and even financial bubbles in the US. Many economists on the left have taken a similar line of argument. For instance, Yanis Varoufakis argues that US trade deficits have planted the seeds for the downfall of the US ‘Minotaur’ because it has made the country increasingly dependent on the willingness of other countries to finance these deficits.

Beyond methodological nationalism

The problem with this reasoning is that international trade, income and financial data mostly represent the trade, income and asset movements made by corporations. Conversely, our system of international accounts is severely out of date given that these data are still reported on the basis of country residence rather than ownership. It also treats these flows as if they were arm’s length trades in final goods, or so-called ‘autonomous’ flows of income or finance, rather than the internalised operations of lead firms and their networks of subsidiaries, affiliates, or subcontractors.

The country-based framing of the international accounts serves to obscure the very resilient and virulent foundations of US power, based in the private corporate sector. Corporate ownership and/or control of trade, income and financial flows have become increasingly internationalised, even while remaining predominantly centred in the North and with a strong allegiance to maintaining US dominance. International efforts to track and govern these aspects of ownership or control from the 1970s onwards have also been systematically undermined, especially by the US. As a result, the antiquated international accounting system is very unfit for the task of tracking these corporate activities. Most of the discussion on global imbalances avoids this reality.

In this sense, as argued by Jan Kregel already a decade ago, the US shift to systemic trade deficits from the late 1970s onwards is best understood as a reflection of this internationalisation of US-centred corporations as well as the increased profitability of these US corporations operating in the international economy.

A simple stylised example is the iPhone. When Apple sends a production order to a subcontractor, this is not recorded as a service export from the US. However, the return export of the iPhone is reported as a goods export from China, even though the export is contracted by Apple, a US company. The iPhone is then sold in the US at many times its exported value, and the vast majority of the value of the final sale is accrued in the US. The US has a merchandise trade deficit in this production and distribution network, even though this deficit is associated with the immense value-added accrued in the US and the profitability of Apple. The same applies when Walmart exports from itself in China to itself in the US.

The idea that China’s surpluses and foreign exchange reserves constitute increasing power is similarly based on this flawed understanding of international accounts. As I have argued in 2010 and 2015, a rarely acknowledged attribute of the explosion of China’s surpluses in the 2000s was their rapid denationalisation. Foreign funded enterprises (FFEs)—most fully foreign funded—quickly came to dominate the exports of China, and then the trade surpluses themselves, to the extent that by 2011, FFEs accounted for over 84% of the merchandise trade surplus.

This share subsequently fell sharply due to a surge in exports from non-FFEs, although this was also in a context of falling current account surpluses as a proportion of GDP. As shown in the figure below, this was due to increasing deficits on China’s services account, which reached 2% of China’s GDP in 2014-16, knocking out about half of its goods surplus in 2014 and 2016.

China also returned to running deficits on its income account from 2009 onwards (with the slight exception of 2014), despite being a major international creditor. As explained by Yu Yongding, this is because China’s foreign assets mostly earn very low returns, such as in US treasury bills, whereas foreign investment in China is very profitable, possibly in excess of 20-30% per year, thereby cancelling out any of the balance of payments benefits that would normally accrue to being a major international creditor.

Graph Andrew Fischer article
Source: Author’s calculations from IMF balance of payments and international finance statistics (last accessed 21 March 2018).

Notably, the US is the mirror image of China: it is a major international debtor and yet it earns a surplus on its income account. Both situations were due to profit remittances, e.g. profits leaving China and entering the US. Indeed, Yilmaz Akyüz estimates that the net current account position of FFEs in China has been in deficit in recent years, meaning that their profit remittances were cancelling out their merchandise trade surpluses.

In other words, after the exceptional but historically brief period of running very large ‘twin surpluses’ (on both the current and financial accounts), the current account structure of China has reverted to a pattern that, as I explain in a recent article, is common among peripheral developing countries. The pattern is characterised by goods trade surpluses that counterbalance service account deficits (dominated by payments to foreign corporations) as well as the profit remittances of foreign corporations (and of other foreign investments, whether licit or illicit).

These rapid transformations have been reflective of the increasingly deep integration of China’s foreign trade into international networks dominated by Northern-based transnational corporations. The model has resulted in exceptional export performance, although this has occurred through the injection of considerable but underappreciated sources of vulnerability.

Indeed, as noted by Yu Yongding, from 2015 to 2017 the People’s Bank of China undertook the largest intervention in foreign exchange markets that any central bank has ever taken in order to prevent a run on the renminbi. This depleted its foreign exchange reserves by over 1 trillion US dollars. In another recent article, Yu adds that from 2011 to 2017, around 1.3 trillion US dollars of China’s foreign assets had effectively disappeared, probably reflecting capital flight. Together with the run on the renminbi, these were the principal reasons that the Bank of China put a hold on capital account liberalisation and tightened capital controls to an extent not seen since the East Asian financial crisis of the late 1990s.

Considering that much of such capital flight is destined for the US, either directly or indirectly via multiple offshore financial centres, in addition to the profitability that US corporations derive from China’s trade with the US, it is clear that the US is in the more powerful position in this bilateral relationship.

The imperial utility of trade decline discourses

From this perspective, the deep US trade deficits that have persisted since the early 1980s arguably represent a new form of advanced capitalist imperialism, the emergence of a system of tributes whereby states around the world effectively subsidise the expansion of US-centred capitalism. At the very least, the deficits are signs of a structural shift underlying global power relations, based on an increasingly predatory form of financialised capitalism, with the US still at its helm.

Much like with discourses of Soviet rivalry in the 1960s and 1970s, the current babble of US decline and lagging serve an ideological purpose within these continuing transmutations of US-centered power. It is effectively aimed at subordinating other countries and shifting the burden of adjustment onto them, while distracting attention away from the US-centered, corporate-led restructurings of global production systems that underlie US deficits in the first place.


Main photo: https://pixabay.com/en/donald-trump-politician-america-1547274/

About the author:

Andrew mug shot.JPGAndrew M. Fischer is Associate Professor of Social Policy and Development Studies at the ISS, and laureate of the European Research Council Starting Grant, which he won in the 2014 round. He is also the founding editor of the book series of the UK and Ireland Development Studies Association, published by Oxford University Press, titled Critical Frontiers of International Development Studies. He is also editor of the journal Development and Change. His forthcoming book, Poverty as Ideology, won the 2015 International Studies in Poverty Prize, awarded by the Comparative Research Programme on Poverty (CROP).