The phrase geopolitics was coined by Swedish political scientist Rudolf Kjellén in 1899. It represents the influence of geography, economics and demography on power relationships in the world. Kjellén observed that the State was a living organism, a ‘force of will’, an amalgamation of aspects and a set of dynamic interests.
The coinage has since acquired lasting contextual currency and is ricocheting across the world. This week the phrase punctuated the text of speechifying by Volodymyr Zelensky and world leaders at the UN General Assembly. The phrase also frames the context for business models – in the first six months of 2023 alone, the word geopolitics found nearly 12,000 mentions in corporate filings of S&P 500 companies.
The trends first witnessed post the pandemic have accelerated following the war in Ukraine. The quest for resilience has triggered a migration from just-in-time economics to just-in-case geopolitics. The tectonic shift in economic relationships is manifest in data and in headlines – Mexico has ousted China and emerged as the largest trading partner of the United States. As underlined by IMF chief Kristalina Georgieva. fragmentation of trade has implications for global growth.
Amid all this angst and din, earlier this month, the World Trade Organisation presented the World Trade Report 2023. In what is bizarre at the least and lazy theorising at its worst, the report leans on misplaced assumptions to paint a picture of risks. Deploying a July 2022 WTO paper, the WTR has conjured a world of two trading blocs based on voting patterns in the United Nations. The hypothesis lumps India with China along with Russia, most of North Africa and Southeast Asia, and places Europe, Canada, Australia, Japan and South Korea in the western bloc. Latin America and sub-Saharan Africa fall somewhere in between, closer to the US.
Before we get to its analysis and assessment of risks, consider the construct. The definition of the blocs illustrates the pitfalls of wilful blindness. Consider geopolitics first. India is a member of the US-led QUAD and the Indo Pacific Economic Framework for Prosperity which was formed in response to China’s expansionism. India and the US have signed agreements on cooperation in space, in developing artificial intelligence and manufacture of defence equipment. Last fortnight India along with the United States, Saudi Arabia, the United Arab Emirates, France, Germany, Italy and the European Union announced the new India-Middle East-Europe Economic Corridor to counter the China-led Belt and Road Initiative.
Now consider the economic relationships. The United States is one of the top trading partners of India with exports touching $128.55 billion in 2022-23 and includes sourcing by Walmart and Apple. Last month Harley Davidson launched its cheapest bike made in India. The bulk of India’s $320-billion-plus services exports is to the US, Europe and UK. According to Nasscom, India is home to over 50 percent of the world’s Global Capability Centres. The US is the third largest contributor of FDI into India. This week J P Morgan announced that it will add India to its widely tracked emerging market debt index.
The artificiality of the assumptions is stark. The UN resolution for ending the war in Ukraine and asking Russia to withdraw saw 141 countries voting for the resolution, 32 abstaining and seven voting against. Saudi Arabia voted with the US. So did UAE and 12 others from Middle East and North Africa. Yet North Africa is lumped in the China bloc. What is the basis for the bunching and the presumptions? Can it be argued that the 141 countries who voted for the resolution can or will cease to engage with those who abstained or voted against?
The observations of WTR 2023 and the paper suffer from post hoc, ergo propter hoc fallacy. Typically, the choice of members in a bloc will define outcomes as data can be tortured to deliver. WTR 2023 argues that goods trade flows “between the two blocs grew by 4-6 percent more slowly than within these blocs since the onset of war in Ukraine”. The July 2022 paper assumes two scenarios. In the ‘full decouple’ scenario all trade happens within the blocs. In the ‘tariff decouple’ scenario countries move away from cooperative to non-cooperative tariff. In both scenarios volume of trade is affected as is the cost of goods.
There is no disputing that faultlines in global trade represent real and present danger. In the 1973 tome, The World in Depression 1929-1939, economist Charles Kindleberger underlined the role of “imposition of tariffs, collapse of world trade, bilateralism” in creating the conditions for the Great Depression. The passage of protectionist legislation – the Fordney-McCumber Tariff Act and the Smoot-Hawley Tariff Act in the US, the Macmillan Tariff in the UK, the introduction of Obertarif in Germany-- exacerbated the depression.
In 2023 the global economy faces the spectre of rising cost of capital and slowing growth. The WTO, with all its faults, has scaffolded global trade. Instead of presenting postulates based on misplaced presumptions, it would be better if it illuminates real risks to global trade and growth. How about a study on the impact of new industrial policies – the Inflation Reduction Act in the United States or the Fit for 55 programmes in the EU – on trade and global growth?