The market for leadership

The recent news about Washington’s interest in advancing free trade, both in the Pacific with the Trans-Pacific Partnership (TPP) and in the Atlantic with the Transatlantic Trade and Investment Partnership (TTIP), has led me to think about the market for leadership in global affairs.  With regard to free trade, it’s well known that the WTO-led global talks have floundered.  The Doha round of negotiations, which commenced in 2001, has faltered over disagreement about agricultural subsidies.  In the absence of a global deal, trade liberalization has been pursued on a bilateral and regional basis.  Today, almost 400 regional and bilateral preferential trade agreements are in place, with the average WTO member belonging to 13.  The failure of the Doha round has led many to question whether the WTO is still relevant as a trade-promoting institution (see this U of Chicago faculty debate on the issue) and likewise, whether the United States, as the architect of the WTO, is capable of guiding the governance of global economics anymore.  However, the recent push by the U.S. to forge massive, precedent-setting free trade deals in both Europe and Asia has convinced me the U.S. is serious about retaining it’s leadership in global economics.

The question is, what changed from the time when Doha began to falter in the mid-00s to the launching of the the TPP in 2010 and the proposal of the TTIP in 2013?  My hypothesis, in short, is that the world has experienced a shift in the supply of global leadership.  Econ 101 tells us that when demand for a good or service exists, someone will step up to supply the desired product.  However, if the supplier has a monopoly on the production of the desired good, it will produce less than the desired amount and charge a higher price.  Additionally, the producer has less incentive to innovate since it faces no competition.  Consequently, more of the economic surplus accrues to the producer, less to the consumer, and some becomes deadweight loss.  In a way, this is how I view the issue of leadership on global trade (and other issues) over the past few decades.

Generally speaking, big changes in global affairs (such as multilateral trade negotiations) are driven by the predominant power(s) at the time.  When the Doha round formally launched in 2001, the United States stood alone as what former French Foreign Minister Hubert Vedrine termed a “hyperpower.”  At this point in time, with the United States enjoying its unipolar moment, no other country possessed the economic or diplomatic weight to move multipolar trade talks along.  At the same time, U.S. demand for advancing multilateral trade, while genuine, was not as robust as it had been during the Cold War.  With the U.S. economy growing at a healthy rate and a lack of any immediate economic or political rivals, Washington could afford to disregard certain issues.

Today, the situation is different.  U.S. economic growth is anemic and no where near the level needed to return the country to pre-recession rates of employment.  Meanwhile, as the U.S. struggles, China continues to grow at a rapid pace.  From 2001, when Doha launched, to 2012 the Chinese economy increased by more than a factor of six, from approximately $1.3 trillion to $8.2 trillion.  Not surprisingly, as China’s economy has expanded so has its global influence.  Furthermore, the same story can be applied, albeit at a lesser scale, to several other countries (India, Brazil, etc).  The result is that today the U.S. faces a growing challenge to its position as the leader and rule-setter of the global economy.  Returning to the econ analogy, it means the U.S. no longer has a monopoly on global leadership.

Faced with this growing challenge, Washington has responded as any monopolistic supplier would: it has started to produce more of the desired good and in newly innovative ways.  If successful, the TTIP and TPP would be the first and second largest free trade areas in the world.  Moreover, because of their size, the standards they adopt will set a compelling precedent for standards in any future global multilateral trade deal.  Of course both the TTIP and TPP are in the early stages of development, so the fate of this recent trade liberalization push is still unknown.  Will the supply/demand explanation for global leadership continue to make sense in the years to come?  How will China and the other emerging powers respond?  Initial signs are that Beijing knows it is in a competition with Washington to set the global trade agenda.  I’m not sure what the future holds re: global leadership, but it will be interesting to watch and learn.

4 thoughts on “The market for leadership”

  1. Food for thought-
    If we’re applying concepts culled from economics theory, we ought to remember that a simple market is made up of “like units”. In this application, states are the like units. I think states have changed very little in the last 10 or 12 years. What has changed is the growing role of multinational corporations (MNCs) and international organizations (IOs). I still accept the traditional realist argument that the anarchic international system is constituted upon sovereign states, but non-state actors push, pull, and prod states to act. That hidden influence certainly has istigated TTP and TTIP.

    A question worth asking: “Should the US be afraid of China, yet?” I’d say not yet. We should, however, be political realists. China will not go into deals aiming to strike improvements that “raise all ships”. Gains are relative.

    This is a great essay on global leadership. What countries’ global leadership capabilities do you think are undervalued by the US?

    1. Thank you for your thoughts Andy. They have prompted me to think about this topic a bit more. I agree with your assessment that nation states are still the backbone of the international system but I question just how “new” the influence of MNCs and IOs is. History is littered with examples of state policy being dictated by the needs or fears of national corporations. Are the TPP and TTIP any different in this regard? Perhaps the calculations of MNCs and IOs have changed, along with those of nation states? Whereas in the past Western corporations faced little competition from developing countries, today China, India, and Brazil are all developing their own large multinationals that seek global footprints. Faced with this increased competition, Western MNCs and IOs are seeking renewed economic leadership from their host governments? In a way, the fears about competition to state power and the fears about competition to corporate power are one in the same and establish a feedback loop.

      As for whether the U.S. should be afraid of China yet, I side with yes. Beijing has been quite clear in its intentions to push the U.S. out of Asia and eventually challenge the U.S. for global influence. It’s imperative that Washington act now to shore up its position while we are still stronger than China, because our advantages keep slipping away one by one, year by year.

      Regarding other countries’ leadership capabilities, I think Washington is developing a hub-and-spoke strategy, whereby trusted allies in key regions take care of the day-to-day issues while the big, globally important issues get left to us to solve. This suits our more modern style of global governance, whereby we try to avoid being overbearing micromanagers but still get to decide the big issues. For example, Washington let Brazil take the lead in pressuring the new Maduro government in Venezuela to hold a recount but when, a few years ago, Brazil and Turkey worked together to resolve the Iranian nuclear issue themselves, Washington was not happy.

      Anyway, these are just my rambling thoughts at 2am. Thanks for the feedback! I appreciate the support.

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