The Ukraine crisis has shown not only that unlimited trade is impossible but also that it needs to be regulated by values.
Globalisation as we know it is dead. Most recently with the outbreak of war in Ukraine, it has become clear that the idea of globally unlimited trade has failed.
Particularly painful is the realisation that trade and peace are not siblings. Autocrats place their potentially belligerent claims to power above the free exchange of goods and commodities. Free trade is only acceptable to them as long as it serves to maintain their own power.
What does this mean for the future? The recent blows to world trade have not invalidated its mutually beneficial nature. David Ricardo’s theory of the comparative advantages of trade still applies, even where they are no longer exploited.
The mutual advantages of trade with Russia are being lost. This particulary applies to trade involving the European Union, including Germany. As rising inflation shows, these trade restrictions make people poorer.
The Russian aggression and the pandemic have shown the high vulnerability of closely interconnected global economies. If trade security is to be enhanced, the challenge is to redefine trade relations globally.
The result should be a new order of preferences for trading partners, which is no longer based solely on the short-term profitability of the exchange. The state and social constitution of the trading partners should play a decisive role.
In future, trade policy should be value-based and the underlying values should be those of liberal and social democracies in their quite different forms. Instead of unlimited offshoring, the United States treasury secretary, Janet Yellen, speaks of ‘friend-shoring’—relocation of sourcing to economies with similar values. The goal is ultimately to make trade safer and, measured by shared values, fairer.
This view of trade relations results in a ranking of desired trade linkages for the EU, which can be roughly divided into three categories. First, there are ‘preferred’ trading partners, which should form a close community of values in geographical proximity.
All members of the EU and the wider European Economic Area fall into this category. There should be no trade barriers among them and they should agree a division of labour on how mutually to strengthen their resilience in times of crisis, taking advantage of their proximity. The gas-supply crisis highlights this need, as have the supply-chain problems thrown up by the pandemic.
Second come ‘close’ trading partners. With them, too, a set of political values should be shared and trade should encounter as few obstacles as possible. This group could include the US and Japan. These economies would not however be part of a resilience network, at least not systematically. This might be due to objective obstacles, such as lack of proximity, or doubts about the common value base (for example, if Turkey were to be considered).
Third are ‘functional’ trading partners. Trade would take place with these—as before—solely on Ricardian grounds. Given that no commonality of values is presumed, these trade flows should be treated with much greater caution in the future. If the political systems in these countries were to degenerate into nationalistic aggression, trade would eventually risk becoming a weapon against our values.
Foresight then becomes essential: there must be no trade relationships which are indispensable. It should be insisted that each of the functional partners could be replaced by another at any time, with as little economic damage as possible. Scenarios would then have to be prepared in advance to make a rapid switch possible, with the companies concerned also readied for such a potential change.
This could be done, for example, by means of insurance contracts through which offers by other suppliers could be guaranteed in the event of a crisis. In case of doubt, production would have to be demanded from a preferred or close trading partner in such a situation, even if this were more expensive.
A future Russia belongs in the category of functional trading partners but also the Gulf states, Saudi Arabia and, above all, China. This list alone shows the enormous challenges facing a reoriented trade policy.
Export links just with China are extremely important for Europe as well as the US; imports are equally important in many sectors. If trade with China is now seen as no longer secure and alternatives must be available as an option at all times, many products will become scarcer and more expensive.
While this will limit capture of global cost advantages immediately, over the long run it will make economies more resilient in the face of political and economic blackmail. In the short term we become poorer but eventually more secure supply routes could make up for these disadvantages.
The world has become a different place since February 24th. The age of politically naïve globalisation has finally come to an end with the war against Ukraine—following increasing doubts due to the financial and coronavirus crises, as well as burgeoning populism.
It should be replaced by a values-based trade policy which enables and promotes trade but no longer at the price of political dependencies. It will be trade whose orientation does not follow economic calculations alone but also satisfies criteria such as security of supply and defence against blackmail.
Only such a value-oriented trade policy can restore the broken link between trade and peace.
Gustav A Horn is professor of economics at the University of Duisburg-Essen, a member of the executive board of the SPD and chair of its Council of Economic Advisers. He is also chair of the Keynes Society.
This article was originally published on Social Europe. Views in this article are author’s own and do not necessarily reflect CGS policy.