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The economic policies of many countries have entered a new era of support and subsidies. But global financial markets still have some catching up to do.
Let’s consider some of the headlines from the last week. At the IMF and World Bank meetings in Washington, the so-called Bretton Woods institutions came under siege as leaders of the global south denounced the hypocrisy of rich country creditors who demanded austerity from borrowers while accumulating huge debt loads.
In Brussels, former European Central Bank President Mario Draghi gave a speech advocating an EU-wide industrial policy. Across the Atlantic, the Biden administration tripled tariffs on China and agreed to unions’ call for trade relief for shipbuilding to counter Chinese state support for its own industry.
However, at the same time, cross-border business continued as usual. German Chancellor Olaf Scholz led a group of industrial leaders on a trip to Beijing with the aim of joint ventures in China. And US Commerce Secretary Gina Raimondo helped Microsoft, a US “national champion” contender, make a $1.5 billion investment in artificial intelligence in the United Arab Emirates.
The best way to bridge the gap between these headlines is to understand that even as rich countries’ fiscal policy is shifting to support the long-term process of reindustrialization and climate transition at home, global financial markets are still resolutely focused on maximizing profits. of the private sector in the short term. The fight between the two will continue until a new balance emerges.
In Europe, the fiscal aspect is putting pressure on the financial aspect. “We followed a deliberate strategy of trying to reduce each other’s wage costs,” Draghi said, referring to Europe’s post-2008 strategy of belt-tightening rather than investing. “The net effect,” he continued, “was only to weaken our own domestic demand and undermine our social model.” Now, the EU is desperately trying to close the gap with a new capital markets union.
Meanwhile, the White House has doubled down on the idea that free trade simply doesn’t take into account the cost of negative externalities like climate change. Last week, John Podesta, President Joe Biden’s senior adviser on clean energy, said in a speech: “When you seriously consider the emissions contained in tradable goods. . . emissions from the production processes that create the raw materials and manufactured products we buy and sell in the global market. . . So traded goods represent about 25 percent of all global emissions.”
By that accounting, free trade itself is the second biggest carbon polluter after China. This is because the current global trade and financial framework still incentivizes what is cheapest for companies and most profitable for shareholders, not what is best for the planet.
As Podesta noted, the United States used to be the world’s largest producer of aluminum. Now, half of the world’s aluminum comes from China, but with 60 percent more emissions. In fact, the emissions that the Inflation Reduction Act hopes to reduce by 2030 are equal only to what the United States imported in carbon-intensive manufactured goods in 2019.
In an attempt to square this circle, the White House has announced a new climate and trade working group that will build on U.S. Trade Representative Katherine Tai’s idea of a “post-colonial” trade system that sets prices in depending on carbon load and labor standards. Such a system could, for example, offer technology transfers to developing countries in exchange for key commodities.
But global financial institutions will also have to change if there is to be real change towards a better system. At an Oxfam panel in Washington last week, Adriana Abdenur, special economic adviser to Brazilian President Luiz Inácio Lula da Silva, denounced the “mismatch” between “rich countries and regions that now openly embrace and defend industrial policy” while “they still drive international politics.” financial institutions to impose an obsolete recipe of the Washington Consensus.”
The White House knows that the global south is right. Last week, US deputy national security adviser for international economics Daleep Singh called for greater use of US sovereign loan guarantee authority to lower interest rates for developing countries.
But he also floated several ideas aimed at boosting investment in the United States that seemed straight out of the pages of a developing-country industrial playbook. These included a “strategic resilience fund” to secure clean energy supply chains, and even a US sovereign wealth fund to make long-term investments in strategic technologies.
All of this tells us that we are at an important turning point and that no country has all the answers. However, many stakeholders want to hold on to the past, even when the future is changing. I marvel, for example, at the willful blindness of German automakers signing a joint declaration to work on connected vehicles with China, even though Europe is likely to impose restrictions on Chinese electric vehicles in Europe. Likewise, I worry that the US push to counter Chinese AI will lead to a handful of US tech giants having even more market power than they already have.
The shift towards a new economic paradigm has begun. Where it will end up is up for grabs.