All the talk of imposing new trade and investment restrictions—often in the name of promoting economic security—may have led officials and analysts to overlook one constructive unilateral option. Namely, strengthening the national and regional business environment so as to enable local firms to adapt to adverse circumstances and opportunities that geopolitical events create.

Here the case is made for Intelligent Unilateralism as a (partial) insurance policy against geopolitics.

As geopolitical rivalry intensifies, the siren song of insular, zero-sum thinking gains in prominence. This flies in the face of decades of experience where our standards of living have been enhanced by doing business with foreign buyers and sellers. Exports augment national sales and make jobs more secure. Import competition keeps local firms on their toes—complacent local oligopolists tend to rip off citizens.

No country in the past half a millennium has become an economic superpower by its economy being hermetically sealed to outsiders. Yet, even for economies as large as Japan, there is still the question: How best to react as China and the United States vie for primacy?

For better or for worse, at least since the global financial crisis, the world is in an era of trade policy unilateralism. The painstaking monitoring of commercial policy by the Global Trade Alert has shown this. Sadly, there remains no appetite for path breaking multilateral opening of markets.

At best, as demonstrated by the outcome of the recent WTO Ministerial Conference, sushi-sized reform is what the WTO has on the menu. Likewise, regional trading agreements. Recently, World Bank analysts reported that the number of newly signed regional accords has been falling as this century unfolds. Reciprocal approaches to trade reform are out of favour, alas. Unilateralism is in.

But, like cholesterol, there are two types of unilateralism. Stupid unilateralism involves erecting trade barriers to imports and other ruses that seek to tilt the commercial playing field in favour of local firms. That the idea for these ruses often come from local firms says a lot about their competitiveness. Successful managers think of new ways to create more value for customers, they don’t go running off for help from officials who are largely clueless in the ways of commerce.

What every government can influence constructively is their national business environment. Unlike trade accords, which take years to negotiate, governments can assess and benchmark their national business environment right away.

Fortunately, there are well-regarded measures and rankings of national competitiveness, such as this one produced by the IMD Business School in Lausanne, Switzerland. Economists can fight like cats and dogs about the best short-term macroeconomic policy, but when it comes to the drivers of long-term economic growth, there is a remarkable degree of agreement. Smart governments should capitalise on this consensus.

To fix ideas consider Switzerland, a country with one of the highest standards of living. Switzerland’s population is too small to support its many successful firms. Switzerland has to export. Therefore, everyone there understands that Switzerland must be competitive no matter what.

If Germany offers huge subsidies to its energy-intensive firms (as it did after Russia’s invasion of Ukraine), Switzerland must react differently because the state doesn’t have as deep pockets as Germany. That involves making sure the transport and digital infrastructure is first rate, that the corporate tax and regulatory burden is fit for purpose, and that Switzerland has the best possible access to the markets of the future as well as to the behemoths of today. Of course, such access does not come for free—in turn Switzerland has to be open to imports as well.

For sure, Switzerland’s current favourable business climate didn’t arise overnight—but bear in mind that these days trade talks take forever (a comment made in the spirit of making a fair comparison.) The intensification of geopolitical rivalry in recent years has strengthened the longstanding case for improving the supply side of national economies. Doing so involves taking on vested interests that cling to privileges that deliver either a quiet life or a very lucrative one. For this reason, supply side reform is like getting children to eat enough fresh vegetables—evidently the right thing to do but an uphill battle all the same.

Governments should focus in particular on those aspects of the business climate that enable firms to adapt to new circumstances. Suppose “economic coercion” by a trading power—or worse, conflict that cuts off supply chains—results in some existing sales markets or sourcing locations being blocked. Then national firms need to have the capabilities and the resources to spot alternative options and to act on them. These firms need to know where foreign markets are being liberalised and the regulations they must comply with to take advantage of any opportunities. This calls for granular monitoring of policy developments abroad as well as beefed up capabilities at home.

Critically, executives and officials need to be comfortable with geopolitical chaos and have gamed out in advance how they might respond. When faced with what many deem “economic coercion,” Australia and Lithuania have shown that small and mid-sized economies can effectively pivot, finding new markets for the valuable goods their firms produce. For sure, at the beginning of these episodes, there were reasons to be fearful. But firms and governments there knew they had alternatives (created in part by WTO and regional trade deals) and pursued them with vigour.

With greater geopolitical rivalry the political calculus of supply side reform has changed. Holdouts against reform must now explain why their interests matter more at a time when adaptability is at a premium. Economic security arguments should push the scales against reform holdouts. The media and public will be at a loss to understand why economic coercion abroad results in higher jobs losses on account of some vested local interest frustrating improvements in national exporters’ adaptability and productivity. Whose side are those vested interests on?

Of course, cushioning those interests that lose from reforms is typically smart politics—but letting them frustrate reform provides geopolitical foes with a greater incentive to strike. In open societies where debates over reform can be followed from autocracies, the opposition of vested interests to reform will be noted—and factored in by foreign governments. As local firms and sectors become more adaptable, the downside from economic coercion shrinks. Supply side reform is one way governments better protect their societies against economic coercion.

Intensified geopolitical rivalry is back—it won’t recede anytime soon. This puts a premium on having nimble firms that can adapt to whatever insanity transpires. In turn, this should shift the political calculus—putting the defenders of status quo bottlenecks on the back foot.

Firms and governments have agency—the times call for the courage to use it.

Simon J. Evenett is the Founder of the St. Gallen Endowment for Prosperity Through Trade and an economics professor. He is also Co-Chair of the World Economic Forum’s Council on Trade & Investment.

To read the full piece posted on LinkedIn by Global Trade Alert, click here.

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These policies create uncertainty, increase investment risk premiums and distort trade. World Trade Organization (WTO) members can justify unilateral action to achieve non-economic objectives by invoking general or essential WTO security exceptions. But widespread recourse to these provisions constitutes a major threat to the rules-based trade order. For the rules to function there must be general acceptance of norms of good behaviour. Those norms are violated when public morals or economic security become a cover for unilateral discriminatory trade policies.

What possible paths forward are there on multilateral trade cooperation?

The erosion of trust among the large economic powers, reflected in their increased willingness to ‘weaponise’ trade policy, is a major constraint to launching negotiations on new rules of the trade game. Instead, strategic autonomy, economic security and other non-economic objectives motivate calls for collaboration among countries with similar values and political-economic systems.

For the WTO to remain relevant in the 21st century, members have to recognise that international trade increasingly is linked to systems competition, cooperation and contestation over non-economic objectives — for which trade is seen as instrumental to policy success. The use of dispute settlement procedures, especially in cases where essential security interests are invoked, is likely to be both counterproductive and ineffective.

Efforts to safeguard an open global trade regime should instead centre on processes through which WTO members engage in policy dialogue. Institutionally supported frameworks must enable peer-based deliberation to assess the effectiveness and efficiency of the unilateral pursuit of non-economic objectives and their associated spillovers, which may be positive or negative. Such dialogue is necessary to inform the multilateral cooperation needed to address the major threats and collective action problems confronting the global community.

Systemic differences and geopolitical rivalry need not preclude cooperation to lessen or manage policy spillovers. The administration of US President Biden has made it clear that the United States is not interested in negotiating traditional preferential trade areas that centre on the reciprocal reduction of tariffs and non-tariff barriers on substantial volumes of trade. Instead, the United States is pursuing issue-specific cooperation and frameworks to coordinate policies, such as agreeing on regulatory practices on digital trade and the governance of supply chains.

One US initiative is the Indo-Pacific Economic Framework for Prosperity, which promotes trade liberalisation, open digital trade and free cross-border data flows with Asia. Such arrangements have implications for the trading system insofar as they act as frameworks for cooperation among subsets of WTO members. These subsets jointly condition trade and investment on shared values, including through production requirements relating to labour, human rights and environmental sustainability.

If associated regulatory cooperation arrangements are open to any economy interested in participating, with benefits extended conditionally after implementing agreed regulatory standards or principles, they can support a process of gradual multilateralisation. If, instead, regulatory cooperation is designed to be made up of exclusive arrangements, it could fragment the global trade system. Domain-specific open plurilateral agreements offer a better prospect for multilateralisation than preferential trade agreements.

Cooperation must be rooted in an understanding of the objectives of the participants and the way their interests are related to the domestic and international commitments of the countries involved. WTO reforms are not needed for discussions among members on non-economic objectives, but there must be political willingness to go beyond the ‘bread-and-butter’ of the WTO — it must negotiate on trade policy without considering the rationale for using specific trade instruments.

WTO members that condition access to their market on satisfying specific production requirements to achieve a non-economic objective have an interest in other states doing so as well. In many cases, WTO members may share a non-economic objective, providing scope for dialogue and discussion about possible joint action. Cooperation can take the form of concerted action by like-minded economies, but it is better to put in place a framework that encourages the formation of WTO-sanctioned clubs. This would ensure greater scrutiny, transparency, and analysis of the effects of trade–non-economic objective issue linkages that are pursued by groups of countries. This would benefit the jurisdictions pursuing joint action by helping them to monitor implementation and understand if interventions are effective and efficient. It will benefit those that do not join a club by providing an institutional mechanism that generates information on the benefits of club participation, the extent and incidence of the external effects of a club, and a channel through which to engage with club members.

There is much to be gained from cooperating on non-economic objectives of broadly common interest. Alliances have long been a form of international cooperation and are likely to appear more in the future to support deeper integration among like-minded economies. WTO reform discussions should include a focus on developing a multilateral framework to guide the formation of groups of like-minded economies motivated by non-economic objectives.

Facilitating scrutiny of such initiatives by WTO members would help club participants design and implement policies that are efficient. Accommodating clubs would also benefit non-participants by reducing the potential adverse effects on the trading system by establishing principles that clubs should abide by, including being open to any member willing to participate.

Anchoring clubs in the WTO would provide them with a multilateral institutional basis, foster transparency and support informed peer review of the use of trade policy instruments justified by non-economic objectives.

Bernard Hoekman is Professor and Director of Global Economics at the Robert Schuman Centre for Advanced Studies in the European University Institute, and a research fellow at the Centre for Economic Policy Research.

Petros C Mavroidis is Professor of Law at Columbia Law School.

Douglas Nelson is Professor in the Department of Economics at Tulane University and External Fellow at the University of Nottingham.

To read the full post, click here

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